Grim Earnings News From GMAC, MBI, ABK and AIG?

GMAC, the finance arm of General Motors that is majority-owned by the clowns at Cerberus, continues to bleed cash like a stuck pig.  GMAC's third-quarter loss widened to $2.52 billion, from $1.6 billion a year earlier.  Net revenue declined 43% to $1.72 billion.  ResCap, the mortgage lending arm, was responsible for $1.9 billion in losses for the quarter.  Curiously, these earnings numbers are nearly identical to the losses posted in July, which would lead any rational person to wonder why on earth a company that consistently loses $2.5 billion a quarter should be allowed to stay in business.  The answer lies with GMAC's bond investors, who continue to finance this money-losing venture.  But I suspect their patience for a turnaround is wearing thin.  The company stated that "substantial doubt exists regarding ResCap's ability to continue as a going concern."  In a desperate effort to curtail further losses the company is now only offering auto loans to customers who can actually afford to repay them (i.e. those with the highest credit ratings,) an idea that may have come in handy a few years ago.  GMAC has around $52 billion of bonds outstanding as of last month, with $10.9 billion that mature in 2009.  GMAC may ask bondholders to swap their investments for new debt.  Why am I experiencing deja vu?  Oh that's right, because GMAC tried the old swap-crappy-debt-for-more-crappy debt ploy back in May with ResCap and now "substantial doubts exist regarding ResCap's ability to continue as a going concern."  Perhaps the beleaguered auto-lender will have more luck becoming a bank holding company and asking for handouts from the government.  I, for one, certainly hope not.

In other bleeding-cash-like-stuck-pig news, MBIA posted a third-quarter net loss of $806.48 million due to an increase in loss reserves for its insured exposures to second lien mortgages.  The net loss included an assortment of other realized and unrealized losses on its investments.  You can read further gory details here.

Not to be outdone by its brother MBIA, Ambac lost $2.43 billion as it increased reserves for mortgage securities and derivatives.  I am still struggling with the math on how a company can lose $8.45 a share when its stock price is only $2.30, but the general implication that it sucks and has very little future is crystal clear.  Speaking of sucking, analysts had forecast a loss of 50 cents a share.  Are you finished laughing (or crying) yet?  Because there's more.  The bulk of Ambac's recorded losses of $2.71 billion in credit derivatives came from increased future loss projections on CDOs.  

The real follow-up question here is: if Ambac lost $2.71 billion mostly due to CDO losses, what does this imply about AIG's earnings for the quarter?  AIG, which every American citizen should know by now, has sold credit default swaps on over $400 billion in notional on a variety of CDOs.  The former insurance giant is set to release earnings on Monday, November 10.  I, for one, am officially quaking in my boots as to the number that AIG will post as a loss.  Furthermore, I think it will become painfully obvious with the release of its earnings that AIG will not be able to pay back the loan from the government.  Make no mistake, this is a government-sponsored orderly liquidation.  

The Drumbeat of Ominous News Continues As MBIA, Ambac Downgraded

In a widely anticipated event, Moody's finally succumbed to mounting criticism from everyone in the investment community and downgraded MBIA and ABK.  MBIA's rating was cut five notches and ABK's three.  Moody's retained a negative outlook on both insurers.  Serious questions remain about the relevance of Moody's ratings system since just about everybody in America already knew that MBIA and ABK were not AAA worthy. 

Moving from the obvious to even more obvious, Citigroup's CFO announced on a conference call with analysts yesterday that the company would be taking further "substantial" write-downs for subprime morgages, leveraged loans, and other garbage in the second quarter.    Furthermore, the bank could face another credit value adjustment from its exposure to the aforementioned bond insurers.  As if that weren't enough, worsening consumer credit quality could have a meaningful impact on Citi's results for the rest of the year. 

Not to be left out of the headlines, Wachovia announced it was liquidating an investment fund called Ultra Short Opportunities due to an 18% loss this month.  This fund was marketed as an alternative to a money market fund as it had a short duration and was supposed to offer a slightly higher yield with a similar risk profile.  In retrospect, I'm certain that the fund's investors are sorry that they tried to get an extra couple of basis points while risking an 18% loss in one month.  I smell a lawsuit.

UBS can't seem to stay out of the headlines either.  Former UBS-private-banker-turned-Justice -Department-canary Bradley Birkenfeld claims he helped UBS clients hide $20 billion in assets from the IRS.  Mr. Birkenfeld insists that his actions were common among his former colleagues at UBS.  UBS has suffered considerable losses in its investment banking arm.  It was dependent on the private banking arm to maintain its reputation.  This investigation may prove to be a bigger problem for the bank than its subprime losses.