UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

 

Commission file number: 1-3754

 

GMAC LLC
(Exact name of registrant as specified in its charter)

 

 

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 requirements for the past 90 days.

Yes þ             No o

 

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):

 

 

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

Yes o          No þ

 

 

GMAC LLC

 

INDEX

 

 

 

GMAC LLC

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

 

 

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

GMAC LLC

 

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

 

 

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

GMAC LLC

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)

Nine Months Ended September 30, 2008 and 2007

 

 

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

GMAC LLC

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Nine Months Ended September 30, 2008 and 2007

 

 

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

 

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. 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 September 30, 2008, and for the three and nine months ended September 30, 2008 and 2007, are unaudited but, in management’s opinion, include all adjustments consisting of 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. 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, 2007, filed with the United States Securities and Exchange Commission (SEC) on February 27, 2008.

 

Our funding strategy and liquidity position have been adversely affected by the ongoing stress in the credit markets that began in the middle of 2007 and reached unprecedented levels during recent months. The capital markets remain highly volatile, and our access to liquidity has been significantly reduced. These conditions, in addition to the reduction in our credit ratings, have resulted in increased borrowing costs and our inability to access the unsecured debt markets in a cost-effective manner. Furthermore, we have regular renewals of outstanding bank loans and credit facilities. Although our material committed facilities due to mature in the third quarter were renewed, albeit at revised terms, some facilities have not renewed placing additional pressure on our liquidity position. Our inability to renew the remaining loans and facilities as they mature could have a further negative impact on our liquidity position. We also have significant maturities of unsecured notes each year. In addition, 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 or financial position could have a an adverse effect on our profitability and financial condition.

 

Our business continues to be affected by these conditions and has led us to take several actions to manage resources during this volatile environment. Certain of these steps have included the following: aligning automotive originations with available committed funding sources in the United States and abroad; streamlining operations to suit the current business plans; growing GMAC Bank within applicable regulatory guidelines; reducing risk in the balance sheet; and divesting select non-core operations. We are also focused on pursuing strategies to increase flexibility and access to liquidity with the primary focus of continuing to support automotive dealers and customers. Ongoing initiatives include participating in the Federal Reserve’s commercial paper purchase program through our asset-backed conduit, New Center Asset Trust (NCAT), and evaluating the use of other government programs, such as the Troubled Asset Relief Program (the TARP). Furthermore, we are engaging in discussions with federal regulatory authorities regarding bank holding company status. We also may commence a private offer to exchange a significant amount of outstanding indebtedness for a reduced principal amount of new indebtedness. If unanticipated market factors emerge or we are unable to successfully execute some or all of our current plans, it could have a material adverse effect on our liquidity, operations, and/or financial position.

 

GMAC LLC

 

NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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. Most recently, the widely publicized credit defaults and/or acquisitions of large financial institutions in the marketplace has further restricted credit in the United States and international lending markets. ResCap is highly leveraged relative to its cash flow and continues to recognize substantial losses resulting in a significant deterioration in capital. On September 30, 2008, GMAC forgave $197 million of ResCap’s debt owed to GMAC, which resulted in an increase to ResCap’s tangible net worth of the same amount. Accordingly, ResCap’s consolidated tangible net worth, as defined, was $350 million as of September 30, 2008, and remained in compliance with its credit facility financial covenants, among other covenants, requiring it to maintain a monthly consolidated tangible net worth of $250 million. 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 2008.

 

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. The accompanying Condensed Consolidated Financial Statements continue to reflect ResCap on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

 

ResCap’s initiatives include, but are not limited to, the following: continue to work with all of its key credit providers to optimize all available liquidity options; continued reduction of assets and other restructuring activities; focused production on government and prime conforming products; exploration of strategic alternative such as alliances, joint ventures, and other transactions with third parties; pursuit of possible liquidity and capital benefits from the TARP; and continued exploration of 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 to their successful execution. There are currently no substantive binding contracts, agreements or understandings with respect to any particular transaction outside the normal course of business.

 

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. If additional financing or capital were to be obtained from GMAC, its affiliates, and/or third parties, the terms may contain covenants that restrict ResCap’s freedom to operate its business. Additionally, ResCap’s ability to participate in any governmental investment program or the TARP, either directly or indirectly through GMAC, is unknown at this time.

 

In light of ResCap’s liquidity and capital needs, combined with volatile conditions in the marketplace, there is substantial doubt about ResCap’s ability to operate as a going concern. If GMAC no longer continues to support the capital or liquidity needs of ResCap or ResCap is unable to successfully execute its other initiatives, it would have a material adverse effect on ResCap’s business, results of operations, and financial position.

 

Recently Adopted Accounting Standards

 

SFAS No. 157 — On January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 provides a definition of fair value, establishes a framework for measuring fair value under GAAP, 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. We adopted SFAS 157 on a prospective basis. SFAS 157 required retrospective adoption of the rescission of Emerging Issues Task Force Issue No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities (EITF 02-3), and certain other guidance. The impact of adopting SFAS 157 and the rescission of EITF 02-3 on January 1, 2008, was an increase to beginning retained earnings through a cumulative effect of a change in accounting principle of approximately $23 million, related

 

GMAC LLC

 

NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

to the recognition of day-one gains on purchased mortgage servicing rights (MSRs) and certain residential loan commitments. Refer to Note 13 to the Condensed Consolidated Financial Statements for further detail.

 

SFAS No. 158 — In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158), which amends SFAS No. 87, Employers’ Accounting for Pensions; SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits; SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions; and SFAS No. 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits (revised 2003). This Statement requires companies to recognize an asset or liability for the overfunded or underfunded status of their benefit plans in their financial statements. The asset or liability is the offset to accumulated other comprehensive income, consisting of previously unrecognized prior service costs and credits, actuarial gains or losses, and accumulated transition obligations and assets. SFAS 158 also requires the measurement date for plan assets and liabilities to coincide with the sponsor’s year-end. The standard provides two transition alternatives for companies to make the measurement-date provisions. During the year ended December 31, 2007, we adopted the recognition and disclosure elements of SFAS 158, which did not have a material effect on our consolidated financial position, results of operations, or cash flows. In addition, we will adopt the measurement elements of SFAS 158 for the year ending December 31, 2008. We do not expect the adoption of the measurement elements to have a material impact on our consolidated financial condition or results of operations.

 

SFAS No. 159 — On January 1, 2008, we adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits entities to choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. Subsequent changes in fair value for designated items are required to be reported in earnings in the current period. SFAS 159 also establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair value. We elected to measure at fair value certain financial assets and liabilities, including certain collateralized debt obligations and certain mortgage loans held-for-investment in financing securitization structures. The cumulative effect to beginning retained earnings was a decrease through a cumulative effect of a change in accounting principle of approximately $178 million on January 1, 2008. Refer to Note 13 to the Condensed Consolidated Financial Statements for further detail.

 

FASB Staff Position (FSP) FIN 39-1 — On January 1, 2008, we adopted FSP FIN 39-1, Amendment of FAS Interpretation No. 39 (FSP FIN 39). FSP FIN 39-1 defines “right of setoff” and specifies what conditions must be met for a derivative contract to qualify for this right of setoff. It also addresses the applicability of a right of setoff to derivative instruments and clarifies the circumstances in which it is appropriate to offset amounts recognized for those instruments in the statement of financial position. In addition, this FSP requires an entity to make an election related to the offsetting of fair value amounts recognized for multiple derivative instruments executed with the same counterparty under a master netting arrangement and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the same master netting arrangement as the derivative instruments without regard to the company’s intent to settle the transactions on a net basis. We have elected to present these items gross; therefore, upon adoption of FSP FIN 39-1, we increased December 31, 2007, other assets and other liabilities equally by approximately $1.2 billion.

 

SEC Staff Accounting Bulletin No. 109 — On January 1, 2008, we adopted Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings (SAB 109). SAB 109 provides the SEC staff’s views on the accounting for written loan commitments recorded at fair value under GAAP and revises and rescinds portions of SAB 105, Application of Accounting Principles to Loan Commitments (SAB 105). SAB 105 provided the views of the SEC staff regarding derivative loan commitments that are accounted for at fair value through earnings pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SAB 105 states that in measuring the fair value of a derivative loan commitment, the staff believed it would be inappropriate to incorporate the expected net

 

GMAC LLC

 

NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and expresses the current view of the SEC staff that, consistent with the guidance in SFAS No. 156, Accounting for Servicing of Financial Assets, and SFAS 159, the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that the SEC staff believed that internally developed intangible assets (such as customer relationship intangible assets) should not be recorded as part of the fair value of a derivative loan commitment. SAB 109 retains that SEC staff view and broadens its application to all written loan commitments that are accounted for at fair value through earnings. The impact of adopting SAB 109 did not have a material impact on our consolidated financial condition or results of operations.

 

FSP FAS 157-3 — In October 2008, the FASB issued FSP FAS 157-3, Determining Fair Value of a Financial Asset in a Market that is not Active (FSP FAS 157-3). This FSP applies to financial assets within the scope of all accounting pronouncements that require or permit fair value measurements in accordance with SFAS 157. This FSP clarifies the application of SFAS 157 in a market that is not active and provides key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP is effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application shall be accounted for as a change in accounting estimate in accordance with FASB Statement No. 154, Accounting Changes and Error Corrections (SFAS 154). The disclosure provisions of SFAS 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. The impact of adopting FSP FAS 157-3 did not have a material impact on our consolidated financial condition or results of operations.

 

Recently Issued Accounting Standards

 

SFAS No. 141(R) — In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)), which replaces SFAS No. 141, Business Combinations. SFAS 141(R) establishes principles and requirements for how an acquiring company recognizes and measures in its financial statements 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. SFAS 141(R), effective for GMAC on January 1, 2009, applies to all transactions or other events in which GMAC obtains control in one or more businesses. Management will assess each transaction on a case-by-case basis as they occur.

 

SFAS No. 160 — In December 2007, the FASB issued 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 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 be clearly identified and presented on the face of the consolidated statement of income. SFAS 160 will be effective for GMAC on January 1, 2009. SFAS 160 shall be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. Management is currently assessing the retrospective impacts of adoption and will assess new transactions as they occur.

 

SFAS No. 161 — In March 2008, the FASB issued 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 financial position, financial performance, and cash flows. SFAS 161 will be effective for GMAC on January 1, 2009. Early adoption is permitted. Because SFAS 161 impacts the disclosure and not the accounting treatment for

 

GMAC LLC

 

NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

derivative instruments and related hedged items, the adoption of SFAS 161 will not have an impact on our consolidated financial condition or results of operations.

 

SFAS No. 162 — In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162 identifies a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities (the Hierarchy). The Hierarchy within SFAS 162 is consistent with that previously defined in the AICPA Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles (SAS 69). SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of SFAS 162 will not have a material effect on our consolidated financial statements because we have utilized the guidance within SAS 69.

 

FSP FAS No. 140-3 — In February 2008, the FASB issued FSP FAS No. 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (FSP FAS No. 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 No. 140-3 provides guidelines that must be met in order for an initial transfer and subsequent repurchase agreement to not be considered linked for evaluation. If the transactions do not meet the specified criteria, they are required to be accounted for as one transaction. This FSP will be effective for GMAC on January 1, 2009, and will be applied prospectively to initial transfers and repurchase financings for which the initial transfer is executed on or after adoption. Management is currently assessing the impact of adoption.

 

FSP FAS No. 142-3 — In April 2008, the FASB issued 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 a 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. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier application is not permitted. We believe the impact of adopting FSP FAS 142-3 will not have a material effect on our consolidated financial condition or results of operations.

 

FSP FAS No. 133-1 and FIN 45-4 — In September 2008, the FASB issued FSP FAS No. 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (FSP FAS No. 133-1 and FIN 45-4). FSP FAS 133-1 and FIN 45-4 amends SFAS 133 to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument. This FSP also amends FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to require an additional disclosure about the current status of the payment/performance risk of a guarantee. Further, this FSP clarifies the Board’s intent about the effective date of SFAS 161. FSP FAS 133-1 and FIN 45-4 is effective for annual and interim reporting periods ending after November 15, 2008. In addition, this FSP encourages that the amendments be applied in periods earlier than the effective date to facilitate comparisons at initial adoption. Because this impacts the disclosure and not the accounting treatment for credit derivative instruments and other guarantees, the adoption of this FSP will not have an impact on our consolidated financial condition or results of operations.

 

EITF Issue No. 08-5 — In September 2008, The Emerging Issues Task Force (EITF) issued EITF No. 08-5, Issuer’s Accounting for Liabilities at Fair Value with a Third-Party Credit Enhancement (EITF 08-5). EITF 08-5 states that the issuer of debt with a third-party credit enhancement that is inseparable from the debt instrument shall not include the effect of the credit enhancement in the fair value measurement of the liability. EITF 08-5 is effective on a prospective basis for periods beginning after December 15, 2008.

 

GMAC LLC

 

NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The impact of adopting EITF 08-5 is not expected to have a material impact on our consolidated financial condition or results of operations.

 

2.    Other Income

 

Details of other income were as follows:

 

		Three months ended								Nine months ended
		September 30,								September 30,
($ in millions)		2008				2007				2008				2007
Gain on retirement of debt			$59				$—				$1,163				$—
Real estate services, net			(25	)			24				(34	)			292
Interest and service fees on transactions with GM (a)			70				86				193				245
Interest on cash equivalents			61				103				188				312
Other interest revenue			57				168				338				466
Full-service leasing fees			106				84				312				239
Late charges and other administrative fees			41				46				127				132
Mortgage processing fees and other mortgage (loss) income			4				21				(248	)			84
Interest on restricted cash deposits			30				28				106				114
Real estate and other investments, net			(8	)			10				(46	)			71
Insurance service fees			36				37				113				115
Factoring commissions			14				14				38				41
Specialty lending fees			11				9				33				30
Fair value adjustment on certain derivatives (b)			(60	)			18				37				53
Changes in fair value for SFAS 159 elections, net (c)			(72	)			—				(200	)			—
Other			49				(46)				135				61
Total other income			$373				$602				$2,255				$2,255
(a)     Refer to Note 12 for a description of related party transactions.
(b)     Refer to Note 9 for a description of derivative instruments and hedging activities.
(c)     Refer to Note 13 for a description of SFAS 159 fair value option elections.

 

GMAC LLC

 

NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

3.    Other Operating Expenses

 

Details of other operating expenses were as follows:

 

		Three months ended								Nine months ended
		September 30,								September 30,
($ in millions)		2008				2007				2008				2007
Insurance commissions			$236				$237				$706				$702
Technology and communications expense			164				177				476				478
Professional services			151				104				481				303
Advertising and marketing			55				72				163				225
Mortgage representation and warranty expense, net			112				(26)				213				176
Premises and equipment depreciation			43				45				136				145
Rent and storage			52				55				156				169
Full-service leasing vehicle maintenance costs			96				78				281				215
Lease and loan administration			38				50				117				156
Automotive remarketing and repossession			79				76				236				170
Restructuring expenses			97				—				181				—
Operating lease disposal loss (gain)			94				1				217				(6	)
Other			750				342				1,415				907
Total other operating expenses			$1,967				$1,211				$4,778				$3,640

 

4.    Impairment of Investment in Operating Leases

 

We evaluate the carrying value of our operating lease assets and test for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), when events or circumstances necessitate the evaluation. Generally, impairment is determined to exist if the undiscounted expected future cash flows are lower than the carrying value of the asset.

 

In light of recent significant declines in used vehicle prices for trucks in Canada, we concluded a triggering event had occurred during the three months ended September 30, 2008, requiring an evaluation of certain Canadian operating lease assets within our North American Automotive Finance operations for recoverability as of September 30, 2008. We grouped these operating lease assets at the lowest level that we could reasonably estimate the identifiable cash flows. In assessing for recoverability, we compared our estimates of future cash flows related to these lease assets to their corresponding carrying values. We considered all of the expected cash flows, including customer payments, the expected residual value upon remarketing the vehicle at lease termination, and any payments from GM under residual risk sharing agreements. To the extent these undiscounted cash flows were less than their respective carrying values, we discounted the cash flows to arrive at an estimated fair value. As a result of this evaluation, during the three months ended September 30, 2008, we concluded that $604 million of the $8.1 billion total net investment in Canadian operating leases was impaired by a total of $93 million. Therefore, we reduced our carrying value to equal the estimated fair value and recorded an impairment charge in the three months ended September 30, 2008, for this amount. When combined with a similar impairment charge for the United States and Canada recorded during the three months ended June 30, 2008, our North American Automotive Finance operations has realized impairment charges on its investment in operating leases assets of $808 million for the nine months ended September 30, 2008. No similar impairment charges were realized during the three months ended March 31, 2008.

 

While we believe our estimates of discounted future cash flows used for the impairment analysis were reasonable based on current market conditions, the process required the use of significant estimates and assumptions. In developing these estimates and assumptions, management used all available evidence.

 

GMAC LLC

 

NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

However, because of uncertainties associated with estimating the amounts, timing, and likelihood of possible outcomes, actual cash flows could ultimately differ from those estimated as part of the recoverability and impairment analyses.

 

5.    Finance Receivables and Loans, and Loans Held-for-Sale

 

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

 

		September 30, 2008												December 31, 2007
($ in millions)		Domestic				Foreign				Total				Domestic				Foreign				Total
Consumer
Retail automotive			$17,593				$25,426				$43,019				$20,030				$25,576				$45,606
Residential mortgages (a)			24,575				5,331				29,906				34,839				7,324				42,163
Total consumer			42,168				30,757				72,925				54,869				32,900				87,769
Commercial
Automotive:
Wholesale			16,353				9,325				25,678				14,689				8,272				22,961
Leasing and lease financing			253				783				1,036				296				930				1,226
Term loans to dealers and other			2,604				657				3,261				2,478				857				3,335
Commercial and industrial			5,217				1,758				6,975				6,431				2,313				8,744
Real estate construction and other			2,150				397				2,547				2,943				536				3,479
Total commercial			26,577				12,920				39,497				26,837				12,908				39,745
Total finance receivables and loans (b)			$68,745				$43,677				$112,422				$81,706				$45,808				$127,514
(a)     Domestic residential mortgages include $2.2 billion at fair value as a result of election made under SFAS 159 as of September 30, 2008. Refer to Note 13 for additional information.
(b)     Net of unearned income of $3.9 billion and $4.0 billion as of September 30, 2008, and December 31, 2007, respectively.

 

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

 

($ in millions)		September 30, 2008				December 31, 2007
Consumer
Retail automotive			$6,116				$8,400
Residential mortgages			4,153				12,078
Total consumer			10,269				20,478
Commercial
Automotive
Wholesale			459				81
Commercial and industrial			1,251				—
Total commercial			1,710				81
Total loans held-for-sale			$11,979				$20,559

 

GMAC LLC

 

NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The following tables present an analysis of the activity in the allowance for credit losses on finance receivables and loans.

 

		Three months ended September 30,
		2008												2007
($ in millions)		Consumer				Commercial				Total				Consumer				Commercial				Total
Allowance at July 1,			$1,918				$630				$2,548				$3,062				$402				$3,464
Provision for credit losses			910				189				1,099				878				86				964
Charge-offs
Domestic			(403	)			(53	)			(456	)			(596	)			(36	)			(632	)
Foreign			(79	)			(10	)			(89	)			(71	)			(13	)			(84	)
Total charge-offs			(482	)			(63	)			(545	)			(667	)			(49	)			(716	)
Recoveries
Domestic			46				16				62				43				11				54
Foreign			18				1				19				13				4				17
Total recoveries			64				17				81				56				15				71
Net charge-offs			(418	)			(46	)			(464	)			(611	)			(34	)			(645	)
Reduction of allowance due to deconsolidation (a)			—				—				—				(306	)			—				(306	)
Impacts of foreign currency translation			(43	)			(8	)			(51	)			8				3				11
Allowance at September 30,			$2,367				$765				$3,132				$3,031				$457				$3,488

 

		Nine months ended September 30,
		2008												2007
($ in millions)		Consumer				Commercial				Total				Consumer				Commercial				Total
Allowance at January 1,			$2,141				$614				$2,755				$2,969				$607				$3,576
Provision for credit losses			1,989				354				2,343				1,761				314				2,075
Charge-offs
Domestic			(1,203	)			(209	)			(1,412	)			(1,438	)			(416	)			(1,854	)
Foreign			(258	)			(11	)			(269	)			(159	)			(73	)			(232	)
Total charge-offs			(1,461	)			(220	)			(1,681	)			(1,597	)			(489	)			(2,086	)
Recoveries
Domestic			153				19				172				153				15				168
Foreign			53				3				56				41				5				46
Total recoveries			206				22				228				194				20				214
Net charge-offs			(1,255	)			(198	)			(1,453	)			(1,403	)			(469	)			(1,872	)
Reduction of allowance due to deconsolidation (a)			—				—				—				(306	)			—				(306	)
Reduction of allowance due to fair value option election (b)			(489	)			—				(489	)			—				—				—
Impacts of foreign currency translation			(19	)			(5	)			(24	)			10				5				15
Allowance at September 30,			$2,367				$765				$3,132				$3,031				$457				$3,488
(a)     During the three months ended September 30, 2007, ResCap completed the sale of residual cash flows related to a number of on-balance sheet securitizations. ResCap completed the approved actions that resulted in the securitization trusts to satisfy the qualifying special-purpose entity requirement of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The actions resulted in the deconsolidation of various securitization trusts.
(b)     Represents the reduction of allowance as a result of fair value option election made under SFAS 159 effective January 1, 2008. Refer to Note 13 for additional information.

 

GMAC LLC

 

NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

 

6.    Mortgage Servicing Rights

 

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

 

		Nine months ended
		September 30,
($ in millions)		2008				2007
Estimated fair value at January 1,			$4,703				$4,930
Additions obtained from sales of financial assets			1,025				1,304
Additions from purchases of servicing rights			—				3
Subtractions from sales of servicing assets			(484	)			—
Subtractions from disposals			—				(165	)
Changes in fair value:
Due to changes in valuation inputs or assumptions used in the valuation model			125				(56	)
Recognized day-one gains on previously purchased MSRs upon adoption of SFAS 157 (a)			11				—
Other changes in fair value			(655	)			(466	)
Other changes that affect the balance			—				(3	)
Estimated fair value at September 30,			$4,725				$5,547
(a)     Refer to Note 13 for additional information.

 

As of September 30, 2008, we pledged MSRs of $3.0 billion as collateral for borrowings, compared to $2.7 billion as of December 31, 2007. For a description of MSRs and the related hedging strategy, refer to Notes 9 and 16 to the Consolidated Financial Statements in our 2007 Annual Report on Form 10-K.

 

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:

 

		September 30,
		2008		2007
Range of prepayment speeds		0.7–46.5%			0.4–53.6	%
Range of discount rates		4.8–31.6%			7.7–13.0	%

 

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. At September 30, 2008, the fair value of derivative financial instruments used to mitigate these risks amounted to $369 million. There were no nonderivative instruments used to mitigate these risks at September 30, 2008. At September 30, 2007, the fair value of derivative and nonderivative financial instruments used to mitigate these risks amounted to $534 million and $839 million, respectively. The change in fair value of the derivative financial instruments amounted to a gain of $493 million and a loss of $58 million for the nine months ended September 30, 2008 and 2007, respectively,

 

GMAC LLC

 

NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

and is included in servicing asset valuation and hedge activities, net in the Condensed Consolidated Statements of Income.

 

The components of servicing fees on MSRs were as follows:

 

		Three months								Nine months
		ended								ended
		September 30,								September 30,
($ in millions)		2008				2007				2008				2007
Contractual servicing fees, net of guarantee fees, and including subservicing			$307				$391				$959				$1,155
Late fees			27				35				94				110
Ancillary fees			35				25				101				86
Total			$369				$451				$1,154				$1,351

 

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, its consolidated subsidiary, and Fannie Mae. In light of the decline in ResCap’s consolidated tangible net worth, as defined, Fannie Mae has requested additional security for some of ResCap’s potential obligations under its agreements with them. ResCap has reached an agreement in principle with Fannie Mae, under the terms of which ResCap will provide them additional collateral valued at $200 million, and agree to sell and transfer the servicing on mortgage loans having an unpaid principal balance of approximately $12.7 billion, or approximately 9% of the total principal balance of loans ResCap services for them. Fannie Mae has indicated that in return for these actions, they will agree to forbear, until January 31, 2009, from exercising contractual remedies otherwise available due to the decline in consolidated tangible net worth, as defined. Actions based on these remedies could have included, among other things, reducing ResCap’s ability to sell loans to them, reducing its capacity to service loans for them, or requiring it to transfer servicing of loans ResCap services for them. Management believes that selling the servicing related to the loans described above will have an incremental positive impact on ResCap’s liquidity and overall cost of servicing, since it will no longer be required to advance delinquent payments on those loans. Meeting Fannie Mae’s collateral request will have a negative impact on ResCap’s liquidity. Moreover, if Fannie Mae deems ResCap’s consolidated tangible net worth, as defined, to be inadequate following the expiration of the forbearance period referred to above, and if Fannie Mae then determines to exercise their contractual remedies as described above, it would adversely affect our profitability and financial condition.

 

GMAC LLC

 

NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

7.    Other Assets

 

Other assets consisted of:

 

		September 30,				December 31,
($ in millions)		2008				2007
Property and equipment at cost			$1,628				$1,759
Accumulated depreciation			(1,177	)			(1,200	)
Net property and equipment			451				559
Cash reserve deposits held-for-securitization trusts (a)			3,521				3,350
Fair value of derivative contracts in receivable position			3,123				5,677
Real estate and other investments (b)			1,483				2,237
Restricted cash collections for securitization trusts (c)			3,462				2,397
Goodwill			1,453				1,496
Deferred policy acquisition cost			1,656				1,702
Accrued interest and rent receivable			644				881
Repossessed and foreclosed assets, net, at lower of cost or fair value			1,188				1,347
Debt issuance costs			836				601
Servicer advances			2,159				1,847
Securities lending (d)			—				856
Investment in used vehicles held-for-sale, at lower of cost or fair value			829				792
Subordinated note receivable			252				250
Intangible assets, net of accumulated amortization			73				93
Other assets			5,022				4,170
Total other assets			$26,152				$28,255
(a)     Represents credit enhancement in the form of cash reserves for various securitization transactions we have executed.
(b)     Includes residential real estate investments of $260 million and $1.1 billion and related accumulated depreciation of $3 million and $16 million at September 30, 2008, and December 31, 2007, respectively.
(c)     Represents cash collections from customer payments on securitized receivables. These funds are distributed to investors as payments on the related secured debt.
(d)     During the three months ended June 30, 2008, our Insurance operations ceased securities-lending activities within its investment portfolio.

 

GMAC LLC

 

NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

8.    Debt

 

		September 30, 2008												December 31, 2007
($ in millions)		Unsecured				Secured				Total				Unsecured				Secured				Total
Short-term debt
Commercial paper			$674				$—				$674				$1,439				$—				$1,439
Demand notes			3,878				—				3,878				6,584				—				6,584
Bank loans and overdrafts			4,801				—				4,801				7,182				—				7,182
Repurchase agreements and other (a)			1,767				7,846				9,613				678				17,923				18,601
Total short-term debt			11,120				7,846				18,966				15,883				17,923				33,806
Long-term debt
Due within one year			13,173				18,924				32,097				17,661				19,868				37,529
Due after one year			47,959				61,249				109,208				68,224				53,018				121,242
Total long-term debt (b)			61,132				80,173				141,305				85,885				72,886				158,771
Fair value adjustment (c)			360				—				360				571				—				571
Total debt			$72,612				$88,019				$160,631				$102,339				$90,809				$193,148
(a)     Repurchase agreements consist of secured financing arrangements with third parties at ResCap. Other primarily includes nonbank secured borrowings and notes payable to GM. Refer to Note 12 for additional information.
(b)     Secured long-term debt includes $2,466 million at fair value as a result of election made under SFAS 159. Refer to Note 13 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 September 30, 2008, 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				Secured				Total
2008			$1,795				$5,612				$7,407
2009			12,799				19,747				32,546
2010			8,752				22,541				31,293
2011			12,304				12,565				24,869
2012			6,064				2,831				8,895
2013 and thereafter			19,418				9,868				29,286
Long-term debt			61,132				73,164				134,296
Collateralized borrowings in securitization trusts (a)			—				7,009				7,009
Total long-term debt			$61,132				$80,173				$141,305
(a)     Collateralized borrowings in securitization trusts represents mortgage lending related debt that is repaid upon the principal payments of the underlying assets.

 

Under a revolving credit facility, we are subject to a leverage ratio covenant under which adjusted consolidated debt should not exceed 11 times adjusted consolidated net worth. As of September 30, 2008, our leverage ratio calculated under the terms of this facility was 10.0:1.

 

GMAC LLC

 

NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The following summarizes assets restricted as collateral for the payment of the related debt obligations.

 

		September 30, 2008								December 31, 2007
						Related								Related
						secured								secured
($ in millions)		Assets (a)				debt (b)				Assets				debt (b)
Loans held-for-sale			$4,499				$1,819				$10,437				$6,765
Mortgage assets held-for-investment and lending receivables			38,490				19,576				45,534				33,911
Retail automotive finance receivables			30,483				23,044				23,079				19,094
Commercial automotive finance receivables			15,910				12,011				10,092				7,709
Investment securities			817				725				880				788
Investment in operating leases, net			25,259				19,691				20,107				17,926
Real estate investments and other assets			20,448				11,153				14,429				4,616
Total			$135,906				$88,019				$124,558				$90,809
(a)     GMAC has a senior position on certain assets pledged by ResCap with subordinate positions held by GM, affiliates of Cerberus, and ultimately some third parties.
(b)     Included as part of secured debt are repurchase agreements of $1.5 billion and $3.6 billion through which we have pledged assets as collateral at September 30, 2008, and December 31, 2007, respectively.

 

GMAC LLC

 

NOTES TO CONDENSED
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
		Sept 30,				Dec 31,				Sept 30,				Dec 31,				Sept 30,				Dec 31,				Sept 30,				Dec 31,
($ in billions)		2008				2007				2008				2007				2008				2007				2008				2007
Committed unsecured:
Global Automotive Finance operations			$2.1				$8.9				$0.1				$7.0				$—				$—				$2.0				$1.9
ResCap			—				3.6				—				1.8				—				—				—				1.8
Other			—				0.1				—				0.1				—				—				—				—
Committed secured:
Global Automotive Finance operations (c)			61.2				62.0				0.5				0.1				17.1				22.9				43.6				39.0
ResCap			9.6				33.2				—				—				3.7				17.4				5.9				15.8
Other			3.3				3.8				—				—				0.8				1.7				2.5				2.1
Total committed facilities			76.2				111.6				0.6				9.0				21.6				42.0				54.0				60.6
Uncommitted unsecured:
Global Automotive Finance operations			4.4				8.5				0.1				1.2				—				—				4.3				7.3
ResCap			0.4				0.6				0.3				0.2				—				—				0.1				0.4
Other			—				0.2				—				—				—				—				—				0.2
Uncommitted secured:
Global Automotive Finance operations			4.4				—				0.1				—				4.1				—				0.2				—
ResCap			11.0				21.6				—				—				0.4				9.5				10.6				12.1
Total uncommitted facilities			20.2				30.9				0.5				1.4				4.5				9.5				15.2				20.0
Total			$96.4				$142.5				$1.1				$10.4				$26.1				$51.5				$69.2				$80.6
Whole-loan forward flow agreements (d)			$20.8				$37.4				$—				$—				$20.8				$37.4				$—				$—
Total commitments			$117.2				$179.9				$1.1				$10.4				$46.9				$88.9				$69.2				$80.6
(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 $9.0 billion and $12.0 billion of potential capacity that was supporting $5.9 billion and $6.9 billion of outstanding NCAT commercial paper as of September 30, 2008 and December 31, 2007 respectively. The NCAT commercial paper outstanding is not included in our Condensed Consolidated Balance Sheets.
(d)     Represents commitments to purchase U.S. automotive retail assets.