GM Wants A New Captive Finance Unit

The headline in yesterday's Wall Street Journal, "GM Looks At Return To Auto Lending," caught me completely off guard when I saw it.

Is Ed Whitacre nuts?

The lead paragraph in the Journal article stated,

"General Motors Co. is weighing an attempt to buy back its old auto-lending arm or start a new finance company in a bid to become more competitive and bolster the company's appeal ahead of an initial public stock offering...."

This is surely among the more wrong-headed, disastrous moves I've read regarding the failed auto maker.

If the 'core competence' notion has any value, this is one stupendously dumb idea. GM has shown over several decades that it couldn't even build attractive, competitively priced gasoline-engine cars.

Its financing arm, GMAC, eventually grew to be its own entity, pursuing profitability through....sigh.....residential finance. Where it went fabulously wrong and lost billions.

True, an equally-naive Cerberus bought into the unit before the implosion. But my point is that finance is, or should be, a related but non-core function for making and selling vehicles.

The temptation has been, in past decades, for US auto makers to cut price through finance terms, making their financing arms the repository of losses while their vehicle operations look healthier.

Granted, the Journal piece went on to note,

"GMAC, which recently renamed itself Ally Financial, made $653 million on its North American automotive operations in 2010's first quarter."

Of course, operational profit on auto lending may, and probably does not address the balance sheet risks for Ally of holding, selling or hedging its portfolio of auto loans.

Like any financial institution which has borrowed in the credit markets, is highly leveraged, and makes loans, Ally and, thus, GM, when it either repurchases part of Ally or starts its own new finance unit, has to manage asset/liability risks.

How is Ally doing on that score right now? If GM owned Ally, and continued its infamous 0% rate financing programs, to which it has seemed to always turn when tempted by slow sales or share erosion, how would it manage borrowing money at positive interest rates and lending it at lower ones?

Sounds to me like yet another recipe for disaster at GM.

My proprietary research has shown that financial services firms which concentrate on just one, or a few businesses, tend to have higher, more consistent total returns over time. Broadening a firm's business mix, especially when the businesses don't share many fundamental functions, tends to overtax management and promote the lack of attention to the core businesses.

In GM's case, the only link between the two businesses is that the finance arm would be making loans whose collateral was the cars GM made and sold. Aside from that, the real question is whether auto financing, as a standalone business, can generate long term superior returns relative to GM's auto making business.

If so, shouldn't any US investor, who, by definition, as a taxpayer, is already long GM, have the option of buying equity in the finance company that services GM, rather than be forced to own that, too?