Form 10-Q
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009, or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                          to                         .

Commission file number: 1-3754

GMAC LLC

(Exact name of registrant as specified in its charter)

 

Delaware   38-0572512

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

200 Renaissance Center

P.O. Box 200, Detroit, Michigan

48265-2000

(Address of principal executive offices)

(Zip Code)

(313) 556-5000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing for the past 90 days.

Yes þ                     No ¨

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for a shorter period that the registrant was required to submit and post such files).

Yes ¨                      No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨    Accelerated filer ¨    Non-accelerated filer þ   Smaller reporting company ¨
      (Do not check if a smaller reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨                      No þ

 

 

 


Table of Contents

GMAC LLC

INDEX

 

        

Page

Part I — Financial Information    3
Item 1.   Financial Statements    3
  Condensed Consolidated Statement of Income (unaudited) for the Three Months Ended March 31, 2009 and 2008    3
  Condensed Consolidated Balance Sheet (unaudited) as of March 31, 2009, and December 31, 2008    4
  Condensed Consolidated Statement of Changes in Equity (unaudited) for the Three Months Ended March 31, 2009 and 2008    5
  Condensed Consolidated Statement of Cash Flows (unaudited) for the Three Months Ended March 31, 2009 and 2008    6
  Notes to Condensed Consolidated Financial Statements (unaudited)    7
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    55
Item 3.   Quantitative and Qualitative Disclosures About Market Risk    91
Item 4.   Controls and Procedures    91
Part II — Other Information    92
Item 1.   Legal Proceedings    92
Item 1A.   Risk Factors    92
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds    95
Item 3.   Defaults Upon Senior Securities    95
Item 4.   Submission of Matters to a Vote of Security Holders    95
Item 5.   Other Information    96
Item 6.   Exhibits    96
Signatures    97
Index of Exhibits    98

 

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PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

GMAC LLC

CONDENSED CONSOLIDATED STATEMENT OF INCOME (unaudited)

 

     Three months ended March 31,  
($ in millions)            2009                     2008          

Revenue

    

Consumer

   $ 1,329     $ 1,821  

Commercial

     442       648  

Loans held-for-sale

     132       360  

Operating leases

     1,725       2,103  

Interest and dividends on investment securities

     96       196  

Other interest income

     88       276  
   

Total financing revenue and other interest income

     3,812       5,404  

Interest expense

    

Interest on deposits

     92       94  

Interest on short-term borrowings

     190       579  

Interest on long-term debt

     1,837       2,351  

Other interest expense

     62       155  
   

Total interest expense

     2,181       3,179  

Depreciation expense on operating lease assets

     1,153       1,397  
   

Net financing revenue

     478       828  

Other revenue

    

Servicing fees

     408       470  

Servicing asset valuation and hedge activities, net

     (360 )     410  

Insurance premiums and service revenue earned

     864       1,109  

Gain (loss) on mortgage and automotive loans, net

     296       (600 )

Gain on extinguishment of debt

     644       488  

Other loss on investments, net

     (19 )     (445 )

Other income, net of losses

     (112 )     150  
   

Total other revenue

     1,721       1,582  

Total net revenue

     2,199       2,410  

Provision for loan losses

     843       474  

Noninterest expense

    

Compensation and benefits expense

     419       614  

Insurance losses and loss adjustment expenses

     553       630  

Other operating expenses

     1,182       1,263  
   

Total noninterest expense

     2,154       2,507  

Loss before income tax (benefit) expense

     (798 )     (571 )

Income tax (benefit) expense

     (123 )     18  
   

Net loss

   $ (675 )   $ (589 )
   

The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

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GMAC LLC

CONDENSED CONSOLIDATED BALANCE SHEET (unaudited)

 

($ in millions)    March 31, 2009     December 31, 2008  

Assets

    

Cash and cash equivalents

   $ 13,333     $ 15,151  

Investment securities

    

Trading

     1,128       1,520  

Available-for-sale

     6,773       6,234  

Held-to-maturity

     3       4  
   

Total investment securities

     7,904       7,758  

Loans held-for-sale

     10,357       7,919  

Finance receivables and loans, net of unearned income

    

Consumer ($1,663 and $1,861 at fair value)

     60,062       63,963  

Commercial

     35,940       36,110  

Allowance for loan losses

     (3,645 )     (3,433 )
   

Total finance receivables and loans, net

     92,357       96,640  

Investment in operating leases, net

     23,527       26,390  

Notes receivable from General Motors

     1,169       1,655  

Mortgage servicing rights

     2,587       2,848  

Premiums receivable and other insurance assets

     4,787       4,507  

Other assets

     23,531       26,608  
   

Total assets

   $ 179,552     $ 189,476  
   

Liabilities

    

Debt

    

Unsecured

   $ 49,238     $ 53,213  

Secured ($1,676 and $1,899 at fair value)

     64,186       73,108  
   

Total debt

     113,424       126,321  

Interest payable

     1,669       1,517  

Unearned insurance premiums and service revenue

     4,266       4,356  

Reserves for insurance losses and loss adjustment expenses

     3,007       2,895  

Deposit liabilities

     23,170       19,807  

Accrued expenses and other liabilities

     11,995       12,726  
   

Total liabilities

     157,531       167,622  

Equity

    

Members’ interests

     10,917       9,670  

Senior preferred interests

     5,000       5,000  

Preferred interests

     1,287       1,287  

Retained earnings

     5,374       6,286  

Accumulated other comprehensive loss

     (557 )     (389 )
   

Total equity

     22,021       21,854  
   

Total liabilities and equity

   $ 179,552     $ 189,476  
   

The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

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GMAC LLC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited)

Three Months Ended March 31, 2009 and 2008

 

($ in millions)  

Members’

interests

 

Senior

preferred

interests

 

Preferred

interests

 

Retained

earnings

   

Accumulated

other

comprehensive

income (loss)

   

Total

equity

   

Comprehensive

income (loss)

 

Balance at January 1, 2008, before cumulative effect of adjustments

  $ 8,912     $ 1,052   $ 4,649     $ 952     $ 15,565    

Cumulative effect of a change in accounting principle, net of tax:

             

Adoption of Statement of Financial Accounting Standards No. 157 (a)

          23         23    

Adoption of Statement of Financial Accounting Standards No. 159 (a)

          (178 )       (178 )  
   

Balance at January 1, 2008, after cumulative effect of adjustments

    8,912       1,052     4,494       952       15,410    

Capital contributions

    3             3    

Net loss

          (589 )       (589 )   $ (589 )

Preferred interests dividends

          (26 )       (26 )  

Dividends paid to members (b)

          (1 )       (1 )  

Other

          2         2    

Other comprehensive loss

            (35 )     (35 )     (35 )
   

Balance at March 31, 2008

  $ 8,915     $ 1,052   $ 3,880     $ 917     $ 14,764     $ (624 )
   

Balance at January 1, 2009

  $ 9,670   $ 5,000   $ 1,287   $ 6,286     $ (389 )   $ 21,854    

Capital contributions (b)

    1,247             1,247    

Net loss

          (675 )       (675 )   $ (675 )

Preferred interests dividends

          (123 )       (123 )  

Dividends to members (b)

          (110 )       (110 )  

Other

          (4 )       (4 )  

Other comprehensive loss

            (168 )     (168 )     (168 )
   

Balance at March 31, 2009

  $ 10,917   $ 5,000   $ 1,287   $ 5,374     $ (557 )   $ 22,021     $ (843 )
   
(a) Refer to Note 15 to the Condensed Consolidated Financial Statements for further detail.
(b) Refer to Note 14 to the Condensed Consolidated Financial Statements for further detail.

The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

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GMAC LLC

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

Three Months Ended March 31, 2009 and 2008

 

($ in millions)    2009     2008  

Operating activities

    

Net cash (used in) provided by operating activities

   $ (1,654 )   $ 1,061  
   

Investing activities

    

Purchases of available-for-sale securities

     (2,759 )     (6,462 )

Proceeds from sales of available-for-sale securities

     1,298       6,647  

Proceeds from maturities of available-for-sale securities

     1,101       1,294  

Net decrease (increase) in finance receivables and loans

     3,816       (1,477 )

Proceeds from sales of finance receivables and loans

     871       591  

Purchases of operating lease assets

     (340 )     (4,583 )

Disposals of operating lease assets

     1,784       1,957  

Sales of mortgage servicing rights

           174  

Net decrease (increase) in notes receivable from General Motors

     463       (44 )

Other, net

     204       (924 )
   

Net cash provided by (used in) investing activities

     6,438       (2,827 )
   

Financing activities

    

Net decrease in short-term debt

     (1,633 )     (3,613 )

Net increase in bank deposits

     2,688       2,419  

Proceeds from issuance of long-term debt

     5,218       11,621  

Repayments of long-term debt

     (15,097 )     (11,573 )

Proceeds from issuance of common membership interests

     1,247        

Dividends paid

     (233 )     (35 )

Other, net

     698       220  
   

Net cash used in financing activities

     (7,112 )     (961 )
   

Effect of exchange rate changes on cash and cash equivalents

     510       (114 )
   

Net decrease in cash and cash equivalents

     (1,818 )     (2,841 )

Cash and cash equivalents at beginning of year

     15,151       17,677  
   

Cash and cash equivalents at March 31,

   $ 13,333     $ 14,836  
   

The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

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GMAC LLC

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

1. Basis of Presentation

GMAC LLC was founded in 1919 as a wholly owned subsidiary of General Motors Corporation (General Motors or GM). On November 30, 2006, GM sold a 51% interest in us (the Sale Transactions) to FIM Holdings LLC (FIM Holdings). FIM Holdings is an investment consortium led by Cerberus FIM Investors, LLC, the sole managing member. The consortium also includes Citigroup Inc., Aozora Bank Ltd., and a subsidiary of The PNC Financial Services Group, Inc. On December 24, 2008, the Board of Governors of the Federal Reserve System approved our application to become a bank holding company under the Bank Holding Company Act of 1956, as amended (the BHC Act). In connection with our approval to become a bank holding company, the Board of Governors of the Federal Reserve System indicated in its approval order that (i) GM is required to reduce its ownership interest in GMAC to less than 10% of the voting and total equity of GMAC and (ii) FIM Holdings is required to reduce the aggregate direct and indirect investments to no greater than 14.9% of the voting and 33% of the total equity of GMAC. The foregoing requirements could change in the event our shareholders and the Board of Governors of the Federal Reserve System agree to any modifications. As of March 31, 2009, GM and FIM Holdings own 59.9% and 40.1% of our voting equity interests, respectively. The terms “GMAC,” “the Company,” “we,” “our,” and “us” refer to GMAC LLC and its subsidiaries as a consolidated entity except where it is clear that the terms mean only GMAC LLC.

The Condensed Consolidated Financial Statements as of March 31, 2009, and for the three months ended March 31, 2009 and 2008, are unaudited but, in management’s opinion, include all normal recurring adjustments necessary for the fair presentation of the results for the interim periods.

The interim-period consolidated financial statements, including the related notes, are condensed and are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim reporting. Certain amounts in prior periods have been reclassified to conform to the current period’s presentation. These reclassifications, as well as certain presentation changes, have been made to more closely conform to Article 9 of Regulation S-X as a result of our recent approval to become a bank holding company. On our Condensed Consolidated Statement of Income, we reclassified interest and dividends on investment securities from investment income (a component of total other revenue) to a separate financial statement line-item within total financing revenue and other interest income. Additionally, we reclassified other interest income from other income, net of losses (a component of total other revenue), to a separate financial statement line-item within total financing revenue and other interest income. Presentation changes were made to interest expense on the Condensed Consolidated Statement of Income and investment securities on the Condensed Consolidated Balance Sheet to provide greater detail on the composition of these financial statement line-items. Additionally, we are in the process of modifying information systems to address Article 9 guidelines that are not in this Form 10-Q. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These interim-period Condensed Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements, which are included in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the United States Securities and Exchange Commission (SEC) on February 26, 2009.

Residential Capital, LLC (ResCap), our mortgage subsidiary, has been negatively impacted by the events and conditions in the mortgage banking industry and the broader economy. The market deterioration has led to fewer sources of, and significantly reduced levels of, liquidity available to finance ResCap’s operations. ResCap is highly leveraged relative to its cash flow and continues to recognize credit and valuation losses resulting in a significant deterioration in capital. During the first quarter of 2009, ResCap received capital contributions from GMAC of $0.4 billion, recognized a gain on extinguishment of debt of $0.9 billion as a result of completed divestitures to GMAC (including the sale of IB Finance Holdings, LLC (IB Finance)), and through contributions and forgiveness of ResCap’s outstanding notes, which GMAC previously repurchased in the open market at a discount or through our private debt exchange and cash tender offers. Accordingly, ResCap’s consolidated tangible net worth was $1.05 billion as of March 31, 2009, and remained in compliance with all of its consolidated tangible net worth covenants. For this purpose, consolidated tangible net worth is defined as ResCap’s consolidated equity excluding intangible assets and any equity in GMAC Bank to the extent included in ResCap’s consolidated balance sheet. There continues to be a risk that ResCap will not be able to meet its debt service obligations, default on its financial debt covenants due to insufficient capital, and/or be in a negative liquidity position in 2009.

 

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GMAC LLC

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

ResCap actively manages its liquidity and capital positions and is continually working on initiatives to address its debt covenant compliance and liquidity needs, including debt maturing in the next twelve months and the identified risks and uncertainties. ResCap’s initiatives include, but are not limited to, the following: continuing to work with key credit providers to optimize all available liquidity options; continued reduction of assets and other restructuring activities; focusing production on government and prime conforming products; exploring strategic alternatives such as alliances, joint ventures, and other transactions with third parties; and continually exploring opportunities for funding and capital support from GMAC and its affiliates. Most of these initiatives are outside of ResCap’s control resulting in an increased uncertainty as to their successful execution.

ResCap remains heavily dependent on GMAC and its affiliates for funding and capital support, and there can be no assurance that GMAC or its affiliates will continue such actions. We have previously disclosed that ResCap is an important subsidiary and that we believed the support we have provided to ResCap was in the best interests of our stakeholders. We have further disclosed that if ResCap were to need additional support, we would provide that support so long as it was in the best interests of our stakeholders. While there can be no assurances, our recently approved status as a regulated bank holding company has increased the importance of our support for ResCap as its core origination and servicing business provides diversification benefits for us.

Although our continued actions through various funding and capital initiatives demonstrate support for ResCap and our status as a bank holding company and completion of our private debt exchange and cash tender offers better position us to be capable of supporting ResCap, there are currently no commitments or assurances for future funding and/or capital support. Consequently, there remains substantial doubt about ResCap’s ability to continue as a going concern. Should we no longer continue to support the capital or liquidity needs of ResCap or should ResCap be unable to successfully execute other initiatives, it would have a material adverse effect on ResCap’s business, results of operations, and financial position.

GMAC has extensive financing and hedging arrangements with ResCap that could be at risk of nonpayment if ResCap were to file for bankruptcy. As of March 31, 2009, we had approximately $4.1 billion in secured financing arrangements and secured hedging agreements with ResCap of which approximately $2.4 billion in loans and $13 million related to hedging agreements had been utilized, and we owned approximately $621 million of ResCap secured notes (with a ResCap book value of $1.8 billion). Amounts outstanding under the secured financing and hedging arrangements fluctuate. If ResCap were to file for bankruptcy, ResCap’s repayments of its financing facilities, including those with us, could be slower than if ResCap had not filed for bankruptcy. In addition, we could be an unsecured creditor of ResCap to the extent that the proceeds from the sale of our collateral are insufficient to repay ResCap’s obligations to us. It is possible that other ResCap creditors would seek to recharacterize our loans to ResCap as equity contributions or to seek equitable subordination of our claims so that the claims of other creditors would have priority over our claims. As a holder of unsecured notes, we would not receive any distributions for the benefit of creditors in a ResCap bankruptcy before secured creditors are repaid. In addition, should ResCap file for bankruptcy, our investment related to ResCap’s equity position would likely be reduced to zero. Based on balances as of March 31, 2009, this would result in a $2.4 billion charge to our investment in ResCap. If a ResCap bankruptcy were to occur and a substantial amount of our credit exposure not repaid to us, it would have an adverse impact on our near-term net income and capital position, but we do not believe it would have a materially adverse impact on GMAC’s consolidated financial position over the longer term.

Recently Adopted Accounting Standards

SFAS No. 141(R) — On January 1, 2009, we adopted SFAS No. 141(R), Business Combinations (SFAS 141(R)), which replaces FASB Statement No. 141, Business Combinations. SFAS 141(R) establishes principles and requirements for how an acquiring company recognizes and measures the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The adoption of SFAS 141(R) did not have a material impact on our consolidated financial condition or results of operations.

SFAS No. 160 — On January 1, 2009, we adopted SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (SFAS 160), which requires the ownership interests in subsidiaries held by

 

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GMAC LLC

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of income. The adoption of SFAS 160 did not have a material impact on our consolidated financial condition or results of operations.

SFAS No. 161 — As of March 31, 2009, we adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 requires specific disclosures regarding the location and amounts of derivative instruments in the financial statements; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect the financial position, financial performance, and cash flows. Because SFAS 161 impacted only the disclosure and not the accounting treatment for derivative instruments and related hedged items, the adoption of SFAS 161 did not have an impact on our consolidated financial condition or results of operations. Refer to Note 12 for disclosures required by SFAS 161.

FSP FAS No. 140-3 — On January 1, 2009, we adopted FSP FAS No. 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (FSP FAS 140-3), which provides a consistent framework for the evaluation of a transfer of a financial asset and subsequent repurchase agreement entered into with the same counterparty. FSP FAS 140-3 provides that transfers of financial assets with subsequent repurchase agreements be viewed as a single transaction. The guidance further provides specific guidelines that, if met, would overcome the linking of the transactions and allow for the transactions to be viewed independently. The adoption of FSP FAS 140-3 did not have a material impact on our consolidated financial condition or results of operations.

FSP FAS No. 141(R)-1 — In April 2009, the FASB issued FSP FAS No. 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (FSP FAS 141(R)-1) to address application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. We retrospectively adopted FSP FAS 141(R)-1 as of January 1, 2009. The adoption did not have a material impact on our consolidated financial condition or results of operations.

FSP FAS No. 142-3 — On January 1, 2009, we adopted FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used for purposes of determining the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets (SFAS 142). FSP FAS 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other GAAP. The adoption of FSP FAS 142-3 did not have a material effect on our consolidated financial condition or results of operations.

EITF Issue No. 08-6 — On January 1, 2009, we adopted EITF No. 08-6, Equity Method Investment Accounting Considerations (Issue No. 08-6) which address how the initial carrying value of an equity method investment should be determined; how an impairment assessment of an underlying indefinite-lived intangible asset of an equity method investment should be performed; how an equity method investee’s issuance of shares should be accounted for; and how to account for a change in an investment from the equity method to the cost method. The adoption of Issue No. 08-6 did not have a material impact on our consolidated financial condition or results of operations.

Recently Issued Accounting Standards

FSP FAS No. 132(R)-1 — In December 2008, the FASB issued FSP FAS No. 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets, to provide guidance on an employer’s disclosure about plan assets of a defined benefit pension or other postretirement plan. This FSP provides disclosure objectives for investment policies and strategies, categories of plan assets, fair value measurements, and significant concentrations of risk. The FSP is effective for fiscal years ending after December 15, 2009. In the year of adoption, the provisions of this FSP are not required for earlier periods that are presented for comparative purposes. Since this impacts the disclosure and not the accounting treatment for benefit and other postretirement plans, adoption will not have a material effect on our consolidated financial condition or results of operations.

 

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GMAC LLC

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

FSP FAS No. 107-1 and APB 28-1 — In April 2009, the FASB issued FSP FAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about the fair value of financial instruments in interim periods. Additionally, the guidance amends APB Opinion No. 28, Interim Financial Reporting, to require these disclosures in all interim financial statements. This FSP is effective for periods ending after June 15, 2009, with early adoption permitted. We have not elected to early adopt this FSP. Since the guidance relates only to disclosures, adoption will not have a material effect on our consolidated financial condition or results of operations.

FSP FAS No. 115-2 and FAS 124-2 — In April 2009, the FASB issued FSP FAS No. 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which amends the guidance for determining and recognizing impairment on debt securities. The guidance requires entities to bifurcate the components of other-than-temporary impairment between credit and liquidity when an entity does not intend to sell an underwater debt security that has a credit impairment. In cases where this criterion is met, an entity recognizes the credit component of the impairment in earnings and all other fair value components in other comprehensive income. This FSP is effective for periods ending after June 15, 2009, with early adoption permitted. We have not elected to early adopt this FSP, and management is still assessing the impact of adoption.

FSP FAS No. 157-4 — In April 2009, the FASB issued FSP FAS No. 157-4, Determining Whether a Market is Not Active and a Transaction is Not Distressed (FSP FAS 157-4), which clarifies the guidance for determining fair value under SFAS No. 157, Fair Value Measurements. This FSP provides application guidance to assist preparers in determining whether an observed transaction has occurred in an inactive market and is also distressed. This FSP is effective for periods ending after June 15, 2009, with early adoption permitted. If an entity chooses to elect early adoption, the entity must also early adopt FSP FAS No. 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. We have not elected to early adopt this FSP; however, because the guidance is merely a clarification of existing guidance, adoption of this FSP will not have a material effect on our consolidated financial condition or results of operations.

 

2. Other Income, Net of Losses

Details of other income, net of losses were as follows:

 

     Three months ended
March 31,
 
($ in millions)        2009             2008      

Real estate services, net

   $ (34 )   $ (28 )

Interest and service fees on transactions with GM (a)

     (43 )     (33 )

Full-service leasing fees

     78       99  

Late charges and other administrative fees (b)

     43       45  

Mortgage processing fees and other mortgage income

     6       2  

Real estate and other investments, net

     4       (38 )

Insurance service fees

     36       42  

Factoring commissions

     8       12  

Specialty lending fees

     8       13  

Fair value adjustment on certain derivatives (c)

     (157 )     45  

Changes in fair value for SFAS 159 elections, net (d)

     (30 )     (55 )

Other, net

     (31 )     46  
   

Total other income, net of losses

   $ (112 )   $ 150  
   
(a) Refer to Note 14 for a description of related party transactions.
(b) Includes nonmortgage securitization fees.
(c) Refer to Note 12 for a description of derivative instruments and hedging activities.
(d) Refer to Note 15 for a description of SFAS 159 fair value option elections.

 

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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

3. Other Operating Expenses

Details of other operating expenses were as follows:

 

     Three months ended
March 31,
($ in millions)        2009             2008    

Insurance commissions

   $ 186     $ 237

Technology and communications expense

     163       153

Professional services

     106       108

Advertising and marketing

     47       53

Mortgage representation and warranty expense, net

     176       21

Premises and equipment depreciation

     32       48

Rent and storage

     34       52

Full-service leasing vehicle maintenance costs

     73       90

Lease and loan administration

     39       45

Automotive remarketing and repossession

     46       72

Restructuring expenses

     6       34

Operating lease disposal (gain) loss

     (33 )     37

Other

     307       313
 

Total other operating expenses

   $ 1,182     $ 1,263
 

 

4. Investment Securities

Our portfolio of securities includes bonds, equity securities, asset- and mortgage-backed securities, notes, interests in securitization trusts, and other investments. The cost, fair value, and gross unrealized gains and losses on available-for-sale and held-to-maturity securities were as follows:

 

     March 31, 2009    December 31, 2008
          Gross unrealized     Fair
value
        Gross unrealized     Fair
value
($ in millions)    Cost    gains    losses        Cost    gains    losses    

Available-for-sale securities

                     

Debt securities

                     

U.S. Treasury and federal agencies

   $ 1,001    $ 24    $     $ 1,025    $ 389    $ 31    $     $ 420

States and political subdivisions

     876      32      (15 )     893      876      31      (26 )     881

Foreign government

     858      23            881      887      25            912

Mortgage-backed

                     

Residential

     605      11      (28 )     588      191      4      (2 )     193

Commercial

     17           (3 )     14      17           (2 )     15

Asset-backed

     552      5      (6 )     551      664           (2 )     662

Interest-only strips

          2            2           2            2

Corporate debt securities

     2,140      28      (135 )     2,033      2,431      24      (165 )     2,290

Other

     318      1            319      350      4      (1 )     353
 

Total debt securities (a)

     6,367      126      (187 )     6,306      5,805      121      (198 )     5,728

Equity securities

     517      73      (123 )     467      525      79      (98 )     506
 

Total available-for-sale securities

   $ 6,884    $ 199    $ (310 )   $ 6,773    $ 6,330    $ 200    $ (296 )   $ 6,234
 

Held-to-maturity securities

                     

Total held-to-maturity securities

   $ 3    $    $     $ 3    $ 4    $    $     $ 4
 
(a) In connection with certain borrowings and letters of credit relating to certain assumed reinsurance contracts, $143 million and $154 million of primarily U.S. Treasury securities were pledged as collateral as of March 31, 2009, and December 31, 2008, respectively.

 

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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

We had other-than-temporary impairment write-downs of $46 million and $4 million for the three months ended March 31, 2009 and 2008, respectively. We recognized other-than-temporary impairments because we no longer intend to hold these securities for a time sufficient to recover the unrealized losses. The change in our intent resulted from unfavorable changes in the financial condition of the issuers of these securities (e.g., downgrades, deteriorating returns, unfavorable earnings guidance, rising credit costs).

The fair value for our portfolio of trading securities was as follows:

 

($ in millions)    March 31, 2009    December 31, 2008

Trading securities

     

Fair value

     

U.S. Treasury

   $    $ 409

Mortgage-backed

     

Residential

     205      237

Commercial

          7

Mortgage residual interests

     268      274

Asset-backed

     501      474

Interest-only strips

     99      100

Principal-only strips

     15      18

Debt and other

     40      1
 

Total trading securities

   $ 1,128    $ 1,520
 

 

5. Finance Receivables and Loans and Loans Held-for-sale

The composition of finance receivables and loans outstanding was as follows:

 

     March 31, 2009    December 31, 2008
($ in millions)    Domestic    Foreign    Total    Domestic    Foreign    Total

Consumer

                 

Retail automotive

   $ 15,269    $ 19,303    $ 34,572    $ 16,281    $ 21,705    $ 37,986

Residential mortgages (a)

     21,176      4,314      25,490      21,319      4,658      25,977
 

Total consumer

     36,445      23,617      60,062      37,600      26,363      63,963

Commercial

                 

Automotive

                 

Wholesale

     16,865      6,511      23,376      16,035      8,094      24,129

Leasing and lease financing

     165      541      706      211      634      845

Term loans to dealers and other

     2,541      450      2,991      2,608      531      3,139

Commercial and industrial

     6,320      916      7,236      4,884      1,157      6,041

Real estate construction and other

     1,402      229      1,631      1,696      260      1,956
 

Total commercial

     27,293      8,647      35,940      25,434      10,676      36,110
 

Total finance receivables and loans (b)

   $ 63,738    $ 32,264    $ 96,002    $ 63,034    $ 37,039    $ 100,073
 
(a) Domestic residential mortgages include $1.7 billion and $1.9 billion at fair value as a result of election made under SFAS 159 as of March 31, 2009, and December 31, 2008, respectively. Refer to Note 15 for additional information.
(b) Net of unearned income of $3.1 billion and $3.4 billion as of March 31, 2009, and December 31, 2008, respectively.

 

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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The composition of loans held-for-sale was as follows:

 

($ in millions)    March 31, 2009    December 31, 2008

Consumer

     

Retail automotive

   $ 4,156    $ 3,805

Residential mortgages

     6,143      2,629
 

Total consumer

     10,299      6,434

Commercial

     

Automotive wholesale

     50      252

Commercial and industrial (a)

     8      1,233
 

Total commercial

     58      1,485
 

Total loans held-for-sale

   $ 10,357    $ 7,919
 
(a) The balance as of December 31, 2008, primarily related to the resort finance business of our Commercial Finance Group, which provides debt capital to resort and timeshare developers. As of March 31, 2009, the resort finance business was reclassified from loans held-for-sale to commercial finance receivables and loans, net of unearned income, on the Condensed Consolidated Balance Sheet because it was unlikely the sale would occur within the foreseeable future.

The following table presents an analysis of the activity in the allowance for loan losses on finance receivables and loans.

 

     Three months ended March 31,  
     2009     2008  
($ in millions)    Consumer     Commercial     Total     Consumer     Commercial     Total  

Allowance at January 1,

   $ 2,536     $ 897     $ 3,433     $ 2,141     $ 614     $ 2,755  

Provision for loan losses

     655       188       843       450       24       474  

Charge-offs

            

Domestic

     (402 )     (188 )     (590 )     (362 )     (110 )     (472 )

Foreign

     (73 )     (12 )     (85 )     (62 )     (1 )     (63 )
   

Total charge-offs

     (475 )     (200 )     (675 )     (424 )     (111 )     (535 )
   

Recoveries

            

Domestic

     52       3       55       53       2       55  

Foreign

     15       1       16       15       1       16  
   

Total recoveries

     67       4       71       68       3       71  
   

Net charge-offs

     (408 )     (196 )     (604 )     (356 )     (108 )     (464 )

Reduction of allowance due to fair value option election (a)

                       (489 )           (489 )

Impacts of foreign currency translation

     (25 )     (2 )     (27 )     14       2       16  
   

Allowance at March 31,

   $ 2,758     $ 887     $ 3,645     $ 1,760     $ 532     $ 2,292  
   
(a) Represents the reduction of allowance as a result of fair value option election made under SFAS 159 effective January 1, 2008. Refer to Note 15 for additional information.

 

6. Off-balance Sheet Securitizations

We sell pools of automotive and residential mortgage loans via securitization transactions that qualify for off-balance sheet treatment under GAAP. The purpose of these securitizations is to provide a permanent funding and asset and liability management. In executing the securitization transactions, we typically sell the pools to wholly owned special-purpose entities (SPEs), which then sell the loans to a separate, transaction-specific, bankruptcy-remote SPE (a securitization trust) for cash, MSRs, and, in some transactions, retained interests. The securitization trust issues and sells interests to investors that are collateralized by the secured loans and entitle the investors to specified cash flows generated from the securitized loans.

 

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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Each securitization is governed by various legal documents that limit and specify the activities of the securitization vehicle. The securitization vehicle is generally allowed to acquire the loans being sold to it, issue interests to investors to fund the acquisition of the loans, and enter into derivatives or other yield maintenance contracts to hedge or mitigate certain risks related to the asset pool or debt securities. Additionally, the securitization vehicle is required to service the assets it holds and the debt or interest it has issued. These functions are performed by a servicer appointed within the underlying legal documents. Servicing functions include, but are not limited to, collecting payments from borrowers, performing escrow functions, monitoring delinquencies, liquidating assets, investing funds until distribution, remitting payments to investors, and accounting for and reporting information to investors.

Generally, the assets initially transferred into the securitization vehicle are the sole funding source to the investors and the various other parties that perform services for the transaction, such as the servicer or the trustee. In certain transactions, a liquidity provider or facility may exist to provide temporary liquidity to the structure. The liquidity provider generally is reimbursed prior to other parties in subsequent distribution periods. Bond insurance may also exist to cover certain shortfalls to certain investors. In certain securitizations, the servicer is required to advance scheduled principal and interest payments due on the pool regardless of whether they have been received from the borrowers. The servicer is allowed to reimburse itself for these servicing advances. Lastly, certain securitization transactions may allow for the acquisition of additional loans subsequent to the initial loan. These loans will generally be funded by principal collections on other loans and/or the issuance of new interests, such as variable funding notes; we are often contractually required to invest in these new interests. Additionally, we provide certain guarantees as discussed in Note 26 to the Consolidated Financial Statements in our 2008 Annual Report on Form 10-K.

As part of our securitizations, we typically retain servicing responsibilities and other retained interests. Accordingly, our servicing responsibilities result in continued involvement in the form of servicing the underlying asset (primary servicing) and/or servicing the bonds resulting from the securitization transactions (master servicing) through servicing platforms. As noted above, certain securitizations require the servicer to advance scheduled principal and interest payments due on the pool regardless of whether they are received from borrowers. Accordingly, we are required to provide these servicing advances when applicable. In certain of our securitizations, we may be required to fund certain investor-triggered put redemptions and are allowed to reimburse ourselves by repurchasing loans at par. Typically, for retail automotive finance receivables where we are paid a fee, we have concluded that the fee represents adequate compensation as a servicer, and as such, no servicing asset or liability is recognized. Considering the short-term revolving nature of wholesale loans, no servicing asset or liability is recognized upon securitization of the loans. Additionally, we retain the rights to cash flows remaining after the investors in most securitization trusts have received their contractual payments. In certain retail securitization transactions, retail receivables are sold on a servicing retained basis with no servicing compensation, and as such, a servicing liability is established and reported in other liabilities. As of March 31, 2009, and December 31, 2008, servicing liabilities of $1 million were outstanding during both periods related to these retail automotive securitization transactions. Refer to Note 1 and Note 22 to the Consolidated Financial Statements in our 2008 Annual Report on Form 10-K regarding the valuation of servicing rights.

We maintain cash reserve accounts at predetermined amounts for certain securitization activities in the event that deficiencies occur in cash flows owed to the investors. The amounts available in these cash reserve accounts related to securitizations of retail finance receivables, wholesale loans, and residential mortgage loans.

The retained interests we may receive represent a continuing economic interest in the securitization. Retained interests include, but are not limited to, senior or subordinate mortgage- or asset-backed securities, interest-only strips, principal-only strips, and residuals. Certain of these retained interests provide credit enhancement to the securitization structure as they may absorb credit losses or other cash shortfalls. Additionally, the securitization documents may require cash flows to be directed away from certain of our retained interests due to specific over-collateralization requirements, which may or may not be performance-driven. The value of any interests that continue to be held take into consideration the features of the securitization transaction and are generally subject to credit, prepayment, and/or interest rate risks on the transferred financial assets. Refer to Note 1 and Note 22 to the Consolidated Financial Statements in our 2008 Annual Report on Form 10-K regarding the valuation of retained interests. We are typically not required to continue retaining these interests. In the past, we have sold certain of these retained interests when it best aligns to our economic or strategic plans.

 

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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The investors and/or securitization trusts have no recourse to us with the exception of customary market representation and warranty repurchase provisions and, in certain transactions, early payment default provisions. Representation and warranty repurchase provisions generally require us to repurchase loans to the extent it is subsequently determined that the loans were ineligible or were otherwise defective at the time of sale. Due to market conditions, early payment default provisions were included in certain securitization transactions that require us to repurchase loans if the borrower is delinquent in making certain specific payments subsequent to the sale.

We hold certain conditional repurchase options that allow us to repurchase assets from the securitization. The majority of the securitizations provide us, as servicer, with a call option that allows us to repurchase the remaining assets or outstanding debt once the asset pool reaches a predefined level, which represents the point where servicing is burdensome rather than beneficial. Such an option is referred to as a cleanup call. As servicer, we are allowed to exercise this option at our discretion anytime after the asset pool size falls below the predefined level. The repurchase price for the loans is typically par plus accrued interest. Additionally, we may hold other conditional repurchase options that allow for us to repurchase the asset if certain events, outside our control, are met. The typical conditional repurchase option is a delinquent loan repurchase option that gives us the option to purchase the loan if it exceeds a certain prespecified delinquency level. We have complete discretion regarding when or if we will exercise these options, but generally we will do so when it is in our best interest.

As required under GAAP, the loans sold into securitization transactions are derecognized. The assets obtained from the securitization are reported as cash, retained interests, or servicing rights. We have elected fair value treatment for our existing mortgage servicing rights portfolio. Our retained interest portfolio is classified as trading securities, available-for-sale securities, or other assets. The portfolio is carried at fair value with valuation adjustments reported through earnings or equity. The valuation adjustments related to trading securities are reported as other income (loss) on investments, net, in our Condensed Consolidated Statement of Income. The valuation adjustments related to unrealized gains and losses of our available-for-sale securities are reported as a component of accumulated other comprehensive income in our Condensed Consolidated Balance Sheet. The realized gains and losses of our available-for-sale securities are reported as other income (loss) on investments, net, in our Condensed Consolidated Income Statement. The valuation adjustments and any gains and losses recognized by our retained interests classified as other assets is reported as other income, net of losses, in our Condensed Consolidated Statement of Income. Liabilities incurred as part of the transaction, such as representation and warranties provisions or early payment default provisions, are recorded at fair value at the time of sale and are reported as accrued expenses and other liabilities on our Condensed Consolidated Balance Sheet. Upon the sale of the loans, a gain or loss on sale is recognized for the difference between the assets recognized, the assets derecognized, and the liabilities recognized as part of the transaction. During the three months ended March 31, 2009, we recognized pretax gains of $64 million and pretax losses of $4 million on the securitization transactions of wholesale loans and residential mortgage loans, respectively. During the three months ended March 31, 2008, we recognized pretax gains of $10 million and $103 million on securitization transactions of retail finance receivables and wholesale loans, respectively, and pretax losses of $6 million on the securitization transactions of residential mortgage loans.

The following summarizes the type and amount of loans held by the securitization trusts in transactions that qualified for off-balance sheet treatment:

 

($ in billions)    March 31, 2009    December 31, 2008

Retail finance receivables

   $ 11.8    $ 13.3

Wholesale loans

     7.1      12.5

Mortgage loans (a)

     119.3      126.2
 

Total off-balance sheet activities

   $ 138.2    $ 152.0
 
(a) Excludes $1.9 billion and $1.6 billion of loans held by securitization trusts as of March 31, 2009, and December 31, 2008, respectively, that we have the option to repurchase under EITF Issue No. 02-9, Accounting for Changes that Result in a Transferor Regaining Control of Financial Assets Sold, as they are included in consumer finance receivable and loans and mortgage loans held-for-sale.

 

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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The following table presents components of securitized financial assets and other assets managed.

 

     Total finance
receivables and loans
 
($ in millions)    March 31, 2009     December 31, 2008  

Retail automotive

   $ 49,954     $ 55,884  

Retail mortgage

     151,349       154,841  
   

Total consumer

     201,303       210,725  
   

Wholesale

     29,400       35,205  

Other automotive and commercial

     12,564       11,981  
   

Total commercial

     41,964       47,186  
   

Total managed portfolio (a)

     243,267       257,911  

Securitized finance receivables and loans

     (136,908 )     (149,919 )

Loans held-for-sale (unpaid principal)

     (10,357 )     (7,919 )
   

Total finance receivables and loans

   $ 96,002     $ 100,073  
   
(a) Managed portfolio represents finance receivables and loans on the balance sheet or that have been securitized, excluding securitized finance receivables and loans that we continue to service but have no other continuing involvement (i.e., in which we retain an interest or risk of loss in the underlying receivables).

 

7. Mortgage Servicing Rights

We define our classes of mortgage servicing rights (MSRs) based on both the availability of market inputs and the manner in which we manage the risks of our servicing assets and liabilities. Sufficient market inputs exist to determine the fair value of our recognized servicing assets and servicing liabilities.

The following table summarizes activity related to mortgage servicing rights (MSRs) carried at fair value.

 

     Three months ended
March 31,
 
($ in millions)        2009             2008      

Estimated fair value at January 1,

   $ 2,848     $ 4,703  

Additions obtained from sales of financial assets

     119       370  

Subtractions from sales of servicing assets

           (174 )

Changes in fair value

    

Due to changes in valuation inputs or assumptions used in the valuation model

     (40 )     (454 )

Recognized day-one gains on previously purchased MSRs upon adoption of SFAS 157 (a)

           11  

Other changes in fair value

     (340 )     (176 )

Other changes that affect the balance

           (2 )
   

Estimated fair value at March 31,

   $ 2,587     $ 4,278  
   
(a) Refer to Note 15 for additional information.

As of March 31, 2009, we pledged MSRs of $1.6 billion as collateral for borrowings compared to $1.8 billion as of December 31, 2008. For a description of MSRs and the related hedging strategy, refer to Notes 9 and 16 to the Consolidated Financial Statements in our 2008 Annual Report on Form 10-K.

 

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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Changes in fair value, due to changes in valuation inputs or assumptions used in the valuation models, include all changes due to revaluation by a model or by a benchmarking exercise. Other changes in fair value primarily include the accretion of the present value of the discount related to forecasted cash flows and the economic runoff of the portfolio, foreign currency translation adjustments, and the extinguishment of MSRs related to the exercise of clean-up calls of securitization transactions.

Key assumptions we use in valuing our MSRs are as follows:

 

     March 31,  
      2009      2008  

Range of prepayment speeds

   0.7–50.2 %    0.7–49.6 %

Range of discount rates

   2.7–130.3 %    4.1–30.5 %
   

The primary risk of our servicing rights is interest rate risk and the resulting impact on prepayments. A significant decline in interest rates could lead to higher-than-expected prepayments, which could reduce the value of the MSRs. Historically, we have economically hedged the income statement impact of these risks with both derivative and nonderivative financial instruments. These instruments include interest rate swaps, caps and floors, options to purchase these items, futures, and forward contracts and/or purchasing or selling U.S. Treasury and principal-only securities. The fair value of derivative financial instruments used to mitigate these risks amounted to $845 million and $1.3 billion at March 31, 2009 and 2008, respectively. The change in fair value of the derivative financial instruments amounted to a loss of $20 million and a gain of $1.0 billion for the three months ended March 31, 2009 and 2008, respectively, and is included in servicing asset valuation and hedge activities, net in the Condensed Consolidated Statement of Income.

The components of servicing fees on MSRs were as follows:

 

     Three months ended
March 31,
($ in millions)    2009    2008

Contractual servicing fees, net of guarantee fees, and including subservicing

   $ 281    $ 329

Late fees

     24      35

Ancillary fees

     36      28
 

Total

   $ 341    $ 392
 

During the third quarter of 2008, ResCap’s consolidated tangible net worth, as defined, fell below $1.0 billion giving Fannie Mae the right to pursue certain remedies under the master agreement and contract between GMAC Mortgage, LLC (ResCap’s consolidated subsidiary) and Fannie Mae. ResCap reached an agreement with Fannie Mae to provide Fannie Mae with collateral valued at $200 million, in addition to $100 million previously provided, and agreed to sell and transfer the servicing on mortgage loans having an unpaid principal balance of approximately $12.6 billion, or approximately 9% of the total principal balance of loans ResCap services for Fannie Mae. In return for these actions, Fannie Mae agreed to forbear until January 31, 2009, from exercising contractual remedies otherwise available to them due to the decline in ResCap’s consolidated tangible net worth, as defined. On January 29, 2009, Fannie Mae extended the forbearance period to March 31, 2009. As of March 31, 2009, ResCap had consolidated tangible net worth of $1.05 billion and complied with Fannie Mae’s forbearance requirements.

Also during the fourth quarter of 2008, GMAC Mortgage, LLC, a subsidiary of ResCap, received notice from Fannie Mae that it was in breach of the servicer rating requirement as set forth in the master agreement and contract between Fannie Mae and GMAC Mortgage, LLC. As a result of this breach, Fannie Mae is entitled to exercise certain rights and remedies as permitted by its contract with GMAC Mortgage, LLC. Fannie Mae granted, and subsequently extended, a temporary waiver of this requirement for the period from the date of notification up to and including April 30, 2009. This waiver allows Fannie Mae to conduct enhanced servicing reviews to ensure that GMAC Mortgage, LLC continues to provide satisfactory servicing performance. On April 22, 2009, Fannie Mae agreed to grant a further extension through June 30, 2009,

 

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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

of the existing master agreement with GMAC Mortgage, LLC. On April 30, 2009, Fannie Mae agreed to extend the waiver related to the servicing rating requirement. ResCap is taking the necessary actions to be in compliance by June 30, 2009; however, there can be no assurance it will be in compliance by that date.

 

8. Other Assets

Other assets consisted of:

 

($ in millions)    March 31, 2009     December 31, 2008  

Property and equipment at cost

   $ 1,520     $ 1,535  

Accumulated depreciation

     (1,110 )     (1,104 )
   

Net property and equipment

     410       431  

Fair value of derivative contracts in receivable position

     3,721       5,014  

Restricted cash collections for securitization trusts (a)

     3,071       3,143  

Cash reserve deposits held-for-securitization trusts (b)

     2,685       3,160  

Restricted cash and cash equivalents

     2,335       2,014  

Servicer advances

     2,027       2,126  

Goodwill

     1,352       1,357  

Repossessed and foreclosed assets, net, at lower of cost or fair value

     728       916  

Debt issuance costs

     682       788  

Investment in used vehicles held-for-sale, at lower of cost or fair value

     598       574  

Real estate and other investments (c)

     575       642  

Interests retained in securitization trusts

     510       688  

Accrued interest and rent receivable

     510       591  

Intangible assets, net of accumulated amortization

     55       60  

Other assets

     4,272       5,104  
   

Total other assets

   $ 23,531     $ 26,608  
   
(a) Represents cash collection from customer payments on securitized receivables. These funds are distributed to investors as payments on the related secured debt.
(b) Represents credit enhancement in the form of cash reserves for various securitization transactions we have executed.
(c) Includes residential real estate investments of $145 million and $189 million and related accumulated depreciation of $2 million and $2 million at March 31, 2009, and December 31, 2008, respectively.

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

9. Debt

 

     March 31, 2009    December 31, 2008
($ in millions)    Unsecured    Secured    Total    Unsecured    Secured    Total

Short-term debt

                 

Commercial paper

   $ 63    $    $ 63    $ 146    $    $ 146

Demand notes

     1,342           1,342      1,342           1,342

Bank loans and overdrafts

     2,303           2,303      2,963           2,963

Repurchase agreements and other (a)

     566      3,753      4,319      657      5,278      5,935
 

Total short-term debt

     4,274      3,753      8,027      5,108      5,278      10,386

Long-term debt

                 

Due within one year

     12,406      18,472      30,878      10,279      18,858      29,137

Due after one year

     31,809      41,961      73,770      37,101      48,972      86,073
 

Total long-term debt (b)

     44,215      60,433      104,648      47,380      67,830      115,210

Fair value adjustment (c)

     749           749      725           725
 

Total debt

   $ 49,238    $ 64,186    $ 113,424    $ 53,213    $ 73,108    $ 126,321
 
(a) Repurchase agreements consist of secured financing arrangements with third parties at our Mortgage operations. Other primarily includes nonbank secured borrowings and notes payable to GM. Refer to Note 14 for additional information.
(b) Secured long-term debt includes $1,676 million and $1,899 million at fair value as of March 31, 2009, and December 31, 2008, respectively, as a result of election made under SFAS 159. Refer to Note 15 for additional information.
(c) To adjust designated fixed-rate debt to fair value in accordance with SFAS 133.

The following table presents the scheduled maturity of long-term debt at March 31, 2009, assuming that no early redemptions occur. The actual payment of secured debt may vary based on the payment activity of the related pledged assets.

 

Year ended December 31, ($ in millions)    Unsecured (a)     Secured (b)    Total  

2009

   $ 10,024     $ 14,723    $ 24,747  

2010

     6,881       19,261      26,142  

2011

     9,857       12,602      22,459  

2012

     5,032       2,712      7,744  

2013

     1,900       3,139      5,039  

2014 and thereafter

     15,731       4,581      20,312  

Original issue discount (c)

     (5,210 )          (5,210 )
   

Long-term debt

     44,215       57,018      101,233  

Collateralized borrowings in securitization trusts (d)

           3,415      3,415  
   

Total long-term debt

   $ 44,215     $ 60,433    $ 104,648  
   
(a) Scheduled maturities of ResCap unsecured long-term debt are as follows: $523 million in 2009; $1,255 million in 2010; $208 million in 2011; $337 million in 2012; $536 million in 2013; and $214 million in 2014 and thereafter. These maturities exclude ResCap debt held by GMAC.
(b) Scheduled maturities of ResCap secured long-term debt are as follows: $602 million in 2009; $2,951 million in 2010; $876 million in 2011; $1,865 million in 2012; $2,867 million in 2013; and $4,571 million in 2014 and thereafter. These maturities exclude ResCap debt held by GMAC.
(c) Scheduled amortization of original issue discount is as follows: $963 million in 2009; $1,241 million in 2010; $1,012 million in 2011; $334 million in 2012; $248 million in 2013; and $1,412 million in 2014 and thereafter.
(d) Collateralized borrowings in securitization trusts represents mortgage lending related debt that is repaid upon the principal payments of the underlying assets.

Our $11.4 billion secured revolving credit facility is secured by U.S. and Canadian automotive finance assets, and the borrowers under the facility are structured as bankruptcy-remote special-purpose entities. Capacity under this facility declines to $7.9 billion in June 2010 and ultimately matures in June 2011.

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

This facility includes a leverage ratio covenant that requires our reporting segments, excluding our Mortgage operations reporting segment, to have a ratio of consolidated borrowed funds to consolidated net worth not to exceed 11.0:1. For this calculation, the numerator is our total debt on a consolidated basis (excluding obligations of bankruptcy-remote special-purpose entities), less the total debt of our Mortgage operations reporting segment in our consolidated balance sheet (excluding obligations of bankruptcy-remote special-purpose entities). The denominator is our consolidated net worth less our Mortgage operations consolidated net worth and certain extensions of credit from us to our Mortgage operations. As of March 31, 2009, the leverage ratio was 2.6:1. The following table summarizes the calculation of the leverage ratio covenant.

 

March 31, 2009 ($ in millions)    GMAC LLC    

Less:

Mortgage
operations

   

Adjusted

leverage metrics

 

Consolidated borrowed funds

      

Total debt

   $ 113,424     $ 27,565     $ 85,859  

Less

      

Obligations of bankruptcy-remote SPEs

     (47,191 )     (3,415 )     (43,776 )

Intersegment eliminations

           (5,297 )     5,297  
   

Consolidated borrowed funds used for leverage ratio

   $ 66,233     $ 18,853     $ 47,380  
   

Consolidated net worth

      

Total equity

   $ 22,021     $ 2,961     $ 19,060  

Less

      

Intersegment credit extensions

     (655 )           (655 )
   

Consolidated net worth used for leverage ratio

   $ 21,366     $ 2,961     $ 18,405  
   

Leverage ratio (a)

         2.6  
   
(a) We remain subject to a leverage ratio as previously calculated prior to the formation of the June 2008 secured revolving credit facility but on significantly reduced debt balances relative to prior periods. As of March 31, 2009, the leverage ratio as calculated based on that methodology was 3.0:1.

The following summarizes assets restricted as collateral for the payment of the related debt obligation primarily arising from securitization transactions accounted for as secured borrowings and repurchase agreements:

     March 31, 2009    December 31, 2008
($ in millions)    Assets   

Related secured

debt (a)

   Assets   

Related secured

debt (a)

Loans held-for-sale

   $ 240    $ 126    $ 1,549    $ 660

Mortgage assets held-for-investment and lending receivables

     6,019      4,633      7,011      5,422

Retail automotive finance receivables

     22,733      18,128      30,676      22,091

Wholesale automotive finance receivables

     14,155      10,906      20,738      11,857

Investment securities

     139      40      646      481

Investment in operating leases, net

     19,328      14,415      18,885      16,744

Real estate investments and other assets

     2,818      6,750      6,579      6,550

GMAC Bank (b)

     36,335      9,188      32,852      9,303
 

Total

   $ 101,767    $ 64,186    $ 118,936    $ 73,108
 
(a) Included as part of secured debt are repurchase agreements of $336 million and $588 million where we have pledged assets as collateral for approximately the same amount of debt at March 31, 2009, and December 31, 2008, respectively.
(b) GMAC Bank has an advance agreement with the Federal Home Loan Bank (FHLB) and access to the Federal Reserve Bank Discount Window and TAF program. Under the advance agreement the FHLB has a blanket lien on all GMAC Bank assets, which are made up of approximately $16.5 billion and $16.5 billion in mortgage-related finance receivables and loans, $6.2 billion and $6.0 billion in automotive-related finance receivables and loans, $4.9 billion and $0.9 billion in loans held for sale, $3.9 billion and $5.5 billion in cash and cash equivalents, and $4.8 billion and $4.0 billion in other assets as of March 31, 2009, and December 31, 2008, respectively. GMAC Bank had assets pledged and restricted as collateral totaling $20.0 billion and $21.2 billion as of March 31, 2009, and December 31, 2008, respectively. Availability under these programs is generally available only for the operations of GMAC Bank and cannot be used to fund the operations or liabilities of GMAC or its subsidiaries.

During the three months ended March 31, 2009, we elected to repurchase approximately $1.2 billion in par value notes and accrued interest at a price of $0.45 per dollar of principal from a third-party. These repurchases were the primary driver of the $634 million gain on extinguishment recognized during the three months ended March 31, 2009. The debt repurchased was unsecured and related to our retail debt programs.

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Liquidity Facilities

Liquidity facilities represent additional funding sources. The financial institutions providing the uncommitted facilities are not legally obligated to advance funds under these facilities. Capacity under the secured facilities is generally available to the extent we contribute incremental collateral to a facility. The following table summarizes the liquidity facilities that we maintain.

 

     Total
capacity
   Current
capacity (a)
   Potential
capacity (b)
   Outstanding
($ in billions)   

Mar 31,

2009

  

Dec 31,

2008

  

Mar 31,

2009

  

Dec 31,

2008

  

Mar 31,

2009

  

Dec 31,

2008

  

Mar 31,

2009

  

Dec 31,

2008

Committed unsecured

                       

Global Automotive Finance operations

   $ 1.6    $ 1.7    $ 0.2    $ 0.2    $    $    $ 1.4    $ 1.5

Committed secured

                       

Global Automotive Finance operations (c)

     47.5      56.2      3.0      0.7      12.4      15.6      32.1      39.9

Mortgage operations

     3.4      5.4                0.5      2.3      2.9      3.1

Other

     3.1      2.9                1.4      1.0      1.7      1.9
 

Total committed facilities

     55.6      66.2      3.2      0.9      14.3      18.9      38.1      46.4
 

Uncommitted unsecured

                       

Global Automotive Finance operations

     1.6      2.1      0.2      0.2                1.4      1.9

Mortgage operations

          0.1           0.1                    

Other

                                       

Uncommitted secured

                       

Global Automotive Finance operations

     4.0      4.4      3.7      4.1                0.3      0.3

Mortgage operations

     9.7      9.5      0.5      0.2                9.2      9.3

Other

          0.1                               0.1
 

Total uncommitted facilities

     15.3      16.2      4.4      4.6                10.9      11.6
 

Total

   $ 70.9    $ 82.4    $ 7.6    $ 5.5    $ 14.3    $ 18.9    $ 49.0    $ 58.0
 

Whole-loan forward flow agreements (d)

   $ 15.9    $ 17.8    $    $    $ 15.9    $ 17.8    $    $
 

Total commitments

   $ 86.8    $ 100.2    $ 7.6    $ 5.5    $ 30.2    $ 36.7    $ 49.0    $ 58.0
 
(a) Funding is generally available upon request as excess collateral resides in certain facilities.
(b) Funding is generally available to the extent incremental collateral is contributed to the facilities.
(c) Potential capacity includes undrawn credit commitments that serve as backup liquidity to support our asset-backed commercial paper program (NCAT). There was $6.4 billion and $9.0 billion of potential capacity that was supporting $6.1 billion and $8.0 billion of outstanding NCAT commercial paper as of March 31, 2009, and December 31, 2008, respectively. The NCAT commercial paper outstanding is not included in our Condensed Consolidated Balance Sheets. Due to the downgrades by S&P and Moody’s of certain asset-backed securities owned by NCAT, an orderly wind-down of NCAT’s operations began on January 23, 2009. During the wind-down phase, NCAT can continue to issue commercial paper but cannot use the proceeds of issuances to purchase additional asset-backed securities (or increase the principal amount of any revolving asset-backed securities it currently owns). Shortly after entering into wind-down, the outstanding NCAT commercial paper was downgraded and no longer eligible for the Federal Reserve’s Commercial Paper Funding Facility. Most of the NCAT commercial paper outstanding as of March 31, 2009, matured in April 2009 and was not renewed. Therefore, the credit commitments that served as backup liquidity support were utilized to fund the commercial paper maturities. As of April 30, 2009, there was $5.7 billion outstanding against the $6.4 billion of credit commitments with only $9 million of commercial paper outstanding. The $6.4 billion of credit commitments expire in June 2009, but the lenders remain obligated to fund the underlying asset-backed securities beyond the expiration date. Securities backed by retail or lease assets will be funded by the lenders until the underlying assets fully amortize, while securities backed by dealer floorplan receivables will be paid down at different times in 2009 and thus will need to be refinanced during 2009.
(d) Represents commitments of financial institutions to purchase U.S. automotive retail assets.

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

10. Deposit Liabilities

Deposit liabilities consisted of the following:

 

($ in millions)    March 31, 2009    December 31, 2008

Domestic deposits

     

Noninterest bearing deposits

   $ 1,935    $ 1,466

NOW and money market checking accounts

     4,877      3,609

Certificates of deposit

     15,109      13,704

Dealer wholesale deposits

     552      339

Dealer term-loan deposits

     5      3

Dealer lease finance deposits

     1     
 

Total domestic deposits

   $ 22,479    $ 19,121
 

Foreign deposits

     

NOW and money market checking accounts

     9      9

Certificates of deposit

     641      638

Dealer wholesale deposits

     41      39
 

Total foreign deposits

     691      686
 

Total deposit liabilities

   $ 23,170    $ 19,807
 

Noninterest bearing deposits primarily represent third-party escrows associated with our Mortgage operations loan servicing portfolio. The escrow deposits are not subject to an executed agreement and can be withdrawn without penalty at any time. Certificates of deposit included $8.7 billion and $9.6 billion of brokered certificates of deposit at March 31, 2009, and December 31, 2008, respectively.

As of March 31, 2009, domestic certificates of deposit in denominations of $100 thousand or more totaled $3.0 billion.

 

11. Regulatory Capital

As a bank holding company, we and our wholly owned banking subsidiary, GMAC Bank, are subject to risk-based capital and leverage guidelines by federal regulators that require that our capital-to-assets ratios meet certain minimum standards. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.

The risk-based capital ratio is determined by allocating assets and specified off–balance sheet financial instruments into six weighted categories with higher levels of capital being required for the categories perceived as representing greater risk. Under the guidelines, total capital is divided into two tiers: Tier 1 capital and Tier 2 capital. Tier 1 capital generally consists of common equity, minority interests, and qualifying preferred stock (including fixed-rate cumulative preferred stock issued and sold to the U.S. Department of Treasury) less goodwill and other adjustments. Tier 2 capital generally consists of preferred stock not qualifying as Tier 1 capital, limited amounts of subordinated debt, the allowance for loan losses, and other adjustments. The amount of Tier 2 capital may not exceed the amount of Tier 1 capital.

Total risk-based capital is the sum of Tier 1 capital and Tier 2 capital. Under the guidelines, banking organizations are required to maintain a minimum Total risk-based capital ratio (total capital to risk-weighted assets) of 8% and a Tier 1

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

risk-based capital ratio of 4%. Our bank depository institution, GMAC Bank, will continue to be required to maintain “well-capitalized” levels, which dictate a Total risk-based capital ratio of 10% and a Tier 1 risk-based capital ratio of 6%, as described above.

The federal banking regulators also have established minimum leverage ratio guidelines. The leverage ratio is defined as Tier 1 capital divided by adjusted average total assets (which reflect adjustments for disallowed goodwill and certain intangible assets). The minimum Tier 1 leverage ratio is 3% or 4% depending on factors specified in the regulations.

Additionally, on July 21, 2008, GMAC, FIM Holdings, IB Finance Holding Company, LLC, GMAC Bank, and the FDIC entered into a Capital and Liquidity Maintenance Agreement (CLMA). The CLMA requires capital at GMAC Bank to be maintained at a level such that GMAC Bank’s leverage ratio is at least 11% for a three-year period. For this purpose, leverage ratio is determined in accordance with the FDIC’s regulations related to capital maintenance.

The minimum risk-based capital requirements adopted by the federal banking agencies follow the Capital Accord of the Basel Committee on Banking Supervision. The Basel Committee has proposed a revision to the Accord (Basel II). U.S. banking regulators are in the process of incorporating the Basel II Framework into the existing risk-based capital requirements. The Basel II rules will also apply to our operations in non-U.S. jurisdictions. We continue to monitor developments with respect to Basel II requirements and are working to ensure successful execution within the required time periods.

The following table summarizes our capital ratios and risk-weighted assets as of March 31, 2009. GMAC LLC was not previously required to calculate risk-based capital ratios or a leverage ratio. The methodology of calculating these ratios may be refined over time.

 

($ in millions)    Amount    Ratio      Required
minimum
    Well-capitalized
minimum
 

Risk-based capital

            

Tier 1 (to risk-weighted assets)

            

GMAC LLC

   $20,548    10.35%      4.00%     6.00%  

GMAC Bank

   3,975    15.72%                   (a)   6.00%  

Total (to risk-weighted assets)

            

GMAC LLC

   $23,410    11.80%      8.00%     10.00%  

GMAC Bank

   4,294    16.99%                   (a)   10.00%  

Tier 1 leverage (to adjusted average assets) (c)

            

GMAC LLC

   $20,548    11.23%      3.00–4.00 %                (b)

GMAC Bank

   3,975    11.38%                   (a)   5.00%  
   
(a) GMAC Bank is required to maintain well-capitalized levels for Tier 1 risk-based capital and Total risk-based capital, and a Tier 1 leverage ratio of 11%.
(b) There is no Tier 1 leverage component in the definition of a well-capitalized bank holding company.
(c) Federal regulatory reporting guidelines require the calculation of adjusted average assets using a daily average methodology. We currently use a monthly average methodology. We are in the process of modifying information systems to address the daily average requirement.

At March 31, 2009, GMAC LLC and GMAC Bank were “well-capitalized” under the federal regulatory agencies’ definitions as summarized in the table above. Refer to Note 18 for a discussion of our results related to the Supervisory Capital Assessment Program.

 

12. Derivative Instruments and Hedging Activities

We enter into interest rate and foreign currency swaps, futures, forwards, options, swaptions, and credit default swaps in connection with our market risk management activities. Derivative instruments are used to manage interest rate risk relating to specific groups of assets and liabilities, including investment securities, loans held-for-sale, mortgage servicing rights, debt, and deposits. In addition, foreign exchange contracts are used to mitigate foreign currency risk associated with foreign-currency-denominated debt and foreign exchange transactions. Our primary objective for utilizing derivative financial instruments is to manage market risk volatility associated with interest rate and foreign currency risks related to the assets and

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

liabilities of our automotive finance and mortgage operations. These strategies are applied on a decentralized basis by our respective Global Automotive Finance and ResCap operations consistent with the level at which market risk is managed but they are subject to various limits and controls at both the local unit and consolidated level. One of the key goals of our risk-mitigation strategy is to modify the asset and liability and interest rate mix including the assets and liabilities associated with securitization transactions that may be recorded in off-balance sheet SPEs. In addition, we use derivative financial instruments to mitigate the risk of changes in the fair values of loans held-for-sale and mortgage servicing rights.

Interest Rate Risk

We execute interest rate swaps to modify our exposure to interest rate risk by converting fixed-rate instruments to a floating rate. We also enter into derivative instrument contracts to hedge exposure to variability in cash flows related to floating-rate financial instruments.

We have applied hedge accounting for certain derivative instruments used to hedge fixed-rate and variable-rate debt. We monitor our mix of fixed- and floating-rate debt in relationship to the rate profile of our assets. When it is cost effective to do so, we may enter into interest rate swaps to achieve our desired mix of fixed- and floating-rate debt.

Our fair value hedges consist of hedges of fixed-rate unsecured debt obligations. Individual swaps are designated as hedges of specific debt. As of March 31, 2009, outstanding interest rate swaps designated as fair value accounting hedges held in an asset position had a fair value of $528 million. The outstanding notional amount as of March 31, 2009, was $14.0 billion.

Interest rate swaps are also used to modify exposure to variability in expected future cash flows attributable to variable-rate debt. Similar to our fair value hedges, the swaps are generally entered or traded concurrent with the debt issuance. As of March 31, 2009, there were no outstanding cash flow hedging relationships.

We enter into economic hedges to mitigate exposure for the following categories:

 

   

Mortgage servicing rights and retained interests — Our mortgage servicing rights and retained interest portfolios are generally subject to loss in value when mortgage rates decline. Declining mortgage rates generally result in an increase in refinancing activity that increases prepayments and results in a decline in the value of mortgage servicing rights and retained interests. To mitigate the impact of this risk, we maintain a portfolio of financial instruments, primarily derivatives that increase in value when interest rates decline. The primary objective is to minimize the overall risk of loss in the value of mortgage servicing rights due to the change in fair value caused by interest rate changes and their interrelated impact to prepayments.

We use a multitude of derivative instruments to manage the interest rate risk related to mortgage servicing rights and retained interests. They include, but are not limited to, interest rate futures contracts, call or put options on U.S. Treasuries, swaptions, MBS futures, U.S. Treasury futures, interest rate swaps, interest rate floors, and interest rate caps. While we do not utilize nonderivative portfolios (e.g., U.S. Treasuries) to hedge this portfolio, we have utilized them previously and may utilize them again in the future. We monitor and actively manage our risk on a daily basis, and therefore trading volume can be large.

As of March 31, 2009, outstanding contracts held in an asset position had a fair value of $940 million, and those held in a liability position had a fair value of $94 million. The outstanding notional amount was $166 billion as of March 31, 2009.

 

   

Mortgage loan commitments and mortgage and auto loans held-for-sale — We are exposed to interest rate risk from the time an interest rate lock commitment (IRLC) is made until the time the mortgage loan is sold. Changes in interest rates impact the market price for our loans; as market interest rates decline, the value of existing IRLCs and loans held-for-sale go up and vice versa. Our primary objective in risk management activities related to IRLCs and mortgage and automotive loans held-for-sale is to eliminate or greatly reduce any interest rate risk associated with these items.

 

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The primary derivative instrument we use to accomplish this objective for mortgage loans and IRLCs is forward sales of mortgage-backed securities, primarily Fannie Mae or Freddie Mac to-be-announced securities. These instruments typically are entered into at the time the IRLC is made. The value of the forward sales contracts moves in the opposite direction of the value of our IRLCs and mortgage loans held-for-sale. We also use other derivatives, such as interest rate swaps, options, and futures, to hedge auto loans held-for-sale and certain portions of the mortgage portfolio. Nonderivative instruments may also be periodic used to economically hedge the mortgage portfolio, such as short positions on U.S. Treasuries. We monitor and actively manage our risk on a daily basis; therefore trading volume can be large.

We do not apply hedge accounting to our derivative portfolio held to economically hedge the IRLCs and mortgage and auto loans held-for-sale. As of March 31, 2009, outstanding contracts held in an asset position had a fair value of $187 million, and those held in a liability position had a fair value of $236 million. The outstanding notional amount was $29.6 billion as of March 31, 2009.

 

   

Off-balance sheet securitization activities — We enter into interest rate swaps to facilitate securitization transactions where the underlying receivables are sold to a nonconsolidated QSPE. As the underlying assets are carried in a nonconsolidated entity, the interest rate swaps do not qualify for hedge accounting treatment. As of March 31, 2009, outstanding contracts held in an asset position had a fair value of $268 million, and those held in a liability position had a fair value of $4 million. The outstanding notional amount was $9.0 billion as of March 31, 2009.

 

   

Debt — As part of our previous on-balance sheet securitizations and/or secured aggregation facilities, certain interest rate swaps or interest rate caps have been included within consolidated variable interest entities; these swaps or caps were generally required to meet certain rating agency requirements or were required by the facility lender/provider. The interest rate swaps and/or caps are generally entered into when the debt is issued; accordingly, current trading activity on this particular derivative portfolio is minimal.

With the exception of a portion of our unsecured debt (as previously described), we have not applied hedge accounting to our derivative portfolio held in order to economically hedge our debt portfolio. Typically, the significant terms of the interest rate swaps match the significant terms of the underlying debt resulting in an effective conversion of the rate of the related debt. As of March 31, 2009, outstanding contracts held in an asset position had a fair value of $867 million, and those held in a liability position had a fair value of $1.2 billion. The outstanding notional was $78.9 billion as of March 31, 2009.

 

   

Callable debt obligations — We enter into cancellable interest rate swaps as economic hedges of certain callable fixed-rate debt in connection with our market risk management policy. If the hedging relationship does not meet a specified effectiveness assessment threshold, it will be treated as an economic hedge. Prior to May 2007, all cancellable swaps hedging callable debt were treated as economic hedges. As of March 31, 2009, outstanding contracts held in an asset position had a fair value of $28 million and an outstanding notional amount of $474 million.

 

   

Other — We enter into futures, options, swaptions, and credit default swaps to hedge our net fixed versus floating interest rate exposure. As of March 31, 2009, outstanding contracts held in an asset position had a fair value of $23 million, and those held in a liability position had a fair value of $14 million. The outstanding notional amount was $206 million as of March 31, 2009.

Foreign Currency Risk

We enter into derivative financial instrument contracts to hedge exposure to variability in cash flows related to foreign currency financial instruments. Currency swaps and forwards are used to hedge foreign exchange exposure on foreign-currency-denominated debt by converting the funding currency to the same currency of the assets being financed. Similar to our interest rate hedges, the swaps are generally entered or traded concurrent with the debt issuance, with the terms of the swap matching the terms of the underlying debt.

Our non-U.S. subsidiaries maintain both assets and liabilities in local currencies; these local currencies are the subsidiaries’ functional currencies for accounting purposes. Foreign currency exchange rate gains and losses arise when our assets or liabilities or our subsidiaries are denominated in currencies that differ from its functional currency. In addition, our

 

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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

equity is impacted by the cumulative translation adjustments resulting from the translation of foreign subsidiary results; this impact is reflected in our other comprehensive income (loss). Foreign currency risk is reviewed as part of our risk-management process. The principal currencies creating foreign exchange risk are the U.K sterling and the Euro.

In addition, we have a centralized lending program to manage liquidity for all of our subsidiary businesses. Foreign-currency-denominated loan agreements are executed with our foreign subsidiaries in their local currencies. We evaluate our foreign-currency exposure resulting from intercompany lending and manage our currency risk exposure by entering into foreign currency derivatives with external counterparties. Our foreign currency derivatives are recorded at fair value with changes recorded as income offsetting the gains and losses on the hedged foreign currency transactions.

Our current strategy is to economically hedge foreign currency risk that is denominated in currencies other than the US dollar (USD). The principal objective of the foreign currency hedges is to mitigate the earnings volatility specifically created by currency exchange rate gains and losses.

With limited exceptions, we have elected not to treat any foreign currency derivatives as hedges for accounting purposes principally because the changes in the fair values of the foreign currency swaps are substantially offset by the foreign currency revaluation gains and losses of the underlying assets and liabilities.

As of March 31, 2009, outstanding foreign currency swaps designated as cash flow accounting hedges held in an asset position had a fair value of $2 million, and those held in a liability position had a fair value of $75 million. The outstanding notional amount was $381 million as of March 31, 2009.

As of March 31, 2009, outstanding foreign-currency-exchange derivatives not designated as hedges for accounting purposes held in an asset position had a fair value of $878 million, and those held in a liability position had a fair value of $245 million. The outstanding notional amount was $19.9 billion as of March 31, 2009.

Credit Risk

Derivative financial instruments contain an element of credit risk if counterparties are unable to meet the terms of the agreements. Credit risk associated with derivative financial instruments is measured as the net replacement cost should the counterparties which owe us under the contract completely fail to perform under the terms of those contracts, assuming no recoveries of underlying collateral, as measured by the market value of the derivative financial instrument. At March 31, 2009, and December 31, 2008, the market value of derivative financial instruments in an asset or receivable position was $3.7 billion and $5 billion including accrued interest of $328 million and $271 million, respectively.

To further mitigate the risk of counterparty default, we maintain collateral agreements with certain counterparties. The agreements require both parties to maintain collateral in the event the fair values of the derivative financial instruments meet established thresholds. In the event that either party defaults on the obligation, the secured party may seize the collateral. Generally our collateral arrangements are bilateral such that we and the counterparty post collateral for the value of their total obligation to each other. The derivative value is periodically adjusted to fair value, and the collateral is adjusted accordingly. The securing party posts additional collateral when their obligation has risen or removes collateral when it has fallen. We also have unilateral collateral agreements whereby we are the only entity required to post collateral. We have placed cash collateral totaling $1.2 billion and $1.6 billion at March 31, 2009, and December 31, 2008, respectively, in accounts maintained by counterparties. We have received cash collateral from counterparties totaling $800 million and $1.5 billion at March 31, 2009, and December 31, 2008, respectively. The collateral placed and received are included on our Condensed Consolidated Balance Sheet in other assets and accrued expenses and other liabilities, respectively. In certain circumstances, we receive or post securities as collateral with counterparties. In accordance with Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, we do not record such collateral received on our statement of financial position unless certain conditions have been met.

Accounting Treatment

In accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, all derivative financial instruments, whether designated for hedging relationships or not, are recorded on the Condensed Consolidated Balance Sheet as assets or liabilities and carried at fair value. Due to the nature of derivative instruments, they may be in a receivable/asset position or a payable/liability position at the end of an accounting period.

 

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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

At the inception of a derivative contract, we determine whether the instrument will be part of a qualifying hedge accounting relationship. For each of these relationships, we designate the qualifying derivative financial instrument as a hedge of the fair value of a recognized asset or liability (fair value hedge) or a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). We also use derivative financial instruments that do not qualify for hedge accounting under GAAP. Changes in the fair value of derivative financial instruments that are designated and qualify as fair value hedges, along with the gain or loss on the hedged asset or liability attributable to the hedged risk, are recorded in current period earnings. For qualifying cash flow hedges, the effective portion of the change in the fair value of the derivative financial instruments is recorded in other comprehensive income, a component of equity, and is recognized in the Condensed Consolidated Income Statement when the hedged cash flows affect earnings. Changes in the fair value of derivative financial instruments held for risk management purposes that do not meet the criteria to qualify for hedge accounting under GAAP or for which management has not elected hedge accounting treatment are reported in current period earnings. The ineffective portions of fair value and cash flow hedges are immediately recognized in earnings. Ineffectiveness is measured based on the difference in the fair value movement of the swap and the related hedged debt or cash flows. Effectiveness is assessed using historical data. We assess hedge effectiveness by employing a statistical-based approach, which must meet thresholds for R-squared, slope, F-statistic, and T-statistic.

We formally document all relationships between hedging instruments and hedged items, as well as its risk management objectives for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the Condensed Consolidated Balance Sheet, to specific firm commitments or the forecasted transactions. Both at the hedge’s inception and on an ongoing basis, we formally assesses whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in fair values or cash flows of hedged items.

The hedge accounting treatment described above is no longer applied if a derivative financial instrument is terminated or the hedge designation is removed. For terminated fair value hedges, any changes to the hedged asset or liability remain as part of the basis of the asset or liability and are recognized into income over the remaining life of the asset or liability. For terminated cash flow hedges, unless it is probable that the forecasted cash flow will not occur within a specified time frame, any changes in fair value of the derivative financial instrument remain in other comprehensive income, a component of equity, and are reclassified into earnings in the period that the hedged cash flows affects earnings.

Balance Sheet Presentation

The following table summarizes the fair value amounts of derivative instruments reported in our Condensed Consolidated Balance Sheet. The fair value amounts are presented on a gross basis and are segregated by derivatives that are designated and qualifying as hedging instruments or those that are not and further segregated by type of contract within those two categories.

 

     Fair value
March 31, 2009 ($ in millions)    Asset
derivatives
  

Liability

derivatives

Derivatives designated as hedging instruments

     

Interest rate risk

   $ 528    $

Foreign exchange risk

     2      75
 

Total derivatives designated as hedging instruments

     530      75
 

Derivatives not designated as hedging instruments

     

Interest rate risk

     2,313      1,537

Foreign exchange risk

     878      245
 

Total derivatives not designated as hedging instruments

     3,191      1,782
 

Total derivatives

   $ 3,721    $ 1,857
 

 

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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

We record our derivative instruments in our Condensed Consolidated Balance Sheet in the following manner: instruments with an asset fair value position are recorded as other assets; derivatives with a liability fair value position are recorded as accrued expenses and other liabilities.

Income Statement Presentation and Accumulated Other Comprehensive Income Information

The following tables summarize the location and amounts of gains and losses reported in our Condensed Consolidated Income Statement on derivative instruments and related hedge items and amounts flowing through accumulated other comprehensive income. Gains and losses are presented separately for (1) derivative instruments and related hedged items designated and qualifying in fair value hedges; (2) the effective portion of gains and losses on derivative instruments designated and qualifying in cash flow hedges that were recognized in OCI during the period; (3) the effective portion of gains and losses on derivative instruments designated and qualifying as cash flow hedges recorded in accumulated other comprehensive income during the term of the hedging relationship and reclassified into earnings in the current period; (4) the portion of gains and losses on derivative instruments designated and qualifying in cash flow hedges representing the hedges ineffectiveness and the amount, if any, excluded from the hedge effectiveness assessment; and (5) derivative instruments not designated as hedging instruments.

 

Three months ended

March 31, 2009

($ in millions)

  

Location of (loss)
recognized in earnings

on derivative

  

(Loss)
recognized in
earnings

on derivative

   

Location of gain
recognized in earnings

on hedged item

  

Gain recognized
in earnings

on hedged item

Derivatives in fair value
hedging relationships

Interest rate contracts

   Other interest expense    $ (196 )   Other interest expense    $ 165
 

 

Three months ended March 31, 2009 ($ in millions)   

(Loss) gain recognized

in earnings on
derivative

 

Derivatives not designated as hedging instruments

  

Interest rate contracts

  

Other interest expense

   $ (7 )

Servicing asset valuation and hedge activities, net

     20  

Gain (loss) on mortgage and automotive loans, net

     (229 )

Other loss on investments, net

     (1 )

Other income, net of losses

     (6 )

Other operating expenses

     (2 )
   

Total interest rate contracts

     (225 )
   

Foreign exchange contracts

  

Other interest expense

     (16 )

Other income, net of losses

     (205 )
   

Total foreign exchange contracts

     (221 )
   

Loss recognized in income on derivatives

   $ (477 )
   

 

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GMAC LLC

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The following table presents additional information related to our financial instruments:

 

March 31, 2009 ($ in millions)        

Expected gain (loss) reclassifications from other comprehensive income to earnings (a)

   $ (8 )
   
(a) Estimated to occur over the next twelve months.

 

Three months ended
March 31, 2009

($ in millions)

  

Gain
recognized

in OCI on
derivative (a)

   Location of gain
(loss) reclassified
from accumulated
OCI into
earnings (a)
   Gain (loss)
reclassified
from
accumulated
OCI into
earnings (a)
    Location of gain
(loss) recognized in
earnings on
derivative (b)
   Gain (loss)
recognized
in earnings
on derivative (b)

Derivatives in cash flow hedging relationships

             

Foreign exchange contracts

   $ 10    Other interest expense    $ (1 )   Other interest expense    $
 
(a) Amounts related to the effective portion.
(b) Ineffective portion and amounts excluded from effectiveness testing.

 

13. Income Taxes

GMAC, along with certain U.S. subsidiaries, are pass-through entities for U.S. federal income tax purposes. Accordingly, U.S. federal and state and local income taxes have generally not been provided for these entities as they are not taxable entities with the exception of a few local jurisdictions that continue to tax LLCs or partnerships. Members each report their share of our taxable income on their respective income tax returns. Our banking, insurance, and foreign subsidiaries are generally corporations and continue to be subject to and provide for U.S. federal and foreign income taxes. The income tax expense related to these corporations is included in our income tax expense, along with other miscellaneous state, local, and franchise taxes of GMAC and certain other subsidiaries.

 

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GMAC LLC

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

A reconciliation of the statutory U.S. federal income tax rate to our effective income tax rate is shown in the following table.

 

     Three months ended March 31,  
      2009     2008  

Statutory U.S. federal tax rate

   35.0 %   35.0 %

Change in tax rate resulting from

    

LLC results not subject to federal or state income taxes

   (17.2 )   9.8  

Effect of valuation allowance change

   (2.8 )   (38.5 )

Foreign income tax rate differential

   (0.6 )   (14.1 )

State and local income taxes, net of federal income tax benefit

   0.3      

Tax-exempt income

   0.3     0.5  

Other

   0.4     4.1  
   

Effective tax rate

   15.4 %   (3.2 )%
   

Our results segregated by tax status are provided below.

 

     Three months ended March 31,  
     2009     2008  
($ in millions)   

Pass-

through

entities

   

Taxable

entities

    Consolidated     Pass-
through
entities
   

Taxable

entities

    Consolidated  

Pretax (loss) income

   $ (398 )   $ (400 )   $ (798 )   $ 122     $ (693 )   $ (571 )

Tax expense (benefit)

     3       (126 )     (123 )     (4 )     22       18  
   

Net (loss) income

   $ (401 )   $ (274 )   $ (675 )   $ 126     $ (715 )   $ (589 )
   

Effective tax rate

     (0.7 )%     31.5 %     15.4 %     (3.3 )%     (3.2 )%     (3.2 )%
   

The effective tax rate of 15.4% for the three months ended March 31, 2009, was reflective of an equal pretax income split between our pass-through and taxable entities, where our taxable entities are subject to income tax rates in U.S. and foreign tax jurisdictions ranging from 25% to 35%. Compared to the same period in 2008, the effective tax rate (3.2)% resulted from higher losses within our taxable entities combined with valuation allowances established on deferred tax assets of certain foreign operations, primarily mortgage operations in continental Europe, United Kingdom, Canada, and Australia. These valuation allowances were established because, based on historical losses and expected future taxable income, it was no longer more-likely-than-not that these net deferred tax assets would be realized.

Gross unrecognized tax benefits totaled $149 million and $150 million as of March 31, 2009, and December 31, 2008, respectively.

 

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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

14. Related Party Transactions

Balance Sheet

A summary of the balance sheet effect of transactions with GM, FIM Holdings, and affiliated companies follows:

 

($ in millions)    March 31, 2009    December 31, 2008

Assets

     

Available-for-sale investment in asset-backed security — GM (a)

   $ 35    $ 35

Secured:

     

Finance receivables and loans, net of unearned income

     

Wholesale automotive financing — GM (b)

     535      595

Term loans to dealers — GM (b)

     79      105

Lending receivables — GM

     13      26

Lending receivables — affiliates of FIM Holdings

     74      91

Investment in operating leases, net — GM (c)

     261      291

Notes receivable from GM (d)

     1,075      1,464

Other assets

     

Other — GM

     40      32
 

Total secured

     2,077      2,604

Unsecured:

     

Finance receivables and loans, net of unearned income

     

Notes receivable from GM (d)

     94      191

Other assets

     

Subvention receivables (rate and residual support) — GM

     185      53

Lease pull-ahead receivable — GM

     45      28

Other — GM

     46      49
 

Total unsecured

     370      321

Liabilities

     

Unsecured debt

     

Notes payable to GM

   $ 524    $ 566

Secured debt

     

Cerberus model home term loan

          8

Accrued expenses and other liabilities

     

Wholesale payable — GM

     602      319

Deferred revenue — GM (e)

     413      318

Other payables — GM

     110      45
 
(a) In November 2006, GMAC retained an investment in a note secured by operating lease assets transferred to GM. As part of the transfer, GMAC provided a note to a trust, a wholly owned subsidiary of GM. The note is classified in investment securities on our Condensed Consolidated Balance Sheets.
(b) Represents wholesale financing and term loans to certain dealerships wholly owned by GM or in which GM has an interest. The loans are generally secured by the underlying vehicles or assets of the dealerships.
(c) Includes vehicles, buildings, and other equipment classified as operating lease assets that are leased to GM-affiliated entities. These leases are secured by the underlying assets.
(d) Represents wholesale financing we provide to GM for vehicles, parts, and accessories in which GM retains title while consigned to us or dealers primarily in the UK, Italy, and Germany. The financing to GM remains outstanding until the title is transferred to the dealers. The amount of financing provided to GM under this arrangement varies based on inventory levels. These loans are secured by the underlying vehicles or other assets.
(e) Represents prepayments made by GM pursuant to the terms of the Sale Transactions requiring that the aggregate amount of certain unsecured obligations of GM to us not exceed $1.5 billion. Subsequent to December 31, 2008, a new agreement was reached between GMAC and GM with respect to new limitations on unsecured exposure going forward. Generally, unsecured exposure based on what we believe, from time to time, to be “probable” amounts owed from GM will be limited to $2.1 billion; and unsecured exposures based on “maximum” possible amounts owed will be limited to $4.1 billion. This distinction was established to more easily manage exposures since certain amounts that will be owed to us from GM, e.g., pursuant to risk-sharing and similar arrangements, are based on variables and assumptions that may change over time.

 

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GMAC LLC

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Income Statement

A summary of the income statement effect of transactions with GM, FIM Holdings, and affiliated companies follows:

 

     Three months ended March 31,  
($ in millions)        2009             2008      

Net financing revenue

    

GM and affiliates lease residual value support — North American operations (a)

   $ 84     $ 188  

GM and affiliates rate support — North American operations

     189       280  

Wholesale subvention and service fees from GM

     60       77  

Interest earned on wholesale automotive financing

     5       8  

Interest earned on term loans to dealers

     1       1  

Interest expense on loans with GM

     (11 )     (10 )

Interest income on loans with FIM Holdings affiliates, net

     1       3  

Consumer lease payments from GM (b)

     39       20  

Other revenue

    

Insurance premiums earned from GM

     39       50  

Interest on notes receivable from GM and affiliates

     24       30  

Interest on wholesale settlements (c)

     21       29  

Revenues from GM-leased properties, net

     3       4  

Derivatives (d)

     (5 )     10  

Other

           2  

Servicing fees

    

U.S. automotive operating leases (e)

     10       30  

Expense

    

Off-lease vehicle selling expense reimbursement (f)

     (8 )     (8 )

Payments to GM for services, rent, and marketing expenses (g)

     23       46  
   
(a) Represents total amount of residual support and risk sharing earned under the residual support and risk-sharing programs and earned revenue (previously deferred) related to the settlement of residual support and risk-sharing obligations in 2006 for a portion of the lease portfolio.
(b) GM sponsors lease pull-ahead programs whereby consumers are encouraged to terminate lease contracts early in conjunction with the acquisition of a new GM vehicle with the customer’s remaining payment obligation waived. For certain programs, GM compensates us for the waived payments adjusted based on remarketing results associated with the underlying vehicle.
(c) The settlement terms related to the wholesale financing of certain GM products are at shipment date. To the extent that wholesale settlements with GM are made before the expiration of transit, we receive interest from GM.
(d) Represents income or (expense) related to derivative transactions that we enter into with GM as counterparty.
(e) Represents servicing income related to automotive leases distributed to GM on November 22, 2006.
(f) An agreement with GM provides for the reimbursement of certain selling expenses incurred by us on off-lease vehicles sold by GM at auction.
(g) We reimburse GM for certain services provided to us. This amount includes rental payments for our primary executive and administrative offices located in the Renaissance Center in Detroit, Michigan, and exclusivity and royalty fees.

 

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GMAC LLC

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Statement of Changes in Equity

A summary of the changes to the statement of changes in equity related to transactions with GM, FIM Holdings, and affiliated companies follows:

 

($ in millions)   

Three months ended

March 31, 2009

  

Year ended

December 31, 2008

Equity

     

Dividends to members (a)

   $ 110    $ 79

Capital contributions received (b)

     1,247      758

Preferred interest dividends

     123     
 
(a) Pursuant to the operating agreement with our shareholders, our shareholders are permitted distributions to pay the taxes they incur from ownership of their GMAC interests. In March 2009, we executed a transaction that had 2008 tax reporting implications for our shareholders. In accordance with the operating agreement, the approval of both our Board of Directors and the U.S. Department of Treasury were sought in advance for the payment of tax distributions to our shareholders. Amounts to be distributed to GM and FIM Holdings were $44 million and $45 million, respectively, for the three months ended March 31, 2009. Additionally, the 2009 amount includes $21 million of remittances to GM for tax settlements and refunds received related to tax periods prior to the Sale Transactions. The 2008 amounts primarily represent remittances to GM for tax settlements and refunds received related to tax periods prior to the Sale Transactions as required by the terms of the Purchase and Sale Agreement between GM and FIM Holdings.
(b) On January 16, 2009, we completed a $1.25 billion rights offering pursuant to which we issued additional common membership interests to FIM Holdings and a subsidiary of GM. On December 29, 2008, GM and an affiliate of Cerberus Capital Management contributed to GMAC $750 million subordinated participations in a $3.5 billion senior secured credit facility between GMAC and ResCap in exchange for additional common membership interests in GMAC.

A significant portion of our customers are those of GM, GM dealers, and GM-related employees. As a result, a significant adverse change in GM’s business, including significant adverse changes in GM’s liquidity position and access to the capital markets, the production or sale of GM vehicles, the quality or resale value of GM vehicles, the use of GM marketing incentives, GM’s relationships with its key suppliers, GM’s relationship with the United Auto Workers and other labor unions, and other factors impacting GM or its employees would have a significant adverse effect on our profitability and financial condition.

We provide vehicle financing through purchases of retail automotive and lease contracts with retail customers of primarily GM dealers. We also finance the purchase of new and used vehicles by GM dealers through wholesale financing, extend other financing to GM dealers, provide fleet financing for GM dealers to buy vehicles they rent or lease to others, provide wholesale vehicle inventory insurance to GM dealers, provide automotive extended service contracts through GM dealers, and offer other services to GM dealers. As a result, GM’s level of automobile production and sales directly impacts our financing and leasing volume; the premium revenue for wholesale vehicle inventory insurance; the volume of automotive extended service contracts; and the profitability and financial condition of the GM dealers to whom we provide wholesale financing, term loans, and fleet financing. In addition, the quality of GM vehicles affects our obligations under automotive extended service contracts relating to such vehicles. Further, the resale value of GM vehicles, which may be impacted by various factors relating to GM’s business such as brand image, the number of new GM vehicles produced, or reduction in core brands, affects the remarketing proceeds we receive upon the sale of repossessed vehicles and off-lease vehicles at lease termination.

Our Global Automotive Finance operations are highly dependent on GM sales volume. In 2008 and 2009, global vehicle sales have declined rapidly, and there is no assurance that the global automotive market or GM’s share of that market will not suffer a significant further downturn. Vehicle sales volume could be further adversely impacted by any restructuring that would reduce the number of GM retail channels and core brands or consolidate GM’s dealer network.

In the event that GM or any of its significant subsidiaries were to file for bankruptcy, sales volume could decrease as a result of a reduction in consumer confidence, and GM’s business could be otherwise materially adversely affected. This would in turn have a material adverse impact on our business. In addition, pursuant to contractual arrangements with GM, whenever GM offers vehicle financing and leasing incentives to customers (e.g., lower interest rates than market rates), it will do so exclusively through GMAC, subject to certain limitations and exceptions. In the event of a GM bankruptcy, it is possible that GM would reject this exclusivity arrangement with us. If GM did so, this could have a material adverse effect on

 

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GMAC LLC

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

our business, profitability, and financial condition. On April 27, 2009, GM announced that it had commenced a public exchange offer related to certain of its unsecured notes as part of its overall restructuring plan. GM indicated in its disclosures that it expects to seek bankruptcy relief if the public exchange offer is not consummated. According to GM’s disclosures, consummation of the exchange offers are subject to several conditions including that the results are satisfactory to the U. S. Treasury.

It is difficult to predict with certainty all the consequences of a GM bankruptcy. However, there may be systemic economic impacts, such as increased unemployment rates, that could further impact our business.

Our credit exposure to GM is significant. As of March 31, 2009, we had approximately $2.0 billion in secured exposure, which includes primarily wholesale vehicle financing to GM-owned dealerships, notes receivable from GM, and vehicles leased directly to GM. We further had approximately $2.0 billion in unsecured exposure, which includes estimates of payments from GM related to residual support and risk-sharing agreements. If GM were to file for bankruptcy, payment on our unsecured exposures could be delayed or might not occur at all. In addition, we would become an unsecured creditor of GM to the extent that proceeds from the sale of our collateral related to secured exposures are insufficient to repay GM’s obligations to us. Under the terms of certain agreements between GMAC and GM, GMAC has the right to offset certain of its exposures to GM against amounts GMAC owes to GM.

In connection with our dealer floorplan securitizations, if GM either (1) becomes subject to liquidation under Chapter 7 of the U.S. Bankruptcy Code or a similar provision of state or federal law or (2) ceases to operate as an automobile manufacturer or undertakes to sell all or substantially all its automobile manufacturing assets or business, in either case, after a petition has been filed under Chapter 11 of the U.S. Bankruptcy Code or a similar provision of state or federal law, then an early amortization event will occur with respect to such securitizations. Principal collections on the dealer accounts will be paid in accordance with the transactions documents, and no additional borrowings may be made during an early amortization period. In addition, if either of the two GM-specific events were to occur as indicated above, an immediate event of default would occur under our $11.4 billion secured revolving credit facility entered into in June 2008. In this circumstance, all amounts outstanding under this facility would become immediately due and payable, and if the amounts outstanding were not repaid, the collateral securing the facility could be sold by the lender under the facility.

Retail and Lease Programs

GM may elect to sponsor incentive programs (on both retail contracts and operating leases) by supporting financing rates below the standard market rates at which we purchase retail contracts and leases. These marketing incentives are also referred to as rate support or subvention. When GM utilizes these marketing incentives, they pay us the present value of the difference between the customer rate and our standard rate at contract inception, which we defer and recognize as a yield adjustment over the life of the contract.

GM may also sponsor residual support programs as a way to lower customer monthly payments. Under residual support programs, the customer’s contractual residual value is adjusted above our standard residual values. Prior to the Sale Transactions, GM reimbursed us at the time of the vehicle’s disposal if remarketing sales proceeds were less than the customer’s contractual residual value limited to our standard residual value. In addition, under risk-sharing programs, GM shares equally in residual losses to the extent that remarketing proceeds are below our standard residual values (limited to a floor).

In addition, with regard to North American lease originations and balloon retail contract originations occurring in the United States after April 30, 2006, and in Canada after November 30, 2006, that remained with us after the consummation of the Sale Transactions, GM agreed to begin payment of the present value of the expected residual support owed to us at contract origination as opposed to after contract termination at the time of sale of the related vehicle. The residual support amount GM actually owes us is finalized as the leases actually terminate. Under the terms of the residual support program, in cases where the estimate was incorrect, GM may be obligated to pay us, or we may be obligated to reimburse GM. As there were essentially no lease and balloon retail contract originations during the three months ended March 31, 2009, GM was not obligated to make any payments to us during the same period.

 

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Based on the March 31, 2009, outstanding North American operating lease portfolio, the additional maximum amount that could be paid by GM under the residual support programs is approximately $1.3 billion and would be paid only in the unlikely event that the proceeds from the entire portfolio of lease assets were lower than both the contractual residual value and our standard residual rates.

Based on the March 31, 2009, outstanding North American operating lease portfolio, the maximum amount that could be paid under the risk-sharing arrangements is approximately $1.5 billion and would be paid only in the unlikely event that the proceeds from all outstanding lease vehicles were lower than our standard residual rates.

Retail and lease contracts acquired by us that included rate and residual subvention from GM, payable directly or indirectly to GM dealers as a percentage of total new retail and lease contracts acquired, were as follows:

 

     Three months ended March 31,  
          2009             2008      

GM and affiliates subvented contracts acquired

    

North American operations

   77 %   82 %

International operations

   35 %   42 %
   

Other

We have entered into various services agreements with GM that are designed to document and maintain our current and historical relationship. We are required to pay GM fees in connection with certain of these agreements related to our financing of GM consumers and dealers in certain parts of the world.

GM also provides payment guarantees on certain commercial assets we have outstanding with certain third-party customers. As of March 31, 2009, and December 31, 2008, commercial obligations guaranteed by GM were $87 million and $88 million, respectively. Additionally, GM is bound by repurchase obligations to repurchase new vehicle inventory under certain circumstances, such as dealer default. In addition, we have a consignment arrangement with GM for commercial inventories in Europe. As of March 31, 2009, and December 31, 2008, wholesale inventories related to this arrangement were $107 million and $141 million, respectively, and are reflected in other assets on our Condensed Consolidated Balance Sheets.

In June 2008, Cerberus Capital Management, L.P., or its designee(s) (Cerberus) purchased certain assets of ResCap with a carrying value of approximately $479 million for consideration consisting of $230 million in cash and Series B junior preferred membership interests in a newly formed entity, CMH Holdings, LLC (CMH), which is not a subsidiary of ResCap and the managing member of which is an affiliate of Cerberus. CMH purchased model home and lot option assets from ResCap. CMH is consolidated into ResCap, and thus GMAC, under FIN 46(R), Consolidation of Variable Interest Entities, as ResCap remains the primary beneficiary. In conjunction with this agreement, Cerberus extended a term loan of $230 million with a guaranteed overall return of $46 million, which was fully paid as of March 31, 2009. The agreement also included revolving loans to CMH with a maximum limit of $10 million that if used would bear interest at 15%. Any borrowings under the revolving loan facility would be secured by a pledge of all of the assets of CMH and would mature on June 30, 2013.

 

15. Fair Value

Fair Value Measurements (SFAS 157)

SFAS No. 157, Fair Value Measurements (SFAS 157) provides a definition of fair value, establishes a framework for measuring fair value, and requires expanded disclosures about fair value measurements. The standard applies when GAAP requires or allows assets or liabilities to be measured at fair value; therefore, it does not expand the use of fair value in any new circumstance.

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that

 

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prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). Additionally, SFAS 157 requires an entity to consider all aspects of nonperformance risk, including the entity’s own credit standing, when measuring the fair value of a liability.

SFAS 157 establishes a three-level hierarchy to be used when measuring and disclosing fair value. An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. Following is a description of the three hierarchy levels:

 

  Level 1 Inputs are quoted prices in active markets for identical asset or liabilities as of the measurement date. Additionally, the entity must have the ability to access the active market, and the quoted prices cannot be adjusted by the entity.

 

  Level 2 Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full term of the assets or liabilities.

 

  Level 3 Unobservable inputs are supported by little or no market activity. The unobservable inputs represent management’s best assumptions of how market participants would price the assets or liabilities. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.

Following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models, and significant assumptions utilized.

 

   

Trading securities  Trading securities are recorded at fair value and may be asset-backed or asset-related asset-backed securities (including senior and subordinated interests), principal-only, or residual interests and may be investment grade, noninvestment grade, or unrated securities. We base our valuation of trading securities on observable market prices when available; however, observable market prices are not available for a significant portion of these assets due to illiquidity in the markets. When observable market prices are not available, valuations are primarily based on internally developed discounted cash flow models that use a market-based discount rate. The valuation considers recent market transactions, experience with similar securities, current business conditions, and analysis of the underlying collateral, as available. In order to estimate cash flows, we utilize various significant assumptions including market observable inputs (e.g., forward interest rates) and internally developed inputs (e.g., prepayment speeds, delinquency levels, and credit losses). We classified 90% and 68% of the trading securities reported at fair value as Level 3 at March 31, 2009, and December 31, 2008, respectively. Trading securities account for 5% and 6% of all assets reported at fair value at March 31, 2009, and December 31, 2008, respectively.

 

   

Available-for-sale securities  Available-for-sale securities are carried at fair value primarily based on observable market prices. If observable market prices are not available, our valuations are based on internally developed discounted cash flow models that use a market-based discount rate and consider recent market transactions, experience with similar securities, current business conditions, and analysis of the underlying collateral, as available. In order to estimate cash flows, we are required to utilize various significant assumptions including market observable inputs (e.g., forward interest rates) and internally developed inputs (including prepayment speeds, delinquency levels, and credit losses). We classified 6% and 10% of the available-for-sale securities reported at fair value as Level 3 at March 31, 2009, and December 31, 2008, respectively. Available-for-sale securities account for 34% and 24% of all assets reported at fair value at March 31, 2009, and December 31, 2008, respectively.

 

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Loans held-for-sale  The entire loans held-for-sale portfolio is accounted for at the lower of cost or fair value. The accompanying nonrecurring fair value measurement tables include only loans that are being carried at fair value. We classified 100% and 63% of the loans held-for-sale reported at fair value as Level 3 at March 31, 2009, and December 31, 2008, respectively. Loans held-for-sale account for 4% and 9% of all assets reported at fair value at March 31, 2009, and December 31, 2008, respectively.

Approximately 15% and 6% of the total loans held-for-sale carried at fair value are automotive loans at March 31, 2009, and December 31, 2008, respectively. We based our valuation of automotive loans held-for-sale on internally developed discounted cash flow models or terms established under fixed-pricing forward flow agreements and have classified all these loans as Level 3. These valuation models estimate the exit price we expect to receive in the loan’s principal market, which depending upon characteristics of the loans may be the whole-loan market, the securitization market, or committed prices contained in forward sale agreements. Although we utilize and give priority to market observable inputs, such as interest rates and market spreads within these models, we are typically required to utilize internal inputs, such as prepayment speeds, credit losses, and discount rates. While numerous controls exist to calibrate, corroborate, and validate these internal inputs, these internal inputs require the use of judgment and can have a significant impact on the determination of the loan’s value. Accordingly, we classified all automotive loans held-for-sale as Level 3.

Approximately 85% and 94% of the total loans held-for-sale carried at fair value are mortgage loans at March 31, 2009, and December 31, 2008, respectively. We originate or purchase mortgage loans in the United States that we intend to sell to Fannie Mae, Freddie Mac, and Ginnie Mae (collectively, the Agencies). Additionally, we originate or purchase mortgage loans both domestically and internationally that we intend to sell into the secondary markets through whole-loan sales or securitizations, although this activity was substantially curtailed beginning in 2008.

Mortgage loans held-for-sale are typically pooled together and sold into certain exit markets depending upon underlying attributes of the loan, such as agency eligibility (domestic only), product type, interest rate, and credit quality. Two valuation methodologies are used to determine the fair value of loans held-for-sale. The methodology used depends on the exit market as described below.

Loans valued using observable market prices for identical or similar assets — This includes all domestic loans that can be sold to the Agencies, which are valued predominantly by published forward agency prices. This will also include all nonagency domestic loans or international loans where recently negotiated market prices for the loan pool exist with a counterparty (which approximates fair value) or quoted market prices for similar loans are available. As these valuations are derived from quoted market prices, we classify these valuations as Level 2 in the fair value disclosures. As of March 31, 2009, none of the mortgage loans held-for-sale currently being carried at fair value were classified as Level 2. As of December 31, 2008, 40% of the mortgage loans held-for-sale currently being carried at fair value are classified as Level 2. Due to the current illiquidity of the mortgage market, it may be necessary to look for alternate sources of value, including the whole-loan purchase market for similar loans and place more reliance on the valuations using internal models.

Loans valued using internal models — To the extent observable market prices are not available, we will determine the fair value of loans held-for-sale using internally developed valuation models. These valuation models estimate the exit price we expect to receive in the loan’s principal market, which depending upon characteristics of the loan may be the whole-loan or securitization market. Although we utilize and give priority to market observable inputs such as interest rates and market spreads within these models, we are typically required to utilize internal inputs, such as prepayment speeds, credit losses, and discount rates. While numerous controls exist to calibrate, corroborate, and validate these internal inputs, the generation of these internal inputs requires the use of judgment and can have a significant impact on the determination of the loan’s fair value. Accordingly, we classify these valuations as Level 3 in the fair value disclosures. As of March 31, 2009, 100% of the mortgage loans held-for-sale currently being carried at fair value are classified as Level 3. As of December 31, 2008, 60% of the mortgage loans held-for-sale being carried at fair value were classified as Level 3.

 

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Due to limited sales activity and periodically unobservable prices in certain markets, certain loans held-for-sale may transfer between Level 2 and Level 3 in future periods.

 

   

Consumer finance receivables and loans, net of unearned income  Under SFAS No. 159, The Fair Value Option of Financial Assets and Financial Liabilities (SFAS 159), we elected the fair value option for certain mortgage loans held-for-investment. The elected loans collateralized on-balance sheet securitization debt in which we estimated credit reserves pertaining to securitized assets that could have, or already had, exceeded our economic exposure. The elected loans represent a portion of the consumer finance receivable and loans on the Condensed Consolidated Balance Sheets. The balance that was not elected under SFAS 159 was reported on the balance sheet at the principal amount outstanding, net of charge-offs, allowance for loan losses, and net deferred loan fees.

The mortgage loans held-for-investment that collateralized securitization debt are legally isolated from us and are beyond the reach of our creditors. The loans are measured at fair value using a portfolio approach or an in-use premise. The objective in fair valuing the loans and related securitization debt is to properly account for our retained economic interest in the securitizations. As a result of reduced liquidity in capital markets, values of both these loans and the securitized bonds are expected to be volatile. Since this approach involves the use of significant unobservable inputs, we classified all the mortgage loans held-for-investment elected under SFAS 159 as Level 3. As of March 31, 2009, and December 31, 2008, all consumer finance receivables and loans reported at fair value are classified as Level 3. Consumer finance receivables and loans account for 8% and 7% of all assets reported at fair value at March 31, 2009, and December 31, 2008, respectively. Refer to the section within this note titled Fair Value Option of Financial Assets and Financial Liabilities (SFAS 159) for additional information.

 

   

Mortgage servicing rights  We typically retain MSRs when we sell assets into the secondary market. MSRs do not trade in an active market with observable prices; therefore, we use internally developed discounted cash flow models to estimate the fair value of MSRs. These internal valuation models estimate net cash flows based on internal operating assumptions that we believe would be used by market participants combined with market-based assumptions for loan prepayment rates, interest rates, and discount rates that we believe approximate yields required by investors in this asset. Cash flows primarily include servicing fees, float income, and late fees, in each case less operating costs to service the loans. The estimated cash flows are discounted using an option-adjusted spread derived discount rate. All MSRs are classified as Level 3 at March 31, 2009, and December 31, 2008. MSRs account for 12% and 10% of all assets reported at fair value at March 31, 2009, and December 31, 2008, respectively.

 

   

Interests retained in securitization trusts — Interests retained in securitization trusts are carried at fair value. Valuations are based on internally developed discounted cash flow models that use a market-based discount rate. The valuation considers recent market transactions, experience with similar assets, current business conditions, and analysis of the underlying collateral as available. In order to estimate cash flows, we utilize various significant assumptions including market observable inputs (e.g., forward interest rates) and internally developed inputs (e.g., prepayment speeds, delinquency levels, and credit losses). We classified 100% of interests retained in securitization trusts as Level 3 at March 31, 2009, and December 31, 2008. Interests retained in securitization trusts account for 2% and 3% of all assets reported at fair value at March 31, 2009, and December 31, 2008, respectively.

 

   

Derivative instruments  We manage risk through our balance of loan production and servicing businesses while using portfolios of financial instruments, including derivatives, to manage risk related specifically to the value of loans held-for-sale, loans held-for-investment, MSRs, foreign currency debt; and we enter into interest rate swaps to facilitate transactions where the underlying receivables are sold to a nonconsolidated QSPE. During the three months ended March 31, 2009, we recorded net economic hedge losses of $446 million. During the three months ended March 31, 2008, we recorded net economic hedge gains of $1.3 billion. Refer to Note 12 for additional information regarding changes in the fair value of economic hedges.

We enter into a variety of derivative financial instruments as part of our hedging strategies. Certain of these derivatives are exchange traded, such as Eurodollar futures, or traded within highly active dealer markets, such as agency to-be-announced securities. To determine the fair value of these instruments, we utilize the exchange price

 

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or dealer market price for the particular derivative contract; therefore, these contracts are classified as Level 1. We classified 4% of the derivative assets and 10% of the derivative liabilities reported at fair value as Level 1 at March 31, 2009. We classified less than 1% of the derivative assets and 3% of the derivative liabilities reported at fair value as Level 1 at December 31, 2008.

We also execute over-the-counter derivative contracts, such as interest rate swaps, floors, caps, corridors, and swaptions. We utilize third-party-developed valuation models that are widely accepted in the market to value these over-the-counter derivative contracts. The specific terms of the contract and market observable inputs (such as interest rate forward curves and interpolated volatility assumptions) are entered into the model. These over-the-counter derivative contracts were classified as Level 2 at March 31, 2009, because all significant inputs into these markets were market observable. We classified 63% of the derivative assets and 41% of the derivative liabilities reported at fair value as Level 2 at March 31, 2009. We classified less than 69% of the derivative assets and 44% of the derivative liabilities reported at fair value as Level 2 at December 31, 2008.

We also hold certain derivative contracts that are structured specifically to meet a particular hedging objective. These derivative contracts often are utilized to hedge risks inherent within certain on-balance sheet securitizations. To hedge risks on particular bond classes or securitization collateral, the derivative’s notional amount is often indexed to the hedged item. As a result, we typically are required to use internally developed prepayment assumptions as an input into the model in order to forecast future notional amounts on these structured derivative contracts. Accordingly, these derivative contracts were classified as Level 3. We classified 33% of the derivative assets and 49% of the derivative liabilities reported at fair value as Level 3 at March 31, 2009. We classified less than 31% of the derivative assets and 53% of the derivative liabilities reported at fair value as Level 3 at December 31, 2008.

SFAS 157 requires an entity to consider all aspects of nonperformance risk, including the entity’s own credit standing, when measuring fair value of a liability. We consider our credit risk and the credit risk of our counterparties in the valuation of derivative instruments through a credit valuation adjustment (CVA). The CVA calculation utilizes our credit default swap spreads and the spreads of the counterparty. The CVA calculates the probable or potential future exposure on the derivative under different interest and currency exchange rate environments using a simulation tool. For each simulation, a CVA is calculated using either our credit default spread, or the default spread of the counterparty, and the potential exposure of the simulation.

Derivative assets account for 18% and 17% of all assets reported at fair value at March 31, 2009, and December 31, 2008, respectively. Derivative liabilities account for 53% and 58% of all liabilities reported at fair value at March 31, 2009, and December 31, 2008, respectively.

 

   

Securities posted as collateral — Securities posted as collateral are carried at fair value. We base our valuation of trading securities on observable market prices when available; however, observable market prices are not available for a significant portion of these assets due to illiquidity in the markets. As a result, we use quoted prices in active markets for similar assets, quoted prices in inactive markets for identical or similar assets, or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full term of the assets. We classified 100% of securities posted as collateral as Level 2 at March 31, 2009. Securities posted as collateral account for 2% of all assets reported at fair value at March 31, 2009.

 

   

Repossessed and foreclosed assets  Foreclosed upon or repossessed assets resulting from loan defaults are carried at the lower of either cost or fair value less costs to sell and are included in other assets on the Condensed Consolidated Balance Sheets. The fair value disclosures include only assets carried at fair value less costs to sell.

The majority of assets acquired due to default are foreclosed assets. We revalue foreclosed assets on a periodic basis. Properties that are valued based upon independent third-party appraisals less costs to sell are classified as Level 2. When third-party appraisals are not obtained, valuations are typically obtained from third-party broker price opinion; however, depending on the circumstances, the property list price or other sales price information may be used in lieu of a broker price opinion. Based on historical experience, these values are adjusted downward to take

 

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into account damage and other factors that typically cause the actual liquidation value of foreclosed properties to be less than broker price opinion or other price sources. This valuation adjustment is necessary to ensure the valuation ascribed to these assets considers unique factors and circumstances surrounding the foreclosed asset. As a result of applying internally developed adjustments to the third-party-provided valuation of the foreclosed property, these assets are classified as Level 3 in the fair value disclosures. As of March 31, 2009, 36% and 64% of foreclosed and repossessed properties carried at fair value less costs to sell are classified as Level 2 and Level 3, respectively. As of December 31, 2008, 38% and 62% of foreclosed and repossessed properties carried at fair value less costs to sell are classified as Level 2 and Level 3, respectively. Repossessed and foreclosed assets account for 2% of all assets reported at fair value at both March 31, 2009, and December 31, 2008.

 

   

Investment in used vehicles held-for-sale  Our investment in used vehicles is carried at the lower of either cost or fair value less costs to sell and is included in other assets on the Condensed Consolidated Balance Sheets. The nonrecurring fair value tables include only assets carried at fair value less costs to sell. The prevailing market conditions, primarily weakness in the economy of the United States and Canada, have created a decline in used vehicle prices, which lowered the fair value of certain vehicles below cost. The fair value was determined based on our recent remarketing experience related to our investment in used vehicles held-for-sale. We classified all these assets as Level 3 at March 31, 2009, and December 31, 2008. Our investment in used vehicles held-for-sale accounts for 2% of all assets reported at fair value at March 31, 2009, and December 31, 2008.

 

   

On-balance sheet securitization debt  Under SFAS 159, we elected the fair value option for certain mortgage loans held-for-investment and on-balance sheet securitization debt. In particular, we elected the fair value option on securitization debt issued by domestic on-balance sheet securitization vehicles as of January 1, 2008, in which we estimated credit reserves pertaining to securitized assets could have, or already had, exceeded our economic exposure. The objective in measuring the loans and related securitization debt at fair value was to approximate our retained economic interest and economic exposure to the collateral securing the securitization debt. The remaining on-balance sheet securitization debt that was not elected under SFAS 159 is reported on the balance sheet at cost, net of premiums or discounts and issuance costs.

We value securitization debt that was elected pursuant to the fair value option and any economically retained positions using market observables prices whenever possible. The securitization debt is principally in the form of asset- and mortgage-backed securities collateralized by the underlying mortgage loans held-for-investment. Due to the attributes of the underlying collateral and current market conditions, observable prices for these instruments are typically not available in active markets. In these situations, we consider observed transactions as Level 2 inputs in our discounted cash flow models. Additionally, the discounted cash flow models utilize other market observable inputs, such as interest rates, and internally derived inputs including prepayment speeds, credit losses, and discount rates. Fair value option elected financing securitization debt is classified as Level 3 as a result of the reliance on significant assumptions and estimates for model inputs. On-balance sheet securitization debt accounts for 47% and 42% of all liabilities reported at fair value at March 31, 2009, and December 31, 2008, respectively. As a result of reduced liquidity in capital markets, values of both the elected loans and the securitized debt are expected to be volatile. Refer to the section within this note Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159) for a complete description of these securitizations.

 

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Recurring Fair Value

The following table displays the assets and liabilities measured at fair value on a recurring basis, including financial instruments elected for the fair value option under SFAS 159. We often economically hedge the fair value change of our assets or liabilities with derivatives and other financial instruments. The tables below display the hedges separately from the hedged items; therefore, they do not directly display the impact of our risk management activities.

 

     Recurring fair value measures  
March 31, 2009 ($ in millions)    Level 1     Level 2    Level 3     Total  

Assets

         

Investment securities

         

Trading securities

   $ 1     $ 109    $ 1,018     $ 1,128  

Available-for-sale securities

     2,253       4,087      433       6,773  

Consumer finance receivables and loans, net of unearned income (a)

                1,663       1,663  

Mortgage servicing rights

                2,587       2,587  

Other assets

         

Cash reserve deposits held-for-securitization trusts

                30       30  

Interests retained in securitization trusts

                510       510  

Derivative (liabilities) assets, net (b)

     (35 )     1,580      319       1,864  

Securities posted as collateral

           412            412  
   

Total assets

   $ 2,219     $ 6,188    $ 6,560     $ 14,967  
   

Liabilities

         

Secured debt

         

On-balance sheet securitization debt (a)

   $     $    $ (1,676 )   $ (1,676 )
   

Total liabilities

   $     $    $ (1,676 )   $ (1,676 )
   
(a) Carried at fair value due to fair value option election under SFAS 159.
(b) At March 31, 2009, derivative assets within Level 1, Level 2, and Level 3 were $148 million, $2.3 billion, and $1.2 billion, respectively. Additionally, derivative liabilities within Level 1, Level 2, and Level 3 were $183 million, $758 million, and $916 million, respectively.

 

     Recurring fair value measures  
December 31, 2008 ($ in millions)    Level 1     Level 2    Level 3     Total  

Assets

         

Investment securities

         

Trading securities

   $ 1     $ 486    $ 1,033     $ 1,520  

Available-for-sale securities

     1,736       3,867      631       6,234  

Consumer finance receivables and loans, net of unearned income (a)

                1,861       1,861  

Mortgage servicing rights

                2,848       2,848  

Other assets

         

Cash reserve deposits held-for-securitization trusts

                41       41  

Interests retained in securitization trusts

                688       688  

Derivative (liabilities) assets, net (b)

     (51 )     2,263      149       2,361  
   

Total assets

   $ 1,686     $ 6,616    $ 7,251     $ 15,553  
   

Liabilities

         

Secured debt

         

On-balance sheet securitization debt (a)

   $     $    $ (1,899 )   $ (1,899 )
   

Total liabilities

   $     $    $ (1,899 )   $ (1,899 )
   
(a) Carried at fair value due to fair value option election under SFAS 159.
(b) At December 31, 2008, derivative assets within Level 1, Level 2, and Level 3 were $21 million, $3.4 billion, and $1.5 billion, respectively. Additionally, derivative liabilities within Level 1, Level 2, and Level 3 were $72 million, $1.1 billion, and $1.4 billion, respectively.

 

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The following tables present the reconciliation for all Level 3 assets and liabilities measured at fair value on a recurring basis. We often economically hedge the fair value change of our assets or liabilities with derivatives and other financial instruments. The Level 3 items presented below may be hedged by derivatives and other financial instruments that are classified as Level 1 or Level 2. Thus, the following tables do not fully reflect the impact of our risk management activities.

 

    Level 3 recurring fair value measurements  
    Fair value
as of
January 1,
2009
    Net realized/
unrealized gains (losses)
    Purchases,
issuances,
and
settlements,
net
    Net
transfers
into/
(out of)
Level 3
  Fair value
as of
March 31,
2009
    Net unrealized
gains (losses)
included in
earnings still
held as of
March 31,
2009
 
($ in millions)    

Included in

earnings

   

Included in

other

comprehensive

income (h)

         

Assets

             

Investment securities

             

Trading securities

  $ 1,033     $ 10   (b)   $ (2 )   $ (23 )   $   $ 1,018     $ (278 ) (b)

Available-for-sale securities

    631         (b)     1       (199 )         433       (4 ) (b)

Consumer finance receivables and loans, net of unearned income (a)

    1,861       188   (c)           (386 )         1,663       58   (c)

Mortgage servicing rights

    2,848       (356 ) (d)           95           2,587       (348 ) (d)

Other assets

             

Cash reserve deposits held-for-securitization trusts

    41       (6 ) (e)     (1 )     (4 )         30       (112 ) (e)

Interests retained in securitization trusts

    688       (85 ) (e)           (93 )         510         (e)

Fair value of derivative contracts in (liability) receivable position, net

    149       324   (f)     (5 )     (217 )     68     319       588   (f)
   

Total assets

  $ 7,251     $ 75     $ (7 )   $ (827 )   $ 68   $ 6,560     $ (96 )
   

Liabilities

             

Secured debt

             

On-balance sheet securitization debt (a)

  $ (1,899 )   $ (136 ) (g)   $     $ 359     $   $ (1,676 )   $ (35 ) (g)
   

Total liabilities

  $ (1,899 )   $ (136 )   $     $ 359     $   $ (1,676 )   $ (35 )
   
(a) Carried at fair value due to fair value option election under SFAS 159.
(b) Fair value adjustment reported as other loss on investments, net, and the related interest is reported as interest and dividends on investment securities in the Condensed Consolidated Statement of Income.
(c) The fair value adjustment is reported as other income, net of losses, and the related interest is reported as consumer financing revenue in the Condensed Consolidated Statement of Income.
(d) Fair value adjustment reported as servicing asset valuation and hedge activities, net, in the Condensed Consolidated Statement of Income.
(e) Reported as other loss on investments, net, in the Condensed Consolidated Statement of Income.
(f) Derivative instruments relating to risks associated with debt are reported as other interest expense in the Condensed Consolidated Statement of Income, while derivatives relating to risks associated with mortgage loans held-for-sale are reported as other loss on investments, net. The remaining derivative earnings are reported as other income, net of losses, in the Condensed Consolidated Statement of Income.
(g) Fair value adjustment is reported as other income, net of losses, and the related interest is reported within total interest expense in the Condensed Consolidated Statement of Income.
(h) Includes foreign currency translation adjustments, if any.

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

    Level 3 recurring fair value measurements  
    Fair value
as of
January 1,
2008
    Net realized/
unrealized gains (losses)
    Purchases,
sales,

issuances, and
settlements
    Fair value
as of
March 31,
2008
    Net unrealized
gains (losses)
included in
earnings still
held as of
March 31,
2008
 
($ in millions)    

Included in

earnings

   

Included

in other

comprehensive

income (j)

       

Assets

           

Investment securities

           

Available-for-sale securities

  $ 1,249     $ (33 ) (b)   $ 7     $ (28 )   $ 1,195     $ (25 ) (b)

Trading securities

    2,726       (424 ) (b)     (2 )     (152 )     2,148       (521 ) (b)

Consumer finance receivables and loans, net of unearned income (a)

    6,684       (2,003 ) (c)           (766 )     3,915       (2,274 ) (c)

Mortgage servicing rights

    4,713       (646 ) (d)           211       4,278       (630 ) (d)

Other assets

           

Cash reserve deposits held for securitization trusts

    30       8   (e)           3       41       8   (e)

Fair value of derivative contracts in receivable position, net

    (46 )     179   (f)     11       28       172       197   (f)

Restricted cash collections for securitization trusts

    111       (3 ) (g)     (3 )     (5 )     100       (3 ) (g)
   

Total assets

  $ 15,467     $ (2,922 )   $ 13     $ (709 )   $ 11,849     $ (3,248 )
   

Liabilities

           

Secured debt

           

On-balance sheet securitization debt (a)

  $ (6,734 )   $ 2,033   (h)   $     $ 705     $ (3,996 )   $ 2,149   (h)

Collateralized debt obligations (a)

    (351 )     21   (i)           27       (303 )     (59 ) (i)
   

Total liabilities

  $ (7,085 )   $ 2,054     $     $ 732     $ (4,299 )   $ 2,090  
   
(a) Carried at fair value due to fair value option election under SFAS 159.
(b) Fair value adjustment reported as other loss on investments, net, and the related interest is reported as interest and dividends on investment securities in the Condensed Consolidated Statement of Income.
(c) Fair value adjustment is reported as other income, net of losses, and the related interest is reported as consumer financing revenue in the Condensed Consolidated Statement of Income.
(d) Fair value adjustment reported as servicing asset valuation and hedge activities, net, in the Condensed Consolidated Statement of Income.
(e) Reported as other loss on investments, net, in the Condensed Consolidated Statement of Income.
(f) Derivative instruments relating to risks associated with debt are reported as other interest expense in the Condensed Consolidated Statement of Income, while derivatives relating to risks associated with mortgage loans held-for-sale are reported as other loss on investments, net. The remaining derivative earnings are reported as other income, net of losses, in the Condensed Consolidated Statement of Income.
(g) Reported as other operating expenses in the Condensed Consolidated Statement of Income.
(h) Fair value adjustment is reported as other income, net of losses, and the related interest is reported as interest expense in the Condensed Consolidated Statement of Income.
(i) Reported as other income (loss) on investments, net, and the related interest is reported within total interest expense in the Condensed Consolidated Statement of Income.
(j) Includes foreign currency translation adjustments, if any.

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Nonrecurring Fair Value

We may be required to measure certain assets and liabilities at fair value from time to time. These periodic fair value measures typically result from the application of lower of cost or fair value accounting or certain impairment measures under GAAP. These items would constitute nonrecurring fair value measures under SFAS 157.

The following tables display the assets and liabilities measured at fair value on a nonrecurring basis.

 

     Nonrecurring fair value measures    Lower of
cost or
fair value
or credit
allowance
    Total gains
(losses)
included in
earnings for
the three
months ended
 
March 31, 2009 ($ in millions)    Level 1    Level 2    Level 3    Total     

Assets

                

Loans held-for-sale (a)

   $    $    $ 814    $ 814    $ (471 )                (f)

Commercial finance receivables and loans, net of unearned income (b)

          329      1,994      2,323      (588 )     (87 ) (g)

Other assets

                

Real estate and other investments (c)

          43           43                 (e)     1  

Repossessed and foreclosed assets, net (d)

          174      310      484      (245 )         (f)

Investment in used vehicles held-for-sale (a)

               500      500      (109 )         (f)
   

Total assets

   $    $ 546    $ 3,618    $ 4,164    $ (1,413 )   $ (86 )
   

n/m = not meaningful

(a) Represents assets held-for-sale that are required to be measured at lower of cost or fair value in accordance with SFAS No. 65, Accounting for Certain Mortgage Banking Activities or SOP 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others. The table above includes only assets with fair values below cost as of March 31, 2009. The related valuation allowance represents the cumulative adjustment to fair value of those specific loans.
(b) Represents the portion of the commercial portfolio impaired as of March 31, 2009, under SFAS No. 114, Accounting by Creditors for Impairment of a Loan. The related credit allowance represents the cumulative adjustment to fair value of those specific receivables.
(c) Represents assets impaired as of March 31, 2009, under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The total loss included in earnings represents adjustments to the fair value of the portfolio based on actual sales during the three months ended March 31, 2009.
(d) The allowance provided for repossessed and foreclosed assets represents any cumulative valuation adjustment recognized to adjust the assets to fair value less costs to sell.
(e) The total loss included in earnings is the most relevant indicator of the impact on earnings.
(f) We consider the applicable valuation or loan loss allowance to be the most relevant indicator of the impact on earnings caused by the fair value measurement. Accordingly, the table above excludes total gains and losses included in earnings for these items. The carrying values are inclusive of the respective valuation or credit loss allowance.
(g) Represents losses recognized on the impairment of our resort finance business, which provided debt capital to resort and timeshare developers. Refer to footnote (f) for information related to the other commercial finance receivables and loans, net of unearned income, for which impairment was recognized.

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

    Nonrecurring fair value measures   Lower of cost or
fair value or
credit allowance
    Total gains
(losses) included
in earnings for the
three months ended
 
March 31, 2008 ($ in millions)   Level 1   Level 2   Level 3   Total    

Assets

           

Loans held-for-sale (a)

  $   $ 7,784   $ 1,201   $ 8,985   $ (1,368 )     n/m  (g)

Consumer finance receivables and loans, net of unearned income (b)

        238     31     269     (241 )     n/m  (g)

Commercial finance receivables and loans, net of unearned income (c)

            37     37     (18 )     n/m  (g)

Other assets

           

Real estate and other investments (d)

        280         280     n/m  (f)   $ (3 )

Repossessed and foreclosed assets, net (e)

        388     734     1,122     (248 )     n/m  (g)
   

Total assets

  $   $ 8,690   $ 2,003   $ 10,693   $ (1,875 )   $ (3 )
   

n/m = not meaningful

(a) Represents loans held-for-sale that are required to be measured at lower of cost or fair value in accordance with SFAS No. 65, Accounting for Certain Mortgage Banking Activities or (SOP 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others. Only loans with fair values below cost are included in the table above. The related valuation allowance represents the cumulative adjustment to fair value of those specific loans.
(b) Includes only receivables with a specific reserve established using the fair value of the underlying collateral. The related credit allowance represents the cumulative adjustment to fair value of those specific receivables.
(c) Represents the portion of the commercial portfolio impaired as of March 31, 2008, under SFAS No. 114, Accounting by Creditors for Impairment of a Loan. The related credit allowance represents the cumulative adjustment to fair value of those specific receivables.
(d) Represents assets impaired under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Asset. The total loss included in earnings for the three months ended March 31, 2008, represents the fair market value adjustments on the portfolio.
(e) The allowance provided for repossessed and foreclosed assets represents any cumulative valuation adjustment recognized to adjust the assets to fair value less costs to sell.
(f) The total loss included in earnings is the most relevant indicator of the impact on earnings.
(g) We consider the applicable valuation or credit loss allowance to be the most relevant indicator of the impact on earnings caused by the fair value measurement. The carrying values are inclusive of the respective valuation or credit loss allowance.

Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159)

Our Mortgage operations elected to measure at fair value certain mortgage loans held-for-investment. Our intent in electing fair value for these items was to mitigate a divergence between accounting losses and economic exposure for certain assets and liabilities.

The following is a description of the financial liabilities elected to be measured at fair value under SFAS 159.

 

   

On-balance sheet securitizations — In prior years, our Mortgage operations executed certain domestic securitizations that did not meet sale criteria under SFAS 140. As part of these domestic on-balance sheet securitizations, we typically retained the economic residual interest in the securitization. The economic residual entitles us to excess cash flows that remain at each distribution date after absorbing any credit losses in the securitization. Because sale treatment was not achieved under SFAS 140, the mortgage loan collateral remained on the balance sheet and was classified as consumer finance receivable and loans; the securitization’s debt was classified as secured debt; and the economic residuals were not carried on the balance sheet. After execution of the securitizations, we were required under GAAP to continue recording an allowance for loan losses on these held-for-investment loans.

As a result of market conditions and deteriorating credit performance of domestic residential mortgages, our economic exposure on certain of these domestic on-balance sheet securitizations was reduced to zero or approximating zero, thus indicating we expected minimal to no future cash flows to be received on the economic residual. While we no longer were economically exposed to credit losses in the securitizations, we were required to continue recording additional allowance for loan losses on the securitization collateral as credit performance deteriorated. Further, in accordance with GAAP, we did not record any offsetting reduction in the securitization’s

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

debt balances, even though any nonperformance of the assets would ultimately pass through as a reduction of the amount owed to the debt holders once they are contractually extinguished. As a result, we were required to record accounting losses beyond our economic exposure.

To mitigate the divergence between accounting losses and economic exposure, we elected the fair value option for a portion of the domestic on-balance sheet securitizations. In particular, we elected the fair value option for domestic on-balance sheet securitization vehicles in which we estimated that the credit reserves pertaining to securitized assets could, or already had, exceeded our economic exposure. The fair value option election was made at a securitization level; thus the election was made for both the mortgage loans held-for-investment and the related portion of on-balance sheet securitized debt for these particular securitizations.

We carry the fair value-elected loans within consumer finance receivable and loans, net of unearned income, on the Condensed Consolidated Balance Sheets. Our policy is to separately record interest income on the fair value-elected loans unless the loans are placed on nonaccrual status when they are 60 days past due; these amounts continue be classified within consumer financing revenue in the Condensed Consolidated Statement of Income. The fair value adjustment recorded for the loans is classified as other income, net of losses, in the Condensed Consolidated Statement of Income.

The fair value-elected debt balances continue to be recorded as secured debt on the Condensed Consolidated Balance Sheets. Our policy is to separately record interest expense on the fair value-elected securitization debt, which continues to be classified within interest expense in the Condensed Consolidated Statement of Income. The fair value adjustment recorded for this fair value-elected debt is classified within other income, net of losses, in the Consolidated Statement of Income.

The following tables summarize the fair value option elections and information regarding the amounts recorded within earnings for each fair value option-elected item.

 

     Changes included in the Condensed Consolidated Statement of
Income for the three months ended March 31, 2009
 
($ in millions)   

Consumer

financing

revenue

  

Total
interest

expense

   

Other

income,
net of
losses

   

Total

included in

earnings

   

Change in

fair value due to

credit risk (a)

 

Assets

           

Consumer finance receivables and loans, net of unearned income

   $ 142    $     $ 46     $ 188     $ (64 ) (b)

Liabilities

           

Secured debt
On-balance sheet securitization debt

   $    $ (60 )   $ (76 )   $ (136 )   $ 62   (c)
   

Total

          $ 52    
   
(a) Factors other than credit quality that impact fair value include changes in market interest rates and the illiquidity or marketability in the current marketplace. Lower levels of observable data points in illiquid markets generally result in wide bid/offer spreads.
(b) The credit impact for consumer finance receivables and loans were quantified by applying internal credit loss assumptions to cash flow models.
(c) The credit impact for on-balance sheet securitization debt is assumed to be zero until our economic interests in a particular securitization is reduced to zero, at which point the losses on the underlying collateral will be expected to be passed through to third-party bondholders. Losses allocated to third-party bondholders, including changes in the amount of losses allocated, will result in fair value changes due to credit. We also monitor credit ratings and will make credit adjustments to the extent any bond classes are downgraded by rating agencies.

 

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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

     Changes included in the Condensed Consolidated Income Statement
for the three months ended March 31, 2008
 
($ in millions)   

Consumer

financing

revenue

  

Total
interest

expense

   

Investment

income

  

Other

income,
net of
losses

   

Total

included in

earnings

   

Change in

fair value

due to credit

 

Assets

              

Consumer finance receivables and loans, net of unearned income

   $ 198    $     $    $ (2,201 )   $ (2,003 )   $ (18 ) (a)

Liabilities

              

Secured debt

              

On-balance sheet securitization debt

   $    $ (114 )   $    $ 2,147     $ 2,033     $ (22 ) (b)

Collateralized debt obligations

                21            21         (c)
   

Total

             $ 51    
   
(a) The credit impact for consumer finance receivables and loans were quantified by applying internal credit loss assumptions to cash flow models.
(b) The credit impact for on-balance sheet securitization debt is assumed to be zero until our economic interests in a particular securitization is reduced to zero, at which point the losses on the underlying collateral will be expected to be passed through to third-party bondholders. Losses allocated to third-party bondholders, including changes in the amount of losses allocated, will result in fair value changes due to credit. We also monitor credit ratings and will make credit adjustments to the extent any bond classes are downgraded by rating agencies.
(c) The credit impact for collateralized debt obligations is assumed to be zero until our economic interests in the securitization is reduced to zero, at which point the losses projected on the underlying collateral will be expected to be passed through to third-party bondholders. Losses allocated to third-party bondholders, including changes in the amount of losses allocated, will result in fair value changes due to credit. We also monitor credit ratings and will make credit adjustments to the extent any bond classes are downgraded by rating agencies.

Interest income on mortgage loans held-for-investment is measured by multiplying the unpaid principal balance on the loans by the coupon rate and the day’s interest due. Interest expense on the on-balance sheet securitizations is measured by multiplying bond principal by the coupon rate and day’s interest due to the investor.

The following table provides the aggregate fair value and the aggregate unpaid principal balance for the fair value option-elected loans and long-term debt instruments.

 

March 31, 2009 ($ in millions)   

Unpaid

principal

balance

   

Loan

advances/

other

   

Accrued

interest

   

Fair value

allowance

   

Fair

value

 

Assets

          

Consumer finance receivables and loans, net of unearned income

          

Total loans

   $ 8,346     $ (136 )   $ 82     $ (6,629 )   $ 1,663  

Nonaccrual loans

     1,744         (b)       (b)       (b)       (b)

Loans 90+ days past due (a)

     1,302         (b)       (b)       (b)       (b)

Liabilities

          

Secured debt

          

On-balance sheet securitization debt

   $ (8,118 )   $     $ (17 )   $ 6,459     $ (1,676 )
   
(a) Loans 90+ days past due are also presented within the nonaccrual loan balance and the total loan balance.
(b) The fair value of loans held-for-sale is calculated on a pooled basis, which does not allow us to reliably estimate the fair value of loans 90+ days past due or nonaccrual loans. As a result, the fair value of these loans is not included in the table above. Unpaid principal balances were provided to allow assessment of the materiality of loans 90+ days past due and nonaccrual loans relative to total loans. For further discussion regarding the pooled basis, refer to the previous section of this note titled, Consumer finance receivables, net of unearned income.

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

16. Variable Interest Entities

The following describes the VIEs that we have consolidated or in which we have a significant variable interest as described in FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46(R)).

 

   

Off-balance sheet securitization trusts — We sell pools of residential loans through securitization transactions that qualify for off-balance sheet treatment. Under SFAS 140, these entities are set up as trusts and are considered QSPEs. We do not consolidate these QSPEs as they are specifically out of scope of FIN 46(R) and are not allowed to be consolidated under SFAS 140.

Additionally, in certain securitization transactions, we transfer consumer finance receivables and wholesale lines of credit into bank-sponsored, multiseller, commercial paper conduits. These conduits provide a funding source to us (and to other transferors into the conduit) as they fund the purchase of the receivables through the issuance of commercial paper. Total assets outstanding in these bank-sponsored conduits approximated $4.3 billion as of March 31, 2009. Although we have variable interests in these conduits, we are not considered to be the primary beneficiary, as we do not retain the majority of the expected losses or returns. We do not consolidate these conduits as they are specifically out of scope of FIN 46(R) and are not allowed to be consolidated under SFAS 140. Our maximum exposure to loss because of our involvement with these nonconsolidated VIEs is $126 million and would only be incurred in the event of a complete loss on the assets that we transferred.

 

   

On-balance sheet securitization trusts — We have certain securitization transactions that are not QSPEs and are VIEs within the scope of FIN 46(R). We typically hold the first loss position in these securitization transactions and, as a result, anticipate absorbing the majority of the expected losses of the VIE. Accordingly, we are the primary beneficiary; thus, we have consolidated these securitization trusts entities. The assets of the consolidated securitization trusts totaled $46.1 billion and $49.9 billion at March 31, 2009, and December 31, 2008, respectively. The majority of the assets are included as finance receivables and loans, net of unearned interest, in the Condensed Consolidated Balance Sheet. The liabilities of these securitization trust entities totaled $35.9 billion and $39.0 billion at March 31, 2009, and December 31, 2008, respectively. The majority of these liabilities were included as secured debt in the Condensed Consolidated Balance Sheet.

The nature of, purpose of, activities of, and our continuing involvement with the consolidated securitization trusts are virtually identical to those of our off-balance sheet securitization trusts, which are discussed in Note 6. We have not provided financial or other support to the consolidated securitization trusts that was not previously contractually required to be provided. The assets of the securitization trusts generally are the sole source of repayment on the securitization trusts’ liabilities. The creditors of the securitization trusts do not have recourse to our general credit, with the exception of the customary representation and warranty repurchase provisions and, in certain transactions, early payment default provisions, as discussed in Note 26 to the Consolidated Financial Statements in our 2008 Annual Report on Form 10-K.

During 2009, we executed an amendment to a wholesale automotive securitization transaction that was classified as a QSPE under SFAS 140 and, therefore, was unconsolidated. The amendment contractually required us to deposit additional cash into a collateral account held by the trust. Management determined the amendment caused the trust to no longer be classified as a QSPE. As a result, the trust became a consolidated entity in accordance with FIN 46(R).

 

   

Mortgage warehouse funding — Our Mortgage operations transfer international residential mortgage loans into SPEs in order to obtain funding. The facilities have advance rates less than 100% of the pledged asset values, and, in certain cases, we have provided a subordinated loan to the facility to serve as additional collateral. For certain facilities, there is an unconditional guarantee by our Mortgage operations of the entity’s repayment on the related debt to the facility that provides the facility provider with recourse to our general credit. Our Mortgage operations continue to service the assets within the mortgage warehouse facilities.

 

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The over-collateralization and the subordinated loan support the liability balance and are the primary source of repayment of the entities’ liabilities. Assets can be sold from the facilities so long as we support the minimum cash reserve under the borrowing base should the eligibility/concentration limit of the remaining assets require it. We are entitled to excess cash flows generated from the assets beyond those necessary to pay the facility during a particular period; therefore, we hold an economic residual. There are no other forms of support that we provide to the SPE beyond the assets (over-collateralization and subordinated loan) initially provided and the guarantee provided by our Mortgage operations of the entities’ performance.

These entities are VIEs within the scope of FIN 46(R). Due to the subordinated loan and the guarantee, our Mortgage operations anticipate absorbing the majority of the expected losses of the VIE. Accordingly, our Mortgage operations are the primary beneficiary and thus have consolidated these entities.

The assets of these residential mortgage warehouse entities totaled $881 million, and liabilities totaled $1.0 billion at March 31, 2009. At December 31, 2008, the assets of these residential mortgage warehouse entities totaled $1.4 billion, and liabilities totaled $1.5 billion. The majority of the assets and liabilities are included in loans held-for-sale or finance receivables and loans, net of unearned income and secured debt, respectively, in the Condensed Consolidated Balance Sheet. The creditors of these VIEs do not have legal recourse to our general credit.

 

   

Construction and real estate lending — Our Mortgage operations use SPEs to finance construction-lending receivables and other real estate-owned assets. The SPEs purchase and hold the assets through financing obtained from third-party asset-backed commercial paper conduits. All forward commitments to fund receivable obligations previously eligible for financing under this facility were funded by an alternative source creating additional over-collateralization.

Our Mortgage operations are the primary beneficiary since they absorb the majority of the losses and, as such, consolidate the entities in accordance with FIN 46(R). The assets in these entities totaled $999 million and $1.2 billion at March 31, 2009, and December 31, 2008, respectively, which were included in finance receivables and loans, net of unearned income, in the Condensed Consolidated Balance Sheet. The liabilities in these entities totaled $416 million and $557 millions at March 31, 2009, and December 31, 2008, respectively. The beneficial interest holders of these VIEs do not have legal recourse to our general credit. We do not have a contractual obligation to provide any type of financial support in the future, nor have we provided noncontractual financial support or any type of support to the entity during the three months ended March 31, 2009. All forward commitments to fund receivable obligations previously eligible for financing under this facility were funded by an alternative source creating additional over-collateralization.

We invest in certain entities and as such enter into subordinated real estate-lending arrangements. These entities are created to develop land and construct properties. Management has determined we do not have the majority of the expected losses or returns, and, as such, consolidation is not appropriate under FIN 46(R). Total assets in these entities were $65 million at March 31, 2009, of which $41 million represents our maximum exposure. Total assets in these entities were $65 million at December 31, 2008, of which $43 million represents our maximum exposure. We do not have a contractual obligation to provide any type of financial support in the future, nor have we provided noncontractual financial support or any type of support to the entity during the three months ended March 31, 2009.

 

   

Model home financings — In June 2008, Cerberus purchased certain assets of our Mortgage operations with a carrying value of approximately $480 million for consideration consisting of $230 million in cash and Series B junior preferred membership interests in the newly formed entity, CMH, which is not a subsidiary of our Mortgage operations and the managing member of which is an affiliate of Cerberus. CMH purchased model home and lot option assets from our Mortgage operations.

In conjunction with this agreement, Cerberus has entered into a term loan and a revolving loan with CMH. The term loan principal amount is $230 million, and the revolving loan maximum amount is $10 million. Both loans

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

have a five-year term and a 15% interest rate. The term loan and related interest are paid from the dispositions of the model homes and lot options.

The term loan and interest due is repaid out of the dispositions of the models after CMH has repaid the loan and paid the accrued interest. Cash is distributed in the following order: (1) to the Class A senior preferred member all unreturned preferred capital, including a preferred return equal to 20% of total cash outlay less the aggregate amount of interest payments made; (2) to the Class B junior preferred member all unreturned preferred capital, including a preferred return equal to 20% of the initial Class B capital account; (3) to the Class B member until all reimbursable costs have been returned; and (4) to the common unit member (Cerberus). Based on the market conditions and market valuation adjustments, there is a risk that ResCap will not receive all of its Tier 2 payments.

As of March 31, 2009, Cerberus was repaid in full under the term loan and was paid their preferred return on Class A Senior Preferred Capital.

We consolidate CMH in accordance with FIN 46(R) as we hold all the remaining interests in CMH and are, therefore, the primary beneficiary. The assets of CMH were $131 million and $186 million as of March 31, 2009, and December 31, 2008, respectively, and were included in other assets in Condensed Consolidated Balance Sheet. The liabilities of CMH were $2 million and $47 million as of March 31, 2009, and December 31, 2008, respectively, which were classified as debt and accrued expenses and other liabilities on the Condensed Consolidated Balance Sheet. The beneficial interest holders of this VIE do not have legal recourse to our general credit. We do not have a contractual obligation to provide any type of financial support in the future, nor have we provided noncontractual financial support or any type of support to the entity during the three months ended March 31, 2009.

We continue to service, account for, market, and sell the assets without a servicing fee. However we do receive reimbursement of expenses directly related to the assets such as property taxes and other direct out-of-pocket expenses. This VIE does not conduct new business; therefore, no new assets have transferred into CMH.

 

   

Servicing funding — In order to assist in the financing of our servicing advance receivables, our Mortgage operations formed an SPE that issues term notes to third-party investors that are collateralized by servicing advance receivables. These servicing advance receivables are transferred to the SPE and consist of delinquent principal and interest advances made by our Mortgage operations, as servicer, to various investors; property taxes and insurance premiums advanced to taxing authorities and insurance companies on behalf of borrowers; and amounts advanced for mortgages in foreclosure. The SPE funds the purchase of the receivables from financing obtained from the third-party investors and subordinated loans or an equity contribution from our Mortgage operations. Management has determined that we are the primary beneficiary of the SPE and, as such, consolidate the entity in accordance with FIN 46(R). The assets of this entity totaled $1.1 billion and $1.2 billion as of March 31, 2009, and December 31, 2008, respectively, which are included in other assets on the Condensed Consolidated Balance Sheet. The liabilities of this entity totaled $1.2 billion at March 31, 2009, consisting of $700 million in third-party term notes which are included within debt on the Condensed Consolidated Balance Sheet, and $482 million in affiliate payables to ResCap, which are eliminated in consolidation. The liabilities of this entity totaled $1.2 billion at December 31, 2008, consisting of $700 million in third-party term notes that are included within debt on the Condensed Consolidated Balance Sheet and $507 million in affiliate payables to ResCap that are eliminated in consolidation. Our maximum exposure related to this entity is $435 million as of March 31, 2009. The beneficial interest holder of this VIE does not have legal recourse to our general credit. We do not have a contractual obligation to provide any type of financial support in the future, nor have we provided noncontractual financial support to the entity during the three months ended March 31, 2009.

 

   

Commercial Finance receivables  We have a facility in which we transfer commercial-lending receivables to a 100% owned SPE, which, in turn, issues notes received to third-party financial institutions, GMAC Commercial Finance, and asset-backed commercial paper conduits. The SPE funds the purchase of receivables from us with cash obtained from the sale of notes. Management has determined that we are the primary beneficiary of the SPE and, as such, consolidates the entity in accordance with FIN 46(R). The assets and liabilities of the SPE totaled $1.8 billion

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

 

and $932 million, respectively, as of March 31, 2009, and are included in finance receivables and loans, net of unearned income, on our Condensed Consolidated Balance Sheet. The assets and liabilities of the SPE totaled $2.2 billion and $1.1 billion, respectively, as of December 31, 2008. The beneficial interest holders of this variable interest entity do not have legal recourse to our general credit.

In other securitization transactions, we transfer resort time-share and commercial trade receivables into bank-sponsored multiseller commercial paper conduits. These conduits provide a funding source to us (and to other transferors into the conduit) as they fund the purchase of the receivables through the issuance of commercial paper. Total assets and liabilities outstanding in these bank-sponsored conduits approximated $1.8 billion and $669 million, respectively, as of March 31, 2009. Total assets and liabilities outstanding in these bank-sponsored conduits approximated $2.1 billion and $781 million, respectively, as of December 31, 2008. Although we have a variable interest in these conduits, we may at our discretion prepay all or any portion of the loans at any time.

 

   

Preferred Blocker Inc.  In connection with the fourth quarter 2008 private debt exchange, we transferred GMAC Preferred Membership Interests to Preferred Blocker Inc. (Blocker), a newly formed taxable C-corporation. Blocker was established for the sole purpose of investing in a series of GMAC Preferred Membership Interests and financing them through the issuance of Blocker Preferred Stock to third-party investors in connection with the private debt exchange. Blocker will generally not engage in any business activities or hold any assets or incur any liabilities other than in connection with the issuance and maintenance of preferred stock. In connection to the arrangement, we hold 5,000,000 shares of Blocker Common Stock with a par value of $0.01. Additionally, we are bound by a Keep-Well Agreement with Blocker in which we are required to make payment to Blocker in the event that Blocker’s expenses, primarily its income tax expense, are greater than the dividend spread between the GMAC Preferred Membership Interests (11.86% dividend rate per annum) and the Blocker Preferred Stock (7% dividend rate per annum). Refer to Note 26 to the Consolidated Financial Statements in our 2008 Annual Report on Form 10-K for additional information regarding the Keep-Well Agreement. Due to the spread in rates, Blocker’s tax rate would have to exceed 41.0% before we would be required to make payment under the Keep-Well Agreement. Since this rate is in excess of common corporate taxable rates, the potential for loss under this agreement is considered remote, unless corporate tax rates are increased. Although we hold these variable interests in Blocker, we are not considered to be the primary beneficiary as we do not retain the majority of the expected losses or returns. Blocker is a wholly owned nonconsolidated subsidiary of GMAC.

 

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17. Segment Information

Financial results for our reportable segments are summarized below.

 

     Global Automotive Finance
operations (a)
                        

Three months ended
March 31,

($ in millions)

  

North

American

operations (a)

   

International

operations (b)

   

Mortgage

operations (c)

   

Insurance

operations

  

Corporate
and

Other (d)

    Consolidated  

2009

             

Net financing revenue (loss)

   $ 498     $ 213     $ 59     $ 65    $ (357 )   $ 478  

Other revenue (loss)

     270       87       962       850      (448 )     1,721  
   

Total net revenue (loss)

     768       300       1,021       915      (805 )     2,199  

Provision for loan losses

     134       55       650            4       843  

Other noninterest expense

     388       286       614       856      10       2,154  
   

Income (loss) before income tax (benefit) expense

     246       (41 )     (243 )     59      (819 )     (798 )

Income tax (benefit) expense

     (13 )     (7 )     (118 )     9      6       (123 )
   

Net income (loss)

   $ 259     $ (34 )   $ (125 )   $ 50    $ (825 )   $ (675 )
   

Total assets

   $ 105,766     $ 25,702     $ 49,602     $ 12,156    $ (13,674 )   $ 179,552  
   

2008

             

Net financing revenue (loss)

   $ 428     $ 316     $ 30     $ 93    $ (39 )   $ 828  

Other revenue (loss)

     328       162       (51 )     1,154      (11 )     1,582  
   

Total net revenue (loss)

     756       478       (21 )     1,247      (50 )     2,410  

Provision for loan losses

     117       55       300            2       474  

Other noninterest expense

     481       285       584       1,081      76       2,507  
   

Income (loss) before income tax expense (benefit)

     158       138       (905 )     166      (128 )     (571 )

Income tax expense (benefit)

     4       34       (46 )     34      (8 )     18  
   

Net income (loss)

   $ 154     $ 104     $ (859 )   $ 132    $ (120 )   $ (589 )
   

Total assets

   $ 130,893     $ 37,795     $ 73,869     $ 13,730    $ (12,933 )   $ 243,354  
   
(a) North American operations consist of automotive financing in the United States, Canada, and Puerto Rico. International operations consist of automotive financing and full-service leasing in all other countries.
(b) Amounts include intrasegment eliminations between North American operations and International operations.
(c) Represents the ResCap LLC legal entity and the mortgage activities of GMAC Bank and ResMor Trust.
(d) Represents our Commercial Finance business, certain equity investments, other corporate activities, and reclassifications and eliminations between the reportable operating segments.

 

18. Subsequent Events

Amendment to GMAC LLC Operating Agreement

On April 15, 2009, GM Finance Co. Holdings LLC and FIM Holdings, each as members of GMAC, entered into a Fourth Amended and Restated Limited Liability Company Operating Agreement of GMAC (the Fourth Amended and Restated LLC Agreement). The Fourth Amended and Restated LLC Agreement contains amendments to, among other things, (i) simplify GMAC’s common equity structure by combining the Class A and Class B membership interests into a single class of common membership interests, (ii) set forth certain circumstances following the occurrence of which GMAC would be required to convert into a Delaware corporation, (iii) amend certain reporting, consulting and auditing obligations of GMAC with respect to GMAC’s members, (iv) amend GMAC’s obligations to pay tax and other distributions to certain of its members and (v) amend member approval rights with respect to certain corporate and other actions.

 

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Declaration of Quarterly Dividend Payments

On April 16, 2009, our Board of Managers declared quarterly dividend payments on each of our Fixed Rate Cumulative Perpetual Preferred Membership Interests, Series D-1 and Series D-2, and Class E Preferred Membership Interests. Dividend payments declared on the senior preferred membership interests issued to the U.S. Department of the Treasury under the Troubled Asset Relief Program totaled approximately $105.6 million. This consisted of a cash dividend of $20 per unit, or a total of $100 million, on the Series D-1 preferred interests; and a cash dividend of $22.50 per unit, or a total of $5.6 million, on the Series D-2 preferred interests. The dividend payment declared to Preferred Blocker Inc. (Preferred Blocker), a wholly owned subsidiary of GMAC, on the Class E Preferred Membership Interests was $28.99 per unit, or a total of $75 million. Preferred Blocker was established in connection with the settlement of our private exchange and cash tender offers, which were completed in December 2008.

Separately, the Board of Directors of Preferred Blocker declared a quarterly dividend payment of $17.11 per share, or a total of approximately $44 million, on Preferred Blocker’s 9% Cumulative Perpetual Preferred Stock (Blocker Preferred). This dividend is payable on May 15, 2009, to shareholders of record as of May 1, 2009. As previously disclosed, the interest rate payable has been reduced from 9% to 7% in accordance with the terms of the Certificate of Designations of the Blocker Preferred. These preferred membership interests were issued to investors in connection with our private exchange and cash tender offers, which were completed in December 2008.

Master Auto Finance Agreement with Chrysler

On April 30, 2009, as part of Chrysler LLC’s (Chrysler) proposed industrial alliance with Fiat S.p.A. and efforts to effect a restructuring with the support of the U.S. Department of the Treasury (the Treasury), we entered into a Master Auto Finance Agreement Term Sheet with Chrysler (the Term Sheet) pursuant to which we will provide certain retail and wholesale financing for the Chrysler dealer network.

The financial services to be rendered by us will be offered for all brands distributed through the Chrysler dealer network in the United States, Canada, and Mexico, along with other international markets upon the mutual agreement of the parties. We will provide dealer financing and services and retail financing to Chrysler dealers and customers as we deem appropriate according to our credit policies and in our sole discretion. Chrysler is obligated to provide us with certain exclusivity privileges including the use of GMAC for designated minimum threshold percentages of certain of Chrysler’s retail financing subvention programs. The agreement will extend for a period of four years with automatic one-year renewals unless either we or Chrysler provides sufficient notice of nonrenewal.

Under the Term Sheet, we have agreed to use commercially reasonable efforts to offer standard retail financing and to put in place new interim dealer funding for new and used inventory as promptly as practicable (with a target completion date of May 15, 2009) and to conduct dealer credit assessments of each Chrysler dealer within 180 days. All decisions to establish credit lines or to provide other products and services with a dealer will be at our sole discretion. We have also agreed to work with Chrysler to develop other dedicated or customized services as the parties may agree from time to time.

Chrysler has agreed to provide us with certain protections designed to minimize our risk of loss due to, among other things, the effects of a bankruptcy filing and reorganization by Chrysler. We are entitled to take certain actions to ensure that our gross unsecured exposure to Chrysler remains below designated levels, and Chrysler is obligated to provide us with cash collateral in the amount of our current good-faith estimate of unsecured exposure to Chrysler as a result of subvention programs over a rolling two-week period. GMAC and Chrysler have agreed to negotiate in good faith to appropriately adjust such protections following the successful stabilization of Chrysler’s automobile manufacturing business and, in any event, on an annual basis.

We may terminate the Term Sheet on and after May 16, 2009, if, among other things, (i) the bankruptcy court administering the cases of Chrysler and its subsidiaries has not approved, among other things, the Term Sheet; (ii) we not have obtained certain regulatory approvals as previously discussed between the Treasury and us required to permit us to perform our obligations under the Term Sheet; or (iii) the Treasury shall not have (a) provided us with an amount and form of equity capital consistent with prior discussions between the Treasury and us and (b) entered into a binding agreement with us with respect to the GMAC Dealer Transition Financing Support Program providing for reimbursement by the U.S. government of certain losses incurred by GMAC, GMAC Bank, or any other GMAC subsidiary in connection with the Term Sheet in an amount and on terms previously discussed with and mutually agreed by the Treasury and us.

 

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Supervisory Capital Assessment Program

The following table was released by the Federal Reserve Bank of Chicago (FRBC) on May 7, 2009, which reflects capital requirements for GMAC LLC as a result of the Board of Governors of the Federal Reserve System’s Supervisory Capital Assessment Program (SCAP).

 

December 31, 2008 ($ in billions)    Amount     As % of
RWA
 

Tier 1 capital

   $ 17.4     10.1 %

Tier 1 common capital

     11.1     6.4 %

Risk-weighted assets

     172.7    
     More adverse scenario  
Estimated for 2009 and 2010 for the more adverse scenario    Amount     As % of loans  

Total estimated losses

   $ 9.2    

First lien mortgages

     2.0     10.2 %

Second/junior lien mortgages

     1.1     21.2 %

Commercial and industrial loans

     1.0     2.7 %

Commercial real estate loans

     0.6     33.3 %

Credit card loans

     n/a     n/a  

Securities (available-for-sale and held-to-maturity)

     0.5     n/a  

Trading and counterparty

     n/a     n/a  

Other (a)

     4.0     n/a  

Memo: Purchase accounting adjustments

     n/a    

Resources other than capital to absorb losses (b)

     (0.5 )  

SCAP buffer added for more adverse scenario

    

(SCAP buffer is defined as additional Tier 1 Common/contingent Common)

    

Indicated SCAP buffer as of December 31, 2008

     6.7    

Less: Capital actions and effects of Q1 2009 results (c)

     (4.8 )  

SCAP buffer (d)

     11.5    
   
(a) Includes other consumer and nonconsumer loans and miscellaneous commitments and obligations.
(b) Resources to absorb losses include preprovision net revenue less the change in the allowance for loan and lease losses.
(c) Capital actions include completed or contracted transactions since Q4 2008.
(d) GMAC LLC needs to augment the capital buffer with $11.5 billion of Tier 1 Common/contingent Common of which $9.1 billion must be new Tier 1 capital.
Note: Numbers may not sum due to rounding.

The SCAP was a forward-looking evaluation designed to estimate losses, revenues and reserve needs for bank holding companies for 2009 and 2010 under baseline, and “more adverse”, scenarios. Additional capital was required where the assessment under the more adverse scenario indicated such a need. The estimates provided are not forecasts of expected losses or revenues. The amount of capital needed that is in addition to the “Indicated SCAP Buffer as of December 31, 2008” is primarily related to GMAC’s unique risk concentration and the quality and composition of our common equity.

In connection with the SCAP, we have committed that no later than November 9, 2009, we will have increased the common shareholder equity component of Tier 1 capital by $11.5 billion. By the same date, we will increase overall Tier 1 capital by $9.1 billion. Depending on the method of capital augmentation used (e.g., issuance of new common equity or issuance of mandatorily convertible preferred shares or conversion of existing equity into a form of Tier 1 common equity) the increase in common shareholders equity may accomplish the increase in overall Tier 1 capital. We are required to provide the FRBC with information regarding how we intend to accomplish these increases no later than June 8, 2009.

The capital amounts described above do not include the additional capital we will require to finance Chrysler dealers and customers pursuant to the Master Auto Finance Agreement Term Sheet (MAFA) that we announced on May 5, 2009. As previously disclosed, the U.S. Government has indicated that it intends to support GMAC by providing the capital required to support the financing of Chrysler dealers and customers pursuant to the MAFA.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Selected Financial Data

The selected historical financial information set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, our condensed consolidated financial statements, and the notes to consolidated financial statements. The historical financial information presented may not be indicative of our future performance.

 

As of and for the three months ended March 31, ($ in millions)    2009      2008  

Financial statement data

     

Total financing revenue and other interest income

   $ 3,812      $ 5,404  

Interest expense

     2,181  <