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GMAC Application Revives Debate
GMAC's application to become a bank holding company resurrects debate over the mixing of banking and commerce.
November 21, 2008
WASHINGTON—GMAC Financial Services' application to become a bank holding company could reignite the debate over the mixing of banking and commerce.
This time it would have new wrinkles—automakers are involved instead of Wal-Mart Stores and the venue would be the Federal Reserve as opposed to the Federal Deposit Insurance Corp. But observers are watching GMAC's application with history in mind.
"If the Fed approves that, they've just approved a Wal-Mart," said Lawrence White, a professor at New York University's Stern School of Business. "I thought that violated the whole basic structure of what the Fed and what the Congress was trying to do, which was preventing manufacturing firms from directly owning a bank."
Mark Flannery, a professor of finance at the University of Florida, agreed that GMAC's application is likely to rekindle old passions.
"One of the things that inevitably comes up with a bank holding company application is how close the company's actions can come to commerce," he said. "I suspect that one of the things the Fed will be doing when they accept applications is saying, 'You're going to have to get rid of certain subsidiaries and get rid of certain activities you've done.'"
The financial crisis has largely sidelined what was once one of the industry's biggest questions—exactly where the line between banking and other business should be drawn. The debate was mostly fueled by bids from Wal-Mart in 2005 and Home Depot in 2006 to purchase industrial loan companies.
GMAC sees itself on the banking end of the spectrum. It makes loans, already has an ILC, and maintains a mortgage business.
Others argue that, in the aftermath of the Gramm-Leach-Bliley Act of 1999, divisions of banking and commerce are only theoretical, and that GMAC's application should be approved.
"If we allowed more nonfinancial companies to acquire controlling positions in banks, that would be good," said Peter Wallison, a fellow at the American Enterprise Institute and general counsel of the Treasury Department during the Reagan administration. "It would reform the banking industry. … I think that restriction has made the banking system much less competitive."
American Banker
GMAC is one of several companies that have turned to the Fed with an application to become a bank holding company. Weeks after Lehman Brothers failed in September, Goldman Sachs and Morgan Stanley won speedy approval of their applications to become banks. Last week, American Express and its travel arm were also approved for conversions. Protective Life applied this week to become a bank holding company while four other insurance companies applied last Friday to become thrift holding companies by purchasing thrifts.
The clear goal for these firms is to get funding from the Treasury's Troubled Asset Relief Program. A GMAC spokeswoman said her company filed an application to receive TARP funds on Nov. 14, which was the deadline to apply.
But Flannery said that even though GMAC engages in financial activities, it is fundamentally different from its predecessors that sought to change their charters.
"There's an important difference that GMAC is owned by an industrial company … who has a vested interest in financing decisions," he said. "One has trouble thinking GMAC won't be operated for the benefit of General Motors."
General Motors, which owns 49% of GMAC, is exploring a merger with Chrysler and, like other Detroit automakers, has spent recent days on Capitol Hill lobbying for a government bailout. Cerberus Capital Management is the majority owner of GMAC, with a 51% stake.
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