GMAC Guzzles Government Funds, Yet Prospects are Bleak

What major U.S. financial company is hemorrhaging cash, not too big to fail and is mainlining government money like a junkie copping a fix? If you guessed, AIG, that's wrong, but I can offer partial credit.

It's GMAC. The sputtering auto financing company is in line for up to an additional $5.6 billion in federal funding. That would bring the government's total investment in GMAC to more than $18 billion.

The conventional wisdom is that GMAC must be kept on life support so the auto industry may live. Car buyers and dealers depend on the company for financing, and if GMAC goes under their main source of credit will disappear. A domino-like tumbling of dealerships would knock over manufacturers, which in turn would take out parts makers. Dogs and cats, living together.

With the jobless rate edging toward 10 percent, the Obama Administration is understandably leery of doing anything to make it rise any higher just as the economy appears to be turning the corner. Meanwhile, the government would not only forfeit its investment in GMAC, but also lose the $60 billion it has poured into GM and Chrysler.

At least that's the theory. Yet there's an important difference between GMAC and, say, AIG or Citigroup, two other companies staying alive on the public tab. The collapse of either of these companies threatens to wreck the financial system.

GMAC's collapse jeopardizes only one industry. An important one, no doubt. And I sympathize with arguments that a government that shakes the heavens to save large and troublesome banks should do its best to shore up manufacturers. Still, casting the company as too big to fail, as the government is doing by acting as financial backstop, is to expand the definition of that category to dangerous proportions.

Another question: If GMAC is as vital to the auto sector as the Treasury Department evidently believes, and if the company at least has a shot at recovering, why is it still going downhill? Fast. For the second quarter GMAC reported a net loss of $3.9 billion, up from a loss of $2.5 billion in the year-ago period. Through June 30, losses were $4.6 billion, versus $3.1 billion through the first half of 2008.

Yes, people are buying fewer cars. But what does that say about GMAC's long-term prospects? In other words, if the company's fate is directly hitched to the auto industry, and that industry is by all accounts certain to shrink, why are we treating GMAC as if it's too big to fail?

I suspect the answer lies in politics. The U.S. economy will adjust over the long-term to having a much smaller auto industry. The Administration's short-term economic imperatives, by contrast, require delaying that painful transition as long as it can.