GMAC LLC (NYSE:GJM)

GMAC Financial, now Ally Financial, is a wonderful example of a company who is making it's best effort to stabilize after a large US bailout.

Ally Financial, with liabilities of over $200B and a significant portion with dubious quality at the time of reckoning, received a total $20B infusion from the US Treasury in March of 2010 through the conversion preferred shares into common equity. With that, the Treasury essentially recapitalized the whole company and at the end of Q1 2010 had $14.8B in cash and cash equivalents. With stimulus across the world, Ally has been able to write up assets and unload risky assets from their balance sheet.

But they are not resting now that they have caught a break, Ally Financial sold off it's European mortgage assets (1) but has continued exposure to Europe in auto loans and other areas.

This month, Ally Financial has attempted to securitize mortgage securities again by offering a senior not on a $166m mortgage pool with %25 credit enhancement.(2) This means that the pool of low LTV loans and prime borrowers can withstand 25% losses before the senior bond is at risk. The senior note was graded A by Moody's. The auction will not occur until next month.

Overall, Ally Financial is making great strides to reduce risk and return tradtional banking practices. It is still yet to be determined whether the company can stand on it's own. But due to the critical function the company performs in supporting the American auto industry, the implicit support from the US government will provide significant credit protection for all investors.

This blog accepts this as viable for investment. The whole investment logic for this is supported by a quote from Bill Gross, PIMCO, in his May 2010 Investment Outlook

“Still, as future bond issuers belly up to the bar with their rating agency seals of approval, it is incumbent on the buying public to treat those IDs with a healthy skepticism. Firms such as PIMCO with large credit staffs of their own can bypass, anticipate and front run all three, benefiting from their timidity and lack of common sense. Take these recent examples for instance: S&P just this past week downgraded Spain “one notch” to AA from AA+, cautioning that they could face another downgrade if they weren’t careful. Oooh – so tough! And believe it or not, Moody’s and Fitch still have them as AAAs. Here’s a country with 20% unemployment, a recent current account deficit of 10%, that has defaulted 13 times in the past two centuries, whose bonds are already trading at Baa levels, and whose fate is increasingly dependent on the kindness of the EU and IMF to bail them out. Some AAA!

Now let’s go the other way. GMAC, that only too recently near-bankrupt finance company, carries recently upgraded B ratings from the rating services. Profiles in courage for all three, I say! I mean the U.S. government has injected $20 billion of capital and owns 65% of the company. It’s the auto industry’s equivalent of FNMA and FHLMC, except those are AAA and GMAC is B with a “positive outlook!” For that, you can buy a GMAC two-year bond at 6½% (8% with what are called “smart notes” that Investment Outlook readers can buy through their broker), while you receive only 1.2% at Fannie and Freddie. Vive la différence!”

GKM is also Ally Financial senior debt, long term though, and with the same support as mentioned by Mr Gross. Invest with the best, go long GKM.

For the reference information and additional insightful picks like these view http://lockstep-investing.blogspot.com