EX-99.1 7 dex991.htm CONSOLIDATED FINANCIAL STATEMENTS OF ALLY FINANCIAL INC. AND SUBSIDIARIES Consolidated Financial Statements of Ally Financial Inc. and subsidiaries

Exhibit 99.1

Report of Independent Registered Public Accounting Firm

To the Board of Directors of Ally Financial Inc.:

We have audited the accompanying Consolidated Balance Sheet of Ally Financial Inc. and subsidiaries (formerly GMAC Inc.) (the “Company”) as of December 31, 2009 and 2008, and the related Consolidated Statements of Income, Changes in Equity, and Cash Flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Detroit, Michigan

February 26, 2010 (August 6, 2010 as to Note 2, Discontinued and Held-for-Sale Operations and Note 32, Subsequent Events)


Consolidated Statement of Income

 

Year ended December 31, ($ in millions)    2009     2008     2007  

Revenue

      

Finance receivables and loans

      

Consumer

   $ 4,566      $ 6,168      $ 9,037   

Commercial

     1,701        2,206        2,810   

Notes receivable from General Motors

     212        225        304   
   

Total finance receivables and loans

     6,479        8,599        12,151   

Loans held-for-sale

     447        837        1,066   

Interest on trading securities

     132        127        293   

Interest and dividends on available-for-sale investment securities

     234        384        675   

Interest bearing cash

     99        376        608   

Other interest income

     86        320        488   

Operating leases

     5,715        7,582        6,617   
   

Total financing revenue and other interest income

     13,192        18,225        21,898   

Interest expense

      

Interest on deposits

     703        711        644   

Interest on short-term borrowings

     584        1,537        2,239   

Interest on long-term debt

     6,037        8,326        10,743   
   

Total interest expense

     7,324        10,574        13,626   

Depreciation expense on operating lease assets

     3,748        5,478        4,551   

Impairment of investment in operating leases

            1,218          
   

Net financing revenue

     2,120        955        3,721   

Other revenue

      

Servicing fees

     1,549        1,747        2,137   

Servicing asset valuation and hedge activities, net

     (1,104     (263     (542
   

Total servicing income, net

     445        1,484        1,595   

Insurance premiums and service revenue earned

     1,977        2,710        2,806   

Gain on mortgage and automotive loans, net

     811        159        845   

Gain on extinguishment of debt

     665        12,628        563   

Other gain (loss) on investments, net

     331        (1,075     (596

Other income, net of losses

     198        (618     956   
   

Total other revenue

     4,427        15,288        6,169   

Total net revenue

     6,547        16,243        9,890   

Provision for loan losses

     5,611        3,102        3,039   

Noninterest expense

      

Compensation and benefits expense

     1,581        1,919        2,130   

Insurance losses and loss adjustment expenses

     1,042        1,402        1,376   

Other operating expenses

     5,242        5,033        4,325   

Impairment of goodwill

            16        385   
   

Total noninterest expense

     7,865        8,370        8,216   

(Loss) income from continuing operations before income tax expense (benefit)

     (6,929     4,771        (1,365

Income tax expense (benefit) from continuing operations

     77        (131     514   
   

Net (loss) income from continuing operations

     (7,006     4,902        (1,879

Loss from discontinued operations, net of tax

     (3,292     (3,034     (453
   

Net (loss) income

   $ (10,298   $ 1,868      $ (2,332
   

 

The Notes to the Consolidated Financial Statements are an integral part of these statements.

 

2


Consolidated Balance Sheet

 

December 31, ($ in millions)    2009     2008  

Assets

    

Cash and cash equivalents

    

Noninterest bearing

   $ 1,840      $ 1,504   

Interest bearing

     12,948        13,647   
   

Total cash and cash equivalents

     14,788        15,151   

Trading securities

     739        1,207   

Investment securities

    

Available-for-sale

     12,155        6,234   

Held-to-maturity

     3        3   
   

Total investment securities

     12,158        6,237   

Loans held-for-sale ($5,545 fair value elected at December 31, 2009)

     20,625        7,919   

Finance receivables and loans, net of unearned income

    

Consumer ($1,303 and $1,861 fair value elected)

     42,849        63,963   

Commercial

     33,941        36,110   

Notes receivable from General Motors

     911        1,655   

Allowance for loan losses

     (2,445     (3,433
   

Total finance receivables and loans, net

     75,256        98,295   

Investment in operating leases, net

     15,995        26,390   

Mortgage servicing rights

     3,554        2,848   

Premiums receivable and other insurance assets

     2,720        4,507   

Other assets

     19,887        26,922   

Assets of operations held-for-sale

     6,584          
   

Total assets

   $ 172,306      $ 189,476   
   

Liabilities

    

Deposit liabilities

    

Noninterest bearing

   $ 1,755      $ 1,496   

Interest bearing

     30,001        18,311   
   

Total deposit liabilities

     31,756        19,807   

Debt

    

Short-term borrowings

     10,292        10,386   

Long-term debt ($1,293 and $1,899 fair value elected)

     88,021        115,935   
   

Total debt

     98,313        126,321   

Interest payable

     1,637        1,517   

Unearned insurance premiums and service revenue

     3,192        4,356   

Reserves for insurance losses and loss adjustment expenses

     1,215        2,895   

Accrued expenses and other liabilities

     10,456        12,726   

Liabilities of operations held-for-sale

     4,898          
   

Total liabilities

     151,467        167,622   

Equity

    

Common stock and paid-in capital (Members’ interests at December 31, 2008)

     13,829        9,670   

Preferred stock held by U.S. Department of Treasury (Preferred interests held by U.S. Department of Treasury at December 31, 2008)

     10,893        5,000   

Preferred stock (Preferred interests at December 31, 2008)

     1,287        1,287   

(Accumulated deficit) retained earnings

     (5,630     6,286   

Accumulated other comprehensive income (loss)

     460        (389
   

Total equity

     20,839        21,854   
   

Total liabilities and equity

   $ 172,306      $ 189,476   
   

 

The Notes to the Consolidated Financial Statements are an integral part of these statements.

 

3


Consolidated Statement of Changes in Equity

 

($ in millions)   Members’
interest
 

Preferred
interests held

by U.S.
Department

of Treasury

  Preferred
interests
  Retained
earnings
    Accumulated
other
comprehensive
income (loss)
    Total
equity
    Comprehensive
income (loss)
 

Balance at December 31, 2006

  $ 6,711       $ 7,173      $ 485      $ 14,369     

Conversion of preferred membership interests

    1,121     $ 1,052         2,173     

Capital contributions

    1,080             1,080     

Net loss

          (2,332       (2,332   $ (2,332

Preferred interests dividends

          (192       (192  

Other comprehensive income

            450        450        450   

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

             

Adoption of FASB ASC Topic 715, Compensation-Retirement Benefits

            17        17     
   

Balance at December 31, 2007

  $ 8,912     $ 1,052   $ 4,649      $ 952      $ 15,565      $ (1,882
   

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

             

Adoption of FASB ASC Topic 820, Fair Value Measurements and Disclosures (a)

        $ 23        $ 23     

Adoption of fair value option in accordance with FASB ASC Topic 825, Financial Instruments (a)

          (178       (178  
   

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

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

Capital contributions (b)

    758             758     

Net income

          1,868          1,868      $ 1,868   

Dividends to members (b)

          (79       (79  

Issuance of preferred interests to the U.S. Department of Treasury

    $ 5,000           5,000     

Issuance of preferred interest

        235         235     

Other

          3          3     

Other comprehensive loss

            (1,341     (1,341     (1,341
   

Balance at December 31, 2008

  $ 9,670   $ 5,000   $ 1,287   $ 6,286      $ (389   $ 21,854      $ 527   
   

Capital contributions (b)

  $ 1,247           $ 1,247     

Net loss

        $ (4,578       (4,578   $ (4,578

Preferred interest dividends paid to the U.S. Department of Treasury

          (160       (160  

Preferred interests dividends

          (195       (195  

Dividends to members (b)

          (119       (119  

Issuance of preferred interests to the U.S. Department of Treasury

    $ 7,500           7,500     

Other comprehensive income

          $ 497        497        497   
   

Balance at June 30, 2009, before conversion from limited liability company to a corporation (c)

  $ 10,917   $ 12,500   $ 1,287   $ 1,234      $ 108      $ 26,046      $ (4,081
   

 

4


Consolidated Statement of Changes in Equity

 

($ in millions)   Common
stock and
paid-in
capital
 

Preferred
stock

held by

U.S.
Department
of Treasury

    Preferred
stock
  Retained
earnings
(accumulated
deficit)
    Accumulated
other
comprehensive
income
  Total
equity
    Comprehensive
income (loss)
 

Balance at June 30, 2009, after conversion from limited liability company to a corporations (c)

  $ 10,917   $ 12,500      $ 1,287   $ 1,234      $ 108   $ 26,046      $ (4,081

Capital contributions (b)

    55             55     

Net loss

          (5,720       (5,720   $ (5,720

Preferred stock dividends paid to the U.S. Department of Treasury

          (695       (695  

Preferred stock dividends (b)

          (175       (175  

Dividends to shareholders (b)

          (274       (274  

Issuance of preferred stock to the U.S. Department of Treasury

      1,250              1,250     

Conversion of preferred stock to the U.S. Department of Treasury to common stock

    2,857     (2,857          

Other comprehensive income

            352     352        352   
   

Balance at December 31, 2009

  $ 13,829   $ 10,893      $ 1,287   $ (5,630   $ 460   $ 20,839      $ (9,449
   

 

(a) Refer to Note 27 to the Consolidated Financial Statements for further detail.
(b) Refer to Note 25 to the Consolidated Financial Statements for further detail.
(c) Effective June 30, 2009, GMAC LLC was converted from a Delaware limited liability company into a Delaware corporation and renamed GMAC Inc. Each unit of each class of common membership interest issued and outstanding by GMAC LLC immediately prior to the conversion was converted into an equivalent number of shares of common stock of GMAC Inc. with substantially the same rights and preferences as the common membership interests. Upon conversion, holders of GMAC LLC preferred interests also received an equivalent number of GMAC Inc. preferred stock with substantially the same rights and preferences as the former preferred interests. Refer to Note 19 to the Consolidated Financial Statements for further details.

 

The Notes to the Consolidated Financial Statements are an integral part of these statements.

 

5


Consolidated Statement of Cash Flows

 

Year ended December 31, ($ in millions)    2009     2008     2007  

Operating activities

      

Net (loss) income

   $ (10,298   $ 1,868      $ (2,332

Reconciliation of net income (loss) to net cash provided by (used in) operating activities:

      

Depreciation and amortization

     5,958        6,722        5,998   

Operating lease impairment

            1,234          

Impairment of goodwill and other intangible assets

     607        58        455   

Other impairment

     1,516                 

Amortization and valuation adjustments of mortgage servicing rights

     142        2,250        1,260   

Provision for loan losses

     6,173        3,683        3,096   

(Gain) loss on sale of loans, net

     (192     1,825        (508

Net (gains) losses on investment securities

     (2     1,203        737   

Gain on extinguishment of debt

     (665     (12,628     (563

Originations and purchases of loans held-for-sale

     (88,283     (132,023     (128,576

Proceeds from sales and repayments of loans held-for-sale

     78,673        141,312        121,620   

Net change in:

      

Trading securities

     734        741        628   

Deferred income taxes

     (402     (396     95   

Interest payable

     83        (651     (332

Other assets

     3,711        (1,213     (121

Other liabilities

     (1,473     178        686   

Other, net

     (1,414     (68     (683
   

Net cash (used in) provided by operating activities

     (5,132     14,095        1,460   
   

Investing activities

      

Purchases of available-for-sale securities

     (21,148     (16,202     (16,682

Proceeds from sales of available-for-sale securities

     10,153        14,068        8,049   

Proceeds from maturities of available-for-sale securities

     4,527        7,502        8,080   

Net decrease (increase) in finance receivables and loans

     14,259        5,570        (41,972

Proceeds from sales of finance receivables and loans

     260        1,366        70,903   

Change in notes receivable from GM

     803        (62     138   

Purchases of operating lease assets

     (732     (10,544     (17,268

Disposals of operating lease assets

     6,612        7,633        5,472   

Sales of mortgage servicing rights, net

            797        561   

Acquisitions of subsidiaries, net of cash acquired

                   (209

Proceeds from sale of business units, net

     296        319        15   

Other, net (a)

     2,098        471        1,157   
   

Net cash provided by investing activities

     17,128        10,918        18,244   
   

 

6


Consolidated Statement of Cash Flows

 

Year ended December 31, ($ in millions)    2009     2008     2007  

Financing activities

      

Net change in short-term debt

     (338     (22,815     (9,248

Net increase in bank deposits

     10,703        6,447        3,078   

Proceeds from issuance of long-term debt

     30,679        44,724        70,230   

Repayments of long-term debt

     (61,493     (59,627     (82,134

Proceeds from issuance of common stock

     1,247                 

Proceeds from issuance of preferred stock held by U.S. Department of Treasury

     8,750        5,000          

Dividends paid

     (1,592     (113     (179

Other, net (b)

     1,064        (1,784     675   
   

Net cash used in financing activities

     (10,980     (28,168     (17,578
   

Effect of exchange-rate changes on cash and cash equivalents

     (602     629        92   
   

Net increase (decrease) in cash and cash equivalents

     414        (2,526     2,218   

Cash and cash equivalents reclassified to assets held-for-sale

     (777              

Cash and cash equivalents at beginning of year

     15,151        17,677        15,459   
   

Cash and cash equivalents at end of year

   $ 14,788      $ 15,151      $ 17,677   
   

Supplemental disclosures

      

Cash paid for:

      

Interest

   $ 7,868      $ 12,092      $ 14,871   

Income taxes

     355        130        481   

Noncash items:

      

Increase in equity (c)

            235        2,173   

Loans held-for-sale transferred to finance receivables and loans

     1,186        2,618        13,834   

Finance receivables and loans transferred to loans-held-for sale

     5,065        4,798        8,181   

Finance receivables and loans transferred to other assets

     732        1,294        2,976   

Available-for-sale securities transferred to restricted assets (d)

            548          

Originations of mortgage servicing rights from sold loans

     807        1,182        1,597   

Decrease in mortgage loans held-for-investment upon initial adoption of the fair value option election

            3,847          

Decrease in collateralized borrowings upon initial adoption of the fair value option election

            3,668          

Capital contributions from stockholders/members

     34        758        56   

Other disclosures:

      

Proceeds from sales and repayments of mortgage loans held-for-investment originally designated as held-for-sale

     1,010        1,747        6,790   

Proceeds from sales of repossessed, foreclosed, and owned real estate

     1,013        1,796        2,180   

Liabilities assumed through acquisition

                   1,030   

Consolidation of loans, net

     1,410                 

Consolidation of collateralized borrowings

     1,184                 

Deconsolidation of loans, net

            2,353        25,856   

Deconsolidation of collateralized borrowings

            2,539        26,599   
   

 

(a) Includes securities-lending transactions where cash collateral is received and a corresponding liability is recorded, both of which are presented in investing activities in the amount of $856 million for 2007.
(b) 2007 includes a $1 billion capital contribution from General Motors pursuant to the sale of 51% of GMAC to FIM Holdings LLC.
(c) Represents long-term debt exchanged for preferred interests in 2008 and conversion of preferred membership interests in 2007.
(d) Represents the noncash effects of the loss portfolio transfer further described in Note 17 of the Consolidated Financial Statements.

 

The Notes to the Consolidated Financial Statements are an integral part of these statements.

 

7


Notes to Consolidated Financial Statements

1. Description of Business and Significant Accounting Policies

GMAC Inc. (referred to herein as GMAC, we, our, or us) was founded in 1919 as a wholly owned subsidiary of General Motors Corporation (currently General Motors LLC or GM). We are a leading, independent, globally diversified, financial services firm with approximately $172 billion in assets and operations in 40 countries. 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). Our primary banking subsidiary is Ally Bank, which is an indirect wholly owned subsidiary of GMAC Inc.

Residential Capital, LLC

Residential Capital, LLC (ResCap), one of our mortgage subsidiaries, 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 has recognized credit and valuation losses resulting in a significant deterioration in capital. During 2009, ResCap received capital contributions from GMAC of $4.0 billion in the form of cash, mortgage loans held-for-sale (which GMAC acquired from Ally Bank), receivables, the forgiveness of debt and affiliated payables, and recognized a gain on extinguishment of debt of $1.7 billion as a result of 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, as defined, was $275 million as of December 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 Ally Bank to the extent included on ResCap’s consolidated balance sheet. There continues to be a risk that ResCap during December 2009 will not be able to meet its debt service obligations, will default on its financial debt covenants due to insufficient capital, and/or will be in a negative liquidity position in 2010 or future periods.

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 other 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. The outcomes of most of these initiatives are to a great extent outside of ResCap’s control resulting in increased uncertainty as to their successful execution.

On December 30, 2009, we announced that as a result of our ongoing strategic review of how to best deploy GMAC’s current and future capital liquidity, we have decided to pursue strategic alternatives with respect to ResCap. In order to maximize value, we will consider a variety of options including one or more sales, spin-offs, or other potential transactions. The timing and form of execution of any such transactions will depend on market conditions.

Coincident with this announcement, ResCap determined, in conjunction with GMAC, to change its intent with respect to a significant portion of its portfolio of previously held-for-investment mortgage loans to held-for-sale. GMAC also announced its decision to commit to a plan to sell ResCap’s U.K. and continental Europe platforms. As a result of these actions, ResCap incurred valuation losses of approximately $1.1 billion related to its change in intent with respect to certain of its mortgage loan portfolio and impairments of $903 million related to its commitment to sell the U.K. and continental Europe platforms. These actions, inclusive of operating losses for the period, required GMAC to make capital contributions of $2.8 billion that were made to ResCap during December 2009 in the form of cash, asset contributions, and forgiveness of certain affiliate payables and debt to ensure that ResCap maintained a minimum acceptable level of required capital to meet certain covenants.

In the future, GMAC and ResCap may take actions with respect to ResCap as each party deems appropriate. These actions may include GMAC providing or declining to provide additional liquidity and capital support for ResCap; refinancing or restructuring some or all of ResCap’s existing debt; the purchase or sale of ResCap debt securities in the public or private markets for cash or other consideration; entering into derivative or other hedging or similar transactions with respect to

 

8


Notes to Consolidated Financial Statements

 

ResCap or its debt securities; GMAC purchasing assets from ResCap; or undertaking corporate transactions such as a tender offer or exchange offer for some or all of ResCap’s outstanding debt securities, a merger, sale, asset sales, consolidation, spin-off, distribution, or other business combination or reorganization or similar action with respect to all or part of ResCap and/or its affiliates. In this context, GMAC and ResCap typically consider a number of factors to the extent applicable and appropriate including, without limitation, the financial condition, results of operations and prospects of GMAC and ResCap, ResCap’s ability to obtain third-party financing, tax considerations, the current and anticipated future trading price levels of ResCap’s debt instruments, conditions in the mortgage banking industry and general economic conditions, other investment and business opportunities available to GMAC and/or ResCap, and any nonpublic information that ResCap may possess or that GMAC receives from ResCap.

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 or that GMAC will be successful in executing one or more sales, spin-offs, or other potential transactions with respect to ResCap.

Although our continued actions through various funding and capital initiatives demonstrate support for ResCap, other than as described above, 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 December 31, 2009, we had approximately $2.6 billion in secured financing arrangements with ResCap of which approximately $1.9 billion in loans had been utilized. 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 $275 million investment related to ResCap’s equity position would likely be reduced to zero. If a ResCap bankruptcy were to occur and a substantial amount of our credit exposure is 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.

GMAC Conversion

Effective June 30, 2009, GMAC converted (the Conversion) from a Delaware limited liability company to a Delaware corporation pursuant to Section 18-216 of the Delaware Limited Liability Company Act and Section 265 of the Delaware General Corporation Law and was renamed “GMAC Inc.” In connection with the Conversion, each unit of each class of membership interest issued and outstanding immediately prior to the Conversion was converted into shares of capital stock of GMAC with substantially the same rights and preferences as such membership interests. Refer to Note 23 for additional information regarding the tax impact of the conversion.

Consolidation and Basis of Presentation

The consolidated financial statements include our accounts and accounts of our majority-owned subsidiaries after eliminating all significant intercompany balances and transactions and include all variable interest entities (VIEs) in which we are the primary beneficiary. Refer to Note 28 for further details on our VIEs. Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (GAAP).

We operate our international subsidiaries in a similar manner as we operate in the United States of America (U.S. or United States), subject to local laws or other circumstances that may cause us to modify our procedures accordingly. The financial statements of subsidiaries that operate outside of the United States generally are measured using the local currency

 

9


Notes to Consolidated Financial Statements

 

as the functional currency. All assets and liabilities of foreign subsidiaries are translated into U.S. dollars at year-end exchange rates. The resulting translation adjustments are recorded in accumulated other comprehensive income, a component of equity. Income and expense items are translated at average exchange rates prevailing during the reporting period.

Use of Estimates and Assumptions

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and that affect income and expenses during the reporting period. In developing the estimates and assumptions, management uses all available evidence; however, actual results could differ because of uncertainties associated with estimating the amounts, timing, and likelihood of possible outcomes.

Significant Accounting Policies

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and short-term, highly liquid investments with original maturities of 90 days or less. Cash and cash equivalents that have restrictions on our ability to withdraw the funds are included in other assets on our Consolidated Balance Sheet. The balance of cash equivalents was $1.8 billion and $7.9 billion at December 31, 2009 and 2008, respectively. The book value of cash equivalents approximates fair value because of the short maturities of these instruments. Certain securities with original maturities less than 90 days that are held as a portion of longer-term investment portfolios, primarily held by GMAC Insurance, are classified as investment securities.

Securities

Our portfolio of securities includes government securities, corporate bonds, equity securities, asset- and mortgage-backed securities, notes, interests in securitization trusts, and other investments. Securities are classified based on management’s intent. Our trading securities primarily consist of retained and purchased interests in certain securitizations. The retained interests are carried at fair value with changes in fair value recorded in current period earnings. Debt securities that management has the intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. All other securities are classified as available-for-sale and carried at fair value with unrealized gains and losses included in accumulated other comprehensive income or loss, a component of equity, on an after-tax basis. Premiums and discounts on debt securities are amortized as an adjustment to investment yield over the contractual term of the security. We employ a systematic methodology that considers available evidence in evaluating potential other-than-temporary impairment of our investments classified as available-for-sale or held-to-maturity. If the cost of an investment exceeds its fair value, we evaluate, among other factors, the magnitude and duration of the decline in fair value. We also evaluate the financial health of and business outlook for the issuer, the performance of the underlying assets for interests in securitized assets, and our intent and ability to hold the investment.

Once a decline in fair value of an equity security is determined to be other than temporary, an impairment charge is recorded to other gain (loss) on investments, net, in our Consolidated Statement of Income, and a new cost basis in the investment is established. Once a decline in value of a debt security is determined to be other than temporary, the other-than-temporary impairment is separated into credit and noncredit components in accordance with applicable accounting standards. Noncredit component losses of a debt security are recorded in other comprehensive income (loss) when the Company does not intend to sell the security or is not more likely than not to have to sell the security prior to the security’s anticipated recovery. Noncredit component losses are amortized over the remaining life of the debt security by offsetting the recorded value of the asset. Credit component losses of a debt security are charged to earnings. Realized gains and losses on investment securities are reported in other gain (loss) on investments, net, and are determined using the specific identification method.

Loans Held-for-sale

Loans held-for-sale may include automotive, commercial finance, and residential mortgage receivables and loans and are carried at the lower of aggregate cost or estimated fair value. Loan origination fees, as well as discount points and incremental direct origination costs, are initially recorded as an adjustment of the cost of the loan and are reflected in the gain or loss on

 

10


Notes to Consolidated Financial Statements

 

sale of loans when sold. Fair value is determined by type of loan and is generally based on contractually established commitments from investors, current investor yield requirements, current secondary market pricing, or cash flow models using market-based yield requirements. Certain of our domestic residential mortgages are reported at fair value as a result of the fair value option election. Refer to Note 27 for details on fair value measurement.

Finance Receivables and Loans

Finance receivables and loans are reported at the principal amount outstanding, net of unearned income, premiums and discounts, and allowances. Unearned income, which includes deferred origination fees reduced by origination costs and unearned rate support received from an automotive manufacturer, is amortized over the contractual life of the related finance receivable or loan using the interest method. Loan commitment fees are generally deferred and amortized into commercial revenue over the commitment period.

We classify finance receivables and loans between loans held-for-sale and loans held-for-investment based on management’s assessment of our intent and ability to hold loans for the foreseeable future or until maturity. Management’s intent and ability with respect to certain loans may change from time to time depending on a number of factors including economic, liquidity, and capital conditions. Management’s view of the foreseeable future is generally a twelve-month period based on the longest reasonably reliable net income, liquidity, and capital forecast period.

Nonaccrual Loans

Consumer and commercial revenue recognition is suspended when finance receivables and loans are placed on nonaccrual status. Generally, finance receivable and loans are placed on nonaccrual status when delinquent for 90 days or when determined not to be probable of full collection. Exceptions include nonprime retail automotive receivables and commercial real estate loans that are placed on nonaccrual status when delinquent for 60 days. Revenue accrued, but not collected, at the date finance receivables and loans are placed on nonaccrual status is reversed and subsequently recognized only to the extent it is received in cash until it qualifies for return to accrual status. However, where there is doubt regarding the ultimate collectability of loan principal, all cash received is applied to reduce the carrying value of such loans. Finance receivables and loans are restored to accrual status only when contractually current and the collection of future payments is reasonably assured.

Impaired Loans

Loans are considered impaired when we determine it is probable that we will be unable to collect all amounts due according to the terms of the loan agreement. Income recognition is consistent with that of nonaccrual loans discussed above. If the recorded investment in impaired loans exceeds the fair value, a valuation allowance is established as a component of the allowance for loan losses. In addition to commercial loans specifically identified for impairment, we have pools of loans that are collectively evaluated for impairment, as discussed within the allowance for loan losses accounting policy.

Impaired loans also include loans that have been modified in troubled debt restructurings as a concession to borrowers experiencing financial difficulties. Trouble debt restructurings typically result from our loss mitigation activities and could include rate reductions, principal forgiveness, forbearance, and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral. A troubled debt restructuring involving only a modification of terms requires that the restructured loan be measured at the present value of the expected future cash flows discounted at the effective interest rate at the time of modification, as based upon the original loan rate. Alternately, the loan may be measured for impairment based upon the fair value of the underlying collateral if the loan is collateral dependent. If the measure of the loan is less than the recorded investment in the loan, we recognize an impairment by creating a valuation allowance or by adjusting an existing valuation allowance for the impaired loan.

Charge-offs

As a general rule, consumer secured closed-end installment loans are written down to estimated collateral value, less costs to sell, once a loan becomes 120 days past due; and consumer unsecured open-end (revolving) loans are charged off at 180 days past due. Closed-end consumer loans secured by real estate are written down to estimated collateral value, less costs to sell, once a mortgage loan becomes 180 days past due. Retail loans in bankruptcy that are 60 days past due are charged off within 60 days of receipt of notification of filing from the bankruptcy court.

 

11


Notes to Consolidated Financial Statements

 

Commercial loans are individually evaluated and where collectability of the recorded balance is in doubt are written down to fair value of the collateral less costs to sell. Generally, all commercial loans are charged off when they are 360 days or more past due.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses (the allowance) is management’s estimate of incurred losses in the lending portfolios. Portions of the allowance are specified to cover the estimated losses on commercial loans specifically identified for impairment in accordance with applicable accounting standards. The unspecified portion of the allowance covers estimated losses on the homogeneous portfolios of finance receivables and loans collectively evaluated for impairment in accordance with applicable accounting standards. Amounts determined to be uncollectible are charged against the allowance on our Consolidated Balance Sheet. Additionally, losses arising from the sale of repossessed assets, collateralizing automotive finance receivables, and loans are charged to the allowance. Recoveries of previously charged-off amounts are credited at time of collection.

Loans that are individually evaluated and determined not to be impaired are grouped into pools, based on similar risk characteristics, and evaluated for impairment in accordance with applicable accounting standards. Loans determined to be specifically impaired are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, an observable market price, or the fair value of the collateral, whichever is determined to be the most appropriate. Estimated costs to sell or realize the value of the collateral on a discounted basis are included in the impairment measurement.

We perform periodic and systematic detailed reviews of our lending portfolios to identify inherent risks and to assess the overall collectability of those portfolios. The allowance related to portfolios collectively reviewed for impairment (generally consumer finance receivables and loans) is based on aggregated portfolio evaluations by product type. Loss models are utilized for these portfolios, which consider a variety of factors including, but not limited to, historical loss experience, current economic conditions, anticipated repossessions or foreclosures based on portfolio trends, delinquencies and credit scores, and expected loss factors by receivable and loan type. Loans in the commercial portfolios are generally reviewed on an individual loan basis, and if necessary, an allowance is established for individual loan impairment. Loans subject to individual reviews are analyzed based on factors including, but not limited to, historical loss experience, current economic conditions, collateral performance, performance trends within specific geographic and portfolio segments, and any other pertinent information that results in the estimation of the allowance. The evaluation of these factors for both consumer and commercial finance receivables and loans involves complex, subjective judgments.

Securitizations and Other Off-balance Sheet Transactions

We securitize, sell, and service retail finance receivables, operating leases, wholesale loans, securities, and residential loans. Securitizations are accounted for either as sales or secured financings. Interests in the securitized and sold assets are generally retained in the form of senior or subordinated interests, interest- or principal-only strips, cash reserve accounts, residual interests, and servicing rights. With the exception of servicing rights and senior interests, our retained interests are generally subordinate to investors’ interests. The investors and the securitization trusts generally have no recourse to our other assets outside of customary market representation and warranty repurchase provisions and in certain transactions, early payment default provisions and other forms of guarantee or commitments.

We retain servicing responsibilities for all of our retail finance receivable, operating lease, and wholesale loan securitizations and for the majority of our residential loan securitizations. We may receive servicing fees based on the securitized loan balances and certain ancillary fees, all of which are reported in servicing fees in the Consolidated Statement of Income. We also retain the right to service the residential loans sold to Ginnie Mae, Fannie Mae, and Freddie Mac. We also serve as the collateral manager in the securitizations of commercial investment securities.

Gains or losses on securitizations and sales depend on the previous carrying amount of the assets involved in the transfer and are allocated between the assets sold and the retained interests based on relative fair values except for certain servicing assets or liabilities, which are initially recorded at fair value at the date of sale. The estimate of the fair value of the retained interests requires us to exercise significant judgment about the timing and amount of future cash flows from interests. Refer to the Note 27 for a discussion of fair value estimates.

 

12


Notes to Consolidated Financial Statements

 

Gains or losses on securitizations and sales are reported in gain (loss) on mortgage and automotive loans, net, in our Consolidated Statement of Income for retail finance receivables, wholesale loans, and residential loans. Declines in the fair value of retained interests below the carrying amount are reflected in other comprehensive income, a component of equity, or as other (loss) gain on investments, net, in our Consolidated Statement of Income if declines are determined to be other than temporary or if the interests are classified as trading. Retained interests, as well as any purchased securities, are generally included in available-for-sale investment securities, trading investment securities, or other assets. Designation of available-for-sale or trading depends on management’s intent. Securities that are noncertificated and cash reserve accounts related to securitizations are included in other assets on our Consolidated Balance Sheet.

Mortgage Servicing Rights

Primary servicing rights represent our right to service mortgages securitized by us or sold through agency and third-party whole loan sales. Primary servicing involves the collection of payments from individual borrowers and the distribution of these payments to the investors. Master servicing rights represent our right to service mortgage- and asset-backed securities and whole-loan packages issued for investors. Master servicing involves the collection of borrower payments from primary servicers and the distribution of those funds to investors in mortgage- and asset-backed securities and whole-loans packages. We also purchase and sell primary and master servicing rights through transactions with other market participants.

We capitalize the value expected to be realized from performing specified mortgage servicing activities for others as mortgage servicing rights (MSRs). These capitalized servicing rights are purchased or retained upon sale or securitization of mortgage loans. Mortgage servicing rights are not recorded on securitizations accounted for as secured financings. We measure mortgage servicing assets and liabilities at fair value at the date of sale.

We define our classes of servicing rights based on both the availability of market inputs and the manner in which we manage the risks of our servicing assets and liabilities. We leverage all available relevant market data to determine the fair value of our recognized servicing assets and liabilities.

Since quoted market prices for MSRs are not available, we estimate the fair value of MSRs by determining the present value of future expected cash flows using modeling techniques that incorporate management’s best estimates of key variables including expected cash flows, credit losses, prepayment speeds, and return requirements commensurate with the risks involved. Cash flow assumptions are modeled using our internally forecasted revenue and expenses, and where possible, the reasonableness of assumptions is periodically validated through comparisons to other market participants. Credit loss assumptions are based upon historical experience and the characteristics of individual loans underlying the MSRs. Prepayment speed estimates are determined from historical prepayment rates on similar assets or obtained from third-party data. Return requirement assumptions are determined using data obtained from market participants, where available, or based on current relevant interest rates plus a risk-adjusted spread. We also consider other factors that can impact the value of the MSRs, such as surety provider termination clauses and servicer terminations that could result if we failed to materially comply with the covenants or conditions of our servicing agreements and did not remedy the failure. Since many factors can affect the estimate of the fair value of mortgage servicing rights, we regularly evaluate the major assumptions and modeling techniques used in our estimate and review these assumptions against market comparables, if available. We monitor the actual performance of our MSRs by regularly comparing actual cash flow, credit, and prepayment experience to modeled estimates.

Repossessed and Foreclosed Assets

Assets are classified as repossessed and foreclosed and included in other assets when physical possession of the collateral is taken regardless of whether foreclosure proceedings have taken place. Repossessed and foreclosed assets are carried at the lower of the outstanding balance at the time of repossession or foreclosure or the fair value of the asset less estimated costs to sell. Losses on the revaluation of repossessed and foreclosed assets are charged to the allowance for loan and lease losses at the time of repossession.

Goodwill and Other Intangibles

Goodwill and other intangible assets, net of accumulated amortization, are reported in other assets. In accordance with applicable accounting standards, goodwill represents the excess of the cost of an acquisition over the fair value of net assets acquired. Goodwill is reviewed for impairment utilizing a two-step process. The first step of the impairment test requires us to define the reporting units and compare the fair value of each of these reporting units to the respective carrying value. The fair

 

13


Notes to Consolidated Financial Statements

 

value of the reporting units in our impairment test is determined based on various analyses including discounted cash flow projections. If the carrying value is less than the fair value, no impairment exists, and the second step does not need to be completed. If the carrying value is higher than the fair value or there is an indication that impairment may exist, a second step must be performed to compute the amount of the impairment, if any. Applicable accounting standards require goodwill to be tested for impairment annually at the same time every year and whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our annual goodwill impairment assessment is concluded upon during the fourth quarter each year. Refer to Note 14 for a discussion of the related goodwill impairment charge in 2009 and 2008.

Other intangible assets, which include customer lists, trademarks, and other identifiable intangible assets, are amortized on a straight-line basis over an estimate useful life of 3 to 15 years and are subject to impairment testing.

Investment in Operating Leases

Investment in operating leases is reported at cost, less accumulated depreciation and net of impairment charges and origination fees or costs. Income from operating lease assets that includes lease origination fees, net of lease origination costs, is recognized as operating lease revenue on a straight-line basis over the scheduled lease term. Depreciation of vehicles is generally provided on a straight-line basis to an estimated residual value over a period, consistent with the term of the underlying operating lease agreement. We evaluate our depreciation policy for leased vehicles on a regular basis.

We have significant investments in the residual values of assets in our operating lease portfolio. The residual values represent an estimate of the values of the assets at the end of the lease contracts and are initially determined based on residual values established at contract inception by consulting independently published residual value guides. Realization of the residual values is dependent on our future ability to market the vehicles under the prevailing market conditions. Over the life of the lease, we evaluate the adequacy of our estimate of the residual value and may make adjustments to the depreciation rates to the extent the expected value of the vehicle (including any residual support payments from GM) at lease termination changes. In addition to estimating the residual value at lease termination, we also evaluate the current value of the operating lease asset and test for impairment to the extent necessary based on market considerations and portfolio characteristics. Impairment is determined to exist if the undiscounted expected future cash flows are lower than the carrying value of the asset. If our operating lease assets are considered to be impaired, the impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value as estimated by discounted cash flows. Certain triggering events necessitated an impairment review of the investment in operating leases of our Global Automotive Services beginning in the second quarter of 2008. Refer to Note 11 for a discussion of the impairment charges recognized in 2008.

When a lease vehicle is returned to us, the asset is reclassified from investment in operating leases to other assets at the lower-of-cost or estimated fair value, less costs to sell.

Impairment of Long-lived Assets

The carrying value of long-lived assets (including property and equipment and certain identifiable intangibles) are evaluated for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable from the estimated undiscounted future cash flows expected to result from their use and eventual disposition. Recoverability of assets to be held and used is measured by a comparison of their carrying amount to future net undiscounted cash flows expected to be generated by the assets. If these assets are considered to be impaired, the impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value as estimated by discounted cash flows. Refer to the previous section of this note titled Investment in Operating Leases for a discussion pertaining to impairments related to our investment in operating leases in 2009. No material impairment was recognized in 2008 or 2007.

An impairment test on an asset group to be discontinued, held-for-sale, or otherwise disposed of is performed upon occurrence of a triggering event or when certain criteria are met (e.g., the asset can be disposed of within twelve months, appropriate levels of authority have approved the sale, and there is an active program to locate a buyer). Long-lived assets held-for-sale are recorded at the lower of their carrying amount or estimated fair value less cost to sell. If the carrying value of the assets held-for-sale exceeds the fair value less cost to sell, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets less cost to sell. During 2009, impairment losses were recognized on asset groups that were classified as held-for-sale or disposed of by sale. Refer to Note 2 for a discussion of held-for-sale and discontinued operations.

 

14


Notes to Consolidated Financial Statements

 

Property and Equipment

Property and equipment stated at cost, net of accumulated depreciation and amortization, are reported in other assets. Included in property and equipment are certain buildings, furniture and fixtures, leasehold improvements, company vehicles, IT hardware and software, and capitalized software costs. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets, which generally ranges from 3 to 30 years. Capitalized software is generally amortized on a straight-line basis over its useful life, which generally ranges from three to five years. Capitalized software that is not expected to provide substantive service potential or for which development costs significantly exceed the amount originally expected is considered impaired and written down to fair value. Software expenditures that are considered general, administrative, or of a maintenance nature are expensed as incurred.

Deferred Policy Acquisition Costs

Commissions, including compensation paid to producers of automotive service contracts and other costs of acquiring insurance that are primarily related to and vary with the production of business, are deferred and recorded in other assets. Deferred policy acquisition costs are amortized over the terms of the related policies and service contracts on the same basis as premiums and revenue are earned except for direct response advertising costs, which are amortized over their expected future benefit. We group costs incurred for acquiring like contracts and consider anticipated investment income in determining the recoverability of these costs.

Private Debt Exchange and Cash Tender Offers

In evaluating the accounting for the private debt exchange and cash tender offers (the Offers) in 2008, management was required to make a determination as to whether the Offers should be accounted for as a troubled debt restructuring (TDR) or an extinguishment of GMAC and ResCap debt. In concluding on the accounting, management evaluated applicable accounting guidance. The relevant accounting guidance required us to determine whether the exchanges of debt instruments should be accounted for as a TDR. A TDR results when it is determined, evaluating six factors considered to be indicators of whether a debtor is experiencing financial difficulties, that the debtor is experiencing financial difficulties, and the creditors grant a concession; otherwise, such exchanges should be accounted for as an extinguishment or modification of debt. The assessment of this critical accounting estimate required management to apply a significant amount of judgment in evaluating the inputs, estimates, and internally generated forecast information to conclude on the accounting for the Offers.

In assessing whether GMAC was experiencing financial difficulties for the purpose of accounting for the Offers, management applied applicable accounting guidance. Our assessment considered internal analyses such as our short- and long-term liquidity projections, net income forecasts, and runoff projections. These analyses were based upon our consolidated financial condition and our comprehensive ability to service both GMAC and ResCap obligations and were based only on our current business capabilities and funding sources. In addition to our baseline projections, these analyses incorporated stressed scenarios reflecting continued deterioration of the credit markets, further GM financial distress, and significant curtailments of loans originations. Management assigned probability weights to each scenario to determine an overall risk-weighted projection of our ability to meet our consolidated obligations as they come due. These analyses indicated that we could service all GMAC and ResCap obligations as they came due in the normal course of business.

Our assessment also considered capital market perceptions of our financial condition, such as our credit agency ratings, market values for our debt, analysts’ reports, and public statements made by us and our stakeholders. Due to the rigor applied to our internal projections, management placed more weight on our internal projections and less weight on capital market expectations.

Based on this analysis and after the consideration of the applicable accounting guidance, management concluded the Offers were not deemed to be a TDR. As a result of this conclusion, the Offers were accounted for as an extinguishment of debt.

Applying extinguishment accounting, we recognized a gain at the time of the exchange for the difference between the carrying value of the exchanged notes and the fair value of the newly issued securities. In accordance with applicable fair value accounting guidance related to Level 3 fair value measures, we performed various analyses with regard to the valuation of the newly issued instruments. Level 3 fair value measures are valuations that are derived primarily from unobservable inputs and rely heavily on management assessments, assumptions, and judgments. In determining the fair value of the newly

 

15


Notes to Consolidated Financial Statements

 

issued instruments, we performed an internal analysis using trading levels on the trade date, December 29, 2008, of existing GMAC unsecured debt, adjusted for the features of the new instruments. We also obtained bid-ask spreads from brokers attempting to make a market in the new instruments.

Based on the determined fair values, we recognized a pretax gain upon extinguishment of $11.5 billion and reflected the newly issued preferred shares at their face value, which was estimated to be $234 million on December 29, 2008. The majority of costs associated with the Offers were deferred in the basis of the newly issued bonds. In the aggregate, the offers resulted in an $11.7 billion increase to our consolidated equity position.

Unearned Insurance Premiums and Service Revenue

Insurance premiums, net of premiums ceded to reinsurers, and service revenue are earned over the terms of the policies. The portion of premiums and service revenue written applicable to the unexpired terms of the policies is recorded as unearned insurance premiums or unearned service revenue. For extended service and maintenance contracts, premiums and service revenues are earned on a basis proportionate to the anticipated loss emergence. For other short duration contracts, premiums and unearned service revenue are earned on a pro rata basis.

Reserves for Insurance Losses and Loss Adjustment Expenses

Reserves for insurance losses and loss adjustment expenses are established for the unpaid cost of insured events that have occurred as of a point in time. More specifically, the reserves for insurance losses and loss adjustment expenses represent the accumulation of estimates for both reported losses and those incurred, but not reported, including claims adjustment expenses relating to direct insurance and assumed reinsurance agreements. Estimates for salvage and subrogation recoverable are recognized at the time losses are incurred and netted against provision for insurance losses and loss adjustment expenses. Reserves are established for each business at the lowest meaningful level of homogeneous data. Since the reserves are based on estimates, the ultimate liability may vary from such estimates. The estimates are regularly reviewed and adjustments, which can potentially be significant, are included in earnings in the period in which they are deemed necessary.

Reserves for Loans Sold with Recourse

Reserves for loans sold with recourse result from customary market representations and warranties we provide when we sell or securitize loans. These provisions are generally triggered in cases of origination fraud, missing or insufficient underwriting documentation, or borrower compliance violations that exist at the time of sale. The initial reserve, classified in accrued expenses and other liabilities on our Consolidated Balance Sheet, is established on the transfer date at fair value and is recorded as gain (loss) on mortgage and automotive loans, net, on our Consolidated Statement of Income. We recognize changes in the liability as other operating expenses on our Consolidated Statement of Income. We use internally developed models to estimate the liability. Significant assumptions in the models include borrower performance, investor repurchase demand behavior, historic loan defect experience, and loss severity. Adjustments may be made to the modeled losses to take into account qualification factors, such as macroeconomic and other external factors. We regularly evaluate the major assumptions and modeling techniques used in our estimate, and we align assumptions with the our allowance and cash flow forecasting models. The models and assumptions require the use of judgment and can have a significant impact on the determination of the liability.

Derivative Instruments and Hedging Activities

In accordance with applicable accounting standards, all derivative financial instruments, whether designated for hedge accounting or not, are required to be recorded on the balance sheet as assets or liabilities carried at fair value. At inception of a hedging relationship, we designate each qualifying derivative financial instrument as a hedge of the fair value of a specifically identified asset or liability (fair value hedge), as a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge), or as a hedge of the foreign currency exposure of a net investment in a foreign operation. We also use derivative financial instruments, which although acquired for risk management purposes, 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 the 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 accumulated other comprehensive income, a component of equity, and recognized in the income statement when the hedged cash flows affect earnings. For a derivative designated as hedging the foreign currency exposure of a net investment in a foreign operation, the gain or loss is reported in accumulated other

 

16


Notes to Consolidated Financial Statements

 

comprehensive income as part of the cumulative translation adjustment with the exception of the spot to forward difference, which is recorded in current period earnings. Changes in the fair value of derivative financial instruments held for risk management purposes that do not meet the criteria to qualify as hedges under GAAP are reported in current period earnings. The ineffective portions of fair value and cash flow hedges are immediately recognized in earnings.

We formally document all relationships between hedging instruments and hedged items and or risk management objectives for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value, cash flow, or net investment hedges to specific assets and liabilities on our Consolidated Balance Sheet to specific firm commitments or the forecasted transactions. Both at the hedge’s inception and on an ongoing basis, we formally assess 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 herein is no longer applied if a derivative financial instrument is terminated or the hedge designation is removed or is assessed to be no longer highly effective. For these 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 flows will not occur within a specified period, any changes in fair value of the derivative financial instrument previously recognized remain in other comprehensive income, a component of equity, and are reclassified into earnings in the same period that the hedged cash flows affect earnings. The previously recognized net derivative gain or loss for a net investment hedge should continue to remain in accumulated other comprehensive income until earnings are impacted by sale or liquidation of the associated foreign operation. In all instances, any subsequent changes in fair value of the derivative instrument will be recorded into earnings.

Loan Commitments

We enter into commitments to make loans whereby the interest rate on the loans is set prior to funding (i.e., interest rate lock commitments). Interest rate lock commitments for loans to be originated or purchased for sale and for loans to be purchased and held-for-investment are derivative financial instruments carried at fair value in accordance with applicable accounting standards with changes in fair value included within current period earnings. The fair value of the interest rate lock commitments include expected net future cash flows related to the associated servicing of the loan are accounted for through earnings for all written loan commitments accounted at fair value. Servicing assets are recognized as distinct assets once they are contractually separated from the underlying loan by sale or securitization. Interest rate lock commitments are recorded at fair value with changes in value recognized in current period earnings. Day-one gains or losses on derivative interest rate lock commitments are recognized when applicable.

Income Taxes

As of June 30, 2009, GMAC converted from an LLC to a Delaware corporation, thereby ceasing to be a pass-through entity for income tax purposes. As a result, we recorded our deferred tax assets and liabilities using the estimated corporate effective tax rate. Our banking, insurance, and foreign subsidiaries were generally always corporations and continued to be subject to tax and provide for U.S. federal, state, and foreign income taxes.

Deferred tax assets and liabilities are established for future tax consequences of events that have been recognized in the financial statements or tax returns based on enacted tax laws and rates. Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not. Deferred tax assets are reduced through the recording of valuation allowances in cases where realization is not more likely than not. In addition, tax benefits related to positions considered uncertain are recognized only if, based on the technical merits of the issue, we are more likely than not to sustain the position and then at the largest amount that is greater than 50% likely to be realized upon ultimate settlement.

Recently Adopted Accounting Standards

Accounting Standards Codification (ASC) (Formerly SFAS No. 168)

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162 (SFAS 168). This standard established the FASB Codification as the

 

17


Notes to Consolidated Financial Statements

 

exclusive authoritative reference for U.S. GAAP and superseded all existing non-SEC accounting and reporting standards. As a result, we updated the references to accounting literature contained in our financial statement disclosures to reflect the ASC structure.

Disclosures about Derivative Instruments and Hedging Activities (Formerly SFAS No. 161)

As of January 1, 2009, we adopted SFAS No. 161 (SFAS 161), which amended ASC Topic 815, Derivatives and Hedging. SFAS 161 required specific disclosures regarding the location and amounts of derivative instruments in the financial statements, how derivative instruments and related hedged items were accounted for, and how derivative instruments and related hedged items affected 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 financial statements. Refer to Note 21 for disclosures required by SFAS 161.

Interim Disclosures about Fair Value of Financial Instruments (Formerly FSP FAS No. 107-1 and APB No. 28-1)

As of June 30, 2009, we adopted FSP FAS No. 107-1 and APB No. 28-1, which amended ASC Topic 825, Financial Instruments, to require disclosures about the fair value of financial instruments in interim periods. Additionally, the guidance amends ASC Topic 270, Interim Reporting, to require these disclosures in all interim financial statements. Since this guidance related only to disclosures, adoption did not have a material effect on our financial statements.

Recognition and Presentation of Other-Than-Temporary Impairments (Formerly FSP FAS No. 115-2 and FSP FAS No. 124-2)

As of April 1, 2009, we adopted FSP FAS No. 115-2 and FSP FAS 124-2, which amended the guidance for determining and recognizing impairment on debt securities. Under this FSP, an other-than-temporary impairment must be recognized if an entity has the intent to sell the debt security or if it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. In addition, the guidance changed the amount of impairment to be recognized in current period earnings when an entity does not have the intent to sell or it is more likely than not that it will be required to sell the debt security. In these cases, only the amount of the impairment associated with credit losses is recognized in earnings with all other fair value components in other comprehensive income. The guidance also required additional disclosures regarding the calculation of credit losses as well as factors considered in reaching a conclusion that an investment is not other-than-temporarily impaired. This guidance was effective for periods ending after June 15, 2009, and its adoption did not have a material impact on our financial statements.

Determining Fair Value for Assets in Inactive or Distressed Markets (Formerly FAS No. 157-4)

As of April 1, 2009, we adopted FSP FAS No. 157-4, which amended ASC Topic 820, Fair Value Measurements and Disclosures, and clarified the guidance for determining fair value. This standard provided application guidance to assist preparers in determining whether an observed transaction had occurred in an inactive market and if the transaction was distressed. This standard was effective for periods ending after June 15, 2009, and its adoption did not have a material impact on our financial statements.

Recently Issued Accounting Standards

Accounting for Transfers of Financial Assets (Accounting Standards Update (ASU) 2009-16) (Formerly SFAS No. 166)

In December 2009, the FASB issued ASU 2009-16, which amends ASC Topic 860, Transfers and Servicing. This standard removes the concept of a qualifying special-purpose entity (QSPE) and creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale. To determine if a transfer is to be accounted for as a sale, the transferor must assess whether it and all of the entities included in its consolidated financial statements have surrendered control of the assets. This standard is effective for us as of January 1, 2010, with adoption applied prospectively for transfers that occur on and after the effective date. The elimination of the QSPE concept will require us to retrospectively assess all current off-balance sheet QSPE structures for consolidation under ASC Topic 810, Consolidation, and record a cumulative-effect adjustment to retained earnings for any consolidation change. Retrospective application of ASU 2009-16, specifically the QSPE removal, is being assessed as part of the analysis required from ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. Refer to the section below for further information related to ASU 2009-17.

 

18


Notes to Consolidated Financial Statements

 

Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (ASU 2009-17) (Formerly SFAS No. 167)

In December 2009, the FASB issued ASU 2009-17, which amends ASC Topic 810, Consolidation. This standard addresses the primary beneficiary assessment criteria for determining whether an entity is required to consolidate a variable interest entity (VIE). This standard requires an entity to determine whether it is the primary beneficiary by performing a qualitative assessment; rather than using the quantitative-based model required under the previous accounting guidance. The qualitative assessment consists of determining whether the entity has both the power to direct the activities that most significantly impact the VIE’s economic performance and has the right to receive benefits or obligation to absorb losses that could potentially be significant to the VIE. This standard is effective for us as of January 1, 2010. As a result of the implementation of ASU 2009-16 and ASU 2009-17, we will be required to consolidate various securitization structures that were previously held off-balance sheet. On January 1, 2010, this consolidation will result in a net increase of $17.6 billion to assets and liabilities on our Consolidated Balance Sheet ($10.1 billion of the increase relates to operations classified as held-for-sale). As part of the day-one entry, there will also be an immaterial adjustment to our opening equity balance.

2. Discontinued and Held-for-sale Operations

Discontinued Operations

During the three months ended September 30, 2009, we committed to sell the U.S. consumer property and casualty insurance business of our Insurance operations. These operations provide vehicle and home insurance in the United States through a number of distribution channels, including independent agents, affinity groups, and the internet. Additionally, during the three months ended December 31, 2009, we committed to sell the U.K. consumer property and casualty insurance business. In connection with the classification of these operations as held-for-sale we recognized pretax losses, including estimated direct costs to transact a sale, of $250 million during the year ended December 31, 2009. The losses represent the impairment recognized to present the discontinued operations at the lower of cost or fair value less costs to sell. The fair values less costs to sell were determined based on sales price negotiations with potential third-party purchasers (a Level 2 fair value input) and price discoveries with potential third-party purchasers adjusted for factors deemed appropriate by management (a Level 3 fair value input). During the first quarter of 2010, the sale of our U.S. consumer property and casualty business was completed. We expect to complete the sale of our U.K. consumer property and casualty insurance business during 2010.

During the three months ended December 31, 2009, we committed to sell the continental Europe operations of ResCap’s International Business Group (IBG). These operations included residential mortgage loan origination, acquisition, servicing, asset management, sale, and securitizations in the Netherlands and Germany. In connection with the classification of these operations as held-for-sale, we recognized pretax losses, including estimated direct costs to transact a sale, of $723 million during the three months ended December 31, 2009. The losses represent the impairment recognized to present the held-for-sale operations at the lower of cost or fair value less costs to sell. The fair values less costs to sell were determined based on sales price negotiations with potential third-party purchasers adjusted for anticipated price fades or other factors deemed appropriate by management (a Level 3 fair value input). We expect to complete the sale of the IBG’s continental Europe operations during 2010.

During the three months ended December 31, 2009, we committed to sell the U.K. operations of ResCap’s IBG and classified these operations as held-for-sale. The operations include residential mortgage loan origination, acquisition, servicing, asset management, sale, and securitizations. In connection with the classification as held-for-sale, we recognized a pretax loss, including estimated direct costs to transact a sale, of $181 million. The loss represents the impairment recognized to present the held-for-sale operations at the lower of cost or fair value less costs to sell. The fair values less costs to sell were determined based on price discoveries with potential third party purchasers adjusted for anticipated price fades or other factors deemed appropriate by management (a Level 3 fair value input). During the three months ended June 30, 2010, we classified these operations as discontinued. We expect to complete the sale of these operations during 2010.

During the three months ended September 30, 2009, we committed to sell certain operations of our International Automotive Finance operations. These include the sale of our Argentina operations and our Masterlease operations in the United Kingdom and Italy. Our Masterlease operations provide full-service individual leasing and fleet leasing products, including maintenance, fleet, and accident management services as well as fuel programs, short-term vehicle rental, and title

 

19


Notes to Consolidated Financial Statements

 

and licensing services. Additionally, during the three months ended December 31, 2009, we committed to sell our operations in Poland and Ecuador as well as our Masterlease operations in Australia, Belgium, France, Mexico, the Netherlands, and Poland. In connection with the classification of these operations as held-for-sale we recognized pretax losses of $416 million during the year ended December 31, 2009. The losses represent the impairment recognized to present the discontinued operations at the lower of cost or fair value less costs to sell. The fair value less costs to sell were determined using final sales agreements or sales price negotiations entered into by willing parties (a Level 2 fair value input). As of December 31, 2009, the sale of the Masterlease operations in Mexico, Italy, and the Netherlands was completed. During the three months ended June 30, 2010, we completed the sale of our Poland operations and our Masterlease operations in Australia, Poland, Belgium, and France. In July 2010, we completed the sale of our Argentina operations. We expect to complete the sale of our Ecuador operations and our Masterlease operations in the United Kingdom during 2010.

During the three months ended June 30, 2010, we classified the operations of our International Automotive Finance operations in Australia and Russia as discontinued.

During the three months ended December 31, 2009, we committed to sell the North American-based factoring business of our Commercial Finance Group. In connection with the classification of these operations as held-for-sale we recognized pretax losses of $30 million during the year ended December 31, 2009. The losses represent the impairment recognized to present the held-for-sale operations at the lower of cost or fair value, less costs to transact the sale. The fair value less costs to sell was determined based on preliminary bids with potential third-party purchasers (a Level 2 fair value input). On April 30, 2010, the sale of the North American based factoring business was completed.

The pretax losses recognized as of December 31, 2009, including the direct costs to transact a sale, for the discontinued operations could differ from the ultimate sales price due to the fluidity of ongoing negotiations, price volatility, changing interest rates, changing foreign currency rates, and future economic conditions.

Selected financial information of these discontinued operations is summarized below.

 

Year ended December 31, ($ in millions)    2009     2008     2007  

Select Mortgage operations

      

Total net (loss)

   $ (637   $ (2,073   $ (354

Pretax (loss) including direct costs to transact a sale

     (2,234     (2,955     (757

Tax expense (benefit)

            100        (174

Select Insurance operations

      

Total net revenue

   $ 1,448      $ 1,780      $ 1,737   

Pretax (loss) income including direct costs to transact a sale

     (810     97        121   

Tax (benefit) expense

     (99     25        38   

Select International operations

      

Total net revenue

   $ 298      $ 375      $ 402   

Pretax (loss) income including direct costs to transact a sale

     (291     (19     45   

Tax expense

     33        8        14   

Select Commercial Finance operations

      

Total net revenue

   $ 39      $ 49      $ 64   

Pretax (loss) income including direct costs to transact a sale

     (32     (23     18   

Tax (benefit) expense

     (9     1        2   
   

At December 31, 2009, we classified the assets and liabilities of these operations as discontinued operations using generally accepted accounting principles in the United States of America, as the associated operations and cash flows will be eliminated from our ongoing operations and we will not have any significant continuing involvement in their operations after the respective sale transactions. The previously issued Consolidated Financial Statements, for all periods presented, have been recast, such that all of the operating results for these operations have been removed from continuing operations and are presented separately as discontinued operations, net of tax. The Notes to Consolidated Financial Statements have been adjusted to exclude discontinued operations unless otherwise noted.

 

20


Notes to Consolidated Financial Statements

 

Held-for-sale Operations

All of our discontinued operations are classified as held-for-sale as of December 31, 2009, except for our International Automotive Finance operations in Australia and Russia.

The assets and liabilities of operations held-for-sale at December 31, 2009, are summarized below.

 

($ in millions)  

Select
Mortgage

operations (a)

   

Select
Insurance

operations (b)

    Select
International
operations (c)
    Select
Commercial
Finance
Group
operations (d)
    Total
held-for-sale
operations
 

Assets

         

Cash and cash equivalents

         

Noninterest bearing

  $ 4      $ 578      $ 33      $      $ 615   

Interest bearing

    151               11               162   
   

Total cash and cash equivalents

    155        578        44               777   

Trading securities

    36                             36   

Investment securities — available-for-sale

           794                      794   

Loans held-for-sale

    214                             214   

Finance receivables and loans, net of unearned income

         

Consumer

    2,650               400               3,050   

Commercial

                  246        233        479   

Notes receivable from General Motors

                  14               14   

Allowance for loan losses

    (89            (11            (100
   

Total finance receivables and loans, net

    2,561               649        233        3,443   

Investment in operating leases, net

                  885               885   

Mortgage servicing rights

    (26                          (26

Premiums receivable and other insurance assets

           1,126                      1,126   

Other assets

    512        176        135               823   

Impairment on assets of held-for-sale operations

    (903     (231     (324     (30     (1,488
   

Total assets

  $ 2,549      $ 2,443      $ 1,389      $ 203      $ 6,584   
   

Liabilities

         

Debt

         

Short-term borrowings

  $      $ 34      $ 57      $      $ 91   

Long-term debt

    1,749               237               1,986   
   

Total debt

    1,749        34        294               2,077   

Interest payable

    3               1               4   

Unearned insurance premiums and service revenue

           517                      517   

Reserves for insurance losses and loss adjustment expenses

           1,471                      1,471   

Accrued expenses and other liabilities

    430        84        128        187        829   
   

Total liabilities

  $ 2,182      $ 2,106      $ 423      $ 187      $ 4,898   
   

 

(a) Includes the operations of ResCap’s International Business Group in continental Europe and the operations in the United Kingdom.
(b) Includes the U.S. and U.K. consumer property and casualty insurance businesses.
(c) Includes the International Automotive Finance operations of Argentina, Ecuador, and Poland and Masterlease in the United Kingdom, Italy, Australia, Belgium, France, Mexico, the Netherlands, and Poland.
(d) Includes the U.S.-based factoring business of our Commercial Finance Group.

 

21


Notes to Consolidated Financial Statements

 

3. Insurance Premiums and Service Revenue Earned

The following table is a summary of insurance premiums and service revenue written and earned:

 

     2009     2008     2007  
Year ended December 31, ($ in millions)    Written     Earned     Written     Earned     Written     Earned  

Insurance premiums

            

Direct

   $ 795      $ 854      $ 982      $ 1,054      $ 951      $ 1,007   

Assumed

     604        680        737        682        644        652   
   

Gross insurance premiums

     1,399        1,534        1,719        1,736        1,595        1,659   

Ceded

     (604     (695     (481     (321     (183     (190
   

Net insurance premiums

     795        839        1,238        1,415        1,412        1,469   

Service revenue

     685        1,138        964        1,295        1,118        1,337   
   

Insurance premiums and service revenue written and earned

   $ 1,480      $ 1,977      $ 2,202      $ 2,710      $ 2,530      $ 2,806   
   

4. Other Income, Net of Losses

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

 

Year ended December 31, ($ in millions)    2009     2008     2007

Late charges and other administrative fees (a)

   $ 156      $ 159      $ 171

Mortgage processing fees and other mortgage income (loss)

     128        (257     70

Remarketing fees

     128        120        99

Full-service leasing fees

     128        154        125

Other equity method investments (b)

     17        (496     74

Fair value adjustment on certain derivatives (c)

     (56     (99     100

Fair value adjustments due to fair value option elections, net (d)

     (215     (237    

Real estate services, net

     (267     (62     218

Other, net

     179        100        99
 

Total other income, net of losses

   $ 198      $ (618   $ 956
 

 

(a) Includes nonmortgage securitization fees.
(b) During 2008, we recognized $765 million in losses related to an investment accounted for using the equity method. The losses included $195 million as an estimate of our share of the investee’s net loss and the impairment of our remaining investment interests of $570 million. As of December 31, 2008, we have no remaining balance in our investment, no further financial obligations, and have ceased equity method accounting.
(c) Refer to Note 21 for a description of derivative instruments and hedging activities.
(d) Refer to Note 27 for a description of fair value option elections.

 

22


Notes to Consolidated Financial Statements

 

5. Other Operating Expenses

Details of other operating expenses were as follows:

 

Year ended December 31, ($ in millions)    2009    2008    2007

Mortgage representation and warranty expense, net

   $ 1,494    $ 238    $ 256

Insurance commissions

     635      803      831

Technology and communications expense

     594      566      580

Professional services

     506      608      383

Advertising and marketing

     202      154      198

Vehicle remarketing and repossession

     196      288      198

Lease and loan administration

     164      152      204

Full-service leasing vehicle maintenance costs

     132      150      115

Rent and storage

     108      158      181

Premises and equipment depreciation

     85      124      148

Restructuring expenses

     63      192      129

Other

     1,063      1,600      1,102
 

Total other operating expenses

   $ 5,242    $ 5,033    $ 4,325
 

6. Trading Securities

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

 

December 31, ($ in millions)    2009    2008  

Trading securities

     

U.S. Treasury

   $    $ 409   

Mortgage-backed

     

Residential

     143      316   

Commercial

          7   

Asset-backed

     596      474   

Debt and other

          1   
   

Total trading securities

   $ 739    $ 1,207   
   

Net unrealized gains (losses) (a)

   $ 203    $ (1,864

Pledged as collateral

   $ 61    $ 827   
   

 

(a) Unrealized gains and losses are included in other gain (loss) on investments, net, on a current period basis. Net unrealized losses totaled $1,590 million during the year ended December 31, 2007.

 

23


Notes to Consolidated Financial Statements

 

7. Investment Securities

Our portfolio of investment 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:

 

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

Available-for-sale securities

                     

Debt securities

                     

U.S. Treasury and federal agencies

   $ 3,501    $ 15    $ (6   $ 3,510    $ 389    $ 31    $      $ 420

States and political subdivisions

     779      36      (4     811      876      31      (26     881

Foreign government

     1,161      20      (8     1,173      887      25             912

Mortgage-backed

                     

Residential (a)

     3,404      76      (19     3,461      191      6      (2     195

Commercial

                           17           (2     15

Asset-backed

     1,000      7      (2     1,005      664           (2     662

Corporate debt securities

     1,408      74      (9     1,473      2,431      24      (165     2,290

Other

     47                  47      350      4      (1     353
 

Total debt securities (b)

     11,300      228      (48     11,480      5,805      121      (198     5,728

Equity securities

     631      52      (8     675      525      79      (98     506
 

Total available-for-sale securities

   $ 11,931    $ 280    $ (56   $ 12,155    $ 6,330    $ 200    $ (296   $ 6,234
 

Held-to-maturity securities

                     

Total held-to-maturity securities

   $ 3    $    $      $ 3    $ 3    $    $      $ 3
 

 

(a) Residential mortgage-backed securities include agency-backed bonds totaling $2,248 million and $16 million at December 31, 2009 and 2008, respectively.
(b) In connection with certain borrowings and letters of credit relating to certain assumed reinsurance contracts, $164 million and $154 million of primarily U.K. Treasury securities were pledged as collateral as of December 31, 2009 and 2008, respectively.

 

24


Notes to Consolidated Financial Statements

 

The maturity distribution of available-for-sale debt securities outstanding is summarized in the following tables. Prepayments may cause actual maturities to differ from scheduled maturities.

 

    Total     Due in one
year or less
    Due after one
year through
five years
    Due after five
years through
ten years
    Due after ten
years (a)
 
December 31, 2009 ($ in millions)   Amount   Yield     Amount   Yield     Amount   Yield     Amount   Yield     Amount   Yield  

Fair value of available-for-sale debt securities (b)

                   

U.S. Treasury and federal agencies 

  $ 3,510   1.9   $ 103   1.1   $ 3,390   1.9   $ 17   4.1   $  

States and political subdivisions

    811   7.0        9   7.0        175   7.2        147   7.0        480   6.9   

Foreign government

    1,173   3.8        66   1.7        872   3.8        229   4.5        6   5.3   

Mortgage-backed

                   

Residential

    3,461   6.5                 2   6.5        36   13.0        3,423   6.4   

Asset-backed

    1,005   2.5        34   5.2        735   2.3        186   2.6        50   3.9   

Corporate debt

    1,473   5.2        283   3.4        575   5.8        570   5.4        45   6.9   

Other

    47   3.6                 32   3.4        15   4.0            
   

Total available-for-sale debt securities

  $ 11,480   4.3   $ 495   2.8   $ 5,781   2.8   $ 1,200   5.2   $ 4,004   6.5
   

Amortized cost of available-for-sale debt securities

  $ 11,300     $ 473     $ 5,728     $ 1,169     $ 3,930  
   

 

(a) Investments with no stated maturities are included as contractual maturities of greater than 10 years. Actual maturities may differ due to call or prepayment options.
(b) Yields on tax-exempt obligations have been computed on a tax-equivalent basis.

 

    Total     Due in one
year or less
    Due after one
year through
five years
    Due after five
years through
ten years
    Due after ten
years (a)
 
December 31, 2008 ($ in millions)   Amount   Yield     Amount   Yield     Amount   Yield     Amount   Yield     Amount   Yield  

Fair value of available-for-sale debt securities (b)

                   

U.S. Treasury and federal agencies

  $ 420   3.9   $ 81   3.1   $ 208   4.0   $ 109   4.5   $ 22   4.5

States and political subdivisions

    881   7.6        16   9.2        223   7.6        210   7.4        432   7.7   

Foreign government

    912   3.4        403   1.2        325   4.9        166   5.3        18   9.2   

Mortgage-backed

                   

Residential

    195   5.3        2   10.3                          193   5.2   

Commercial

    15   5.4                 2   6.0                 13   5.4   

Asset-backed

    662   0.4        585   0.1        63   2.7        10   4.4        4   0.7   

Corporate debt

    2,290   5.7        324   4.5        999   5.8        888   5.9        79   6.5   

Other

    353   3.7        320   3.6        32   4.9        1              
   

Total available-for-sale debt securities

  $ 5,728   4.8   $ 1,731   2.1   $ 1,852   5.5   $ 1,384   5.9   $ 761   6.8
   

Amortized cost of available-for-sale debt securities

  $ 5,805     $ 1,726     $ 1,856     $ 1,425     $ 798  
   

 

(a) Investments with no stated maturities are included as contractual maturities of greater than 10 years. Actual maturities may differ due to call or prepayment options.
(b) Yields on tax-exempt obligations have been computed on a tax-equivalent basis.

 

25


Notes to Consolidated Financial Statements

 

The following table presents gross gains and losses realized upon the sales of available-for-sale securities and other-than-temporary impairment.

 

Year ended December 31, ($ in millions)    2009     2008     2007  

Gross realized gains

   $ 349      $ 109      $ 253   

Gross realized losses

     (129     (238     (65

Other-than-temporary impairment

     (55     (223     (5
   

Net realized gains (losses)

   $ 165      $ (352   $ 183   
   

The following table presents interest and dividends on investments.

 

Year ended December 31, ($ in millions)    2009    2008    2007

Taxable interest

   $ 320    $ 442    $ 901

Taxable dividends

     9      26      37

Interest and dividends exempt from U.S. federal income tax

     37      43      30
 

Total interest and dividends

   $ 366    $ 511    $ 968
 

Certain available-for-sale securities were sold at a loss in 2009, 2008, and 2007 as a result of market conditions within these respective periods (e.g., a downgrade in the rating of a debt security). The table below summarizes available-for-sale securities in an unrealized loss position in accumulated other comprehensive income. Based on the methodology described below that has been applied to these securities, we believe that the unrealized losses relate to factors other than credit losses in the current market environment. As of December 31, 2009, we do not have the intent to sell the debt securities with an unrealized loss position in accumulated other comprehensive income, and it is not more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis. Also, as of December 31, 2009, we had the ability and intent to hold equity securities with an unrealized loss position in accumulated other comprehensive income. As a result, we believe that the securities with an unrealized loss position in accumulated other comprehensive income are not considered to be other-than-temporarily impaired as of December 31, 2009. Refer to Note 1 to the Consolidated Financial Statements for further information related to investment securities and our methodology for evaluating potential other-than-temporary impairment.

 

    2009     2008  
    Less than 12
months
    12 months or
longer
    Less than 12
months
    12 months or
longer
 
($ in millions)   Fair
value
  Unrealized
loss
    Fair
value
  Unrealized
loss
    Fair
value
  Unrealized
loss
    Fair
value
  Unrealized
loss
 

Available-for-sale securities

               

Debt securities

               

U.S. Treasury and federal agencies

  $ 1,430   $ (6   $   $      $ 7   $      $ 1   $   

States and political subdivisions

    82     (2     8     (2     251     (18     56     (8

Foreign government

    536     (8                36            19       

Mortgage-backed

    811     (14     6     (5     19     (2     23     (2

Asset-backed

    202     (1     22     (1     13     (2     18       

Corporate debt securities

    47     (1     120     (8     1,190     (144     235     (21

Other

    7                       1            4       
   

Total temporarily impaired debt securities

    3,115     (32     156     (16     1,517     (166     356     (31

Equity securities

    115     (5     52     (3     249     (98     4       
   

Total temporarily impaired available-for-sale securities

  $ 3,230   $ (37   $ 208   $ (19   $ 1,766   $ (264   $ 360   $ (31
   

We employ a systematic methodology that considers available evidence in evaluating other-than-temporary impairment of our investments classified as available-for-sale. If the cost of an investment exceeds its fair value, we evaluated, among other factors, the magnitude and duration of the decline in fair value, the financial health of and business outlook for the

 

26


Notes to Consolidated Financial Statements

 

issuer, changes to the rating of the security by a rating agency, the performance of the underlying assets for interests in securitized assets, whether we intend to sell the investment, and whether it is more likely than not we will be required to sell the debt security before recovery of its amortized cost basis. We had other-than-temporary impairment write-downs of $55 million, $223 million, and $5 million for the years ended December 31, 2009, 2008, and 2007, respectively. Gross unrealized gains and losses on investment securities available-for-sale totaled $278 million and $123 million, respectively as of December 31, 2007.

In April 2009, the FASB amended the other-than-temporary impairment model for debt securities. The impairment model for equity securities was not affected. Under the new guidance, other-than-temporary impairment losses for debt securities must be recognized in earnings if an entity has the intent to sell the security or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. However, even if an entity does not expect to sell a security, it must evaluate expected cash flows to be received and determine if a credit loss has occurred. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in earnings. Amounts relating to factors other than credit losses are recorded in other comprehensive income. The guidance also requires additional disclosures regarding the calculation of credit losses as well as factors considered in reaching a conclusion that an investment is not other-than-temporarily impaired. We adopted the new guidance effective for the period ended June 30, 2009. We did not record a transition adjustment for securities held at June 30, 2009, that were previously considered other-than-temporarily impaired as all previously impaired securities remaining in the portfolio were either equity securities or debt securities with impairments relating to credit losses.

8. Loans Held-for-sale

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

 

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

Foreign

  

Total

Consumer

                 

Automobile

   $ 9,417    $ 184    $ 9,601    $ 3,805    $    $ 3,805

1st Mortgage

     9,269      530     
9,799
    
1,576
    
1,052
     2,628

Home equity

     1,068     

     1,068           1      1
 

Total consumer

     19,754      714      20,468      5,381      1,053      6,434
 

Commercial

                 

Commercial and industrial

                 

Automobile

                    148      103      251

Resort finance (a)

                    1,223           1,223

Other

          157      157           9      9

Commercial real estate

                 

Mortgage

                    2           2
 

Total commercial

          157      157      1,373      112      1,485
 

Total loans held-for-sale

   $ 19,754      $871      $20,625      $6,754    $ 1,165    $ 7,919
 

 

(a) The resort finance business of our Commercial Finance Group provides 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 Consolidated Balance Sheet because it was unlikely a sale would occur within the foreseeable future.

 

27


Notes to Consolidated Financial Statements

 

During the year ended December 31, 2009, our Mortgage operations reclassified loans with an unpaid principal balance of $8.5 billion from finance receivables and loan, net of unearned income, to loans held-for-sale on our Consolidated Balance Sheet. Due to capital preservation strategies, business divestitures, and future liquidity considerations, we changed our intent to hold these mortgage loans for the foreseeable future. These loans were measured at fair value immediately prior to the transfer resulting in a valuation loss of approximately $3.4 billion during the year ended December 31, 2009. We recognized the credit and noncredit component of these losses in provision for loan losses and gain (loss) on mortgage loans, net, respectively, in our Consolidated Statement of Income.

9. Finance Receivables and Loans, Net of Unearned Income

The composition of finance receivables and loans, net of unearned income, before allowance for loan losses was as follows:

 

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

Consumer

                 

Automobile

   $ 12,514    $ 17,731    $ 30,245    $ 16,281    $ 21,705    $ 37,986

1st Mortgage (a)

     7,960      405      8,365      13,542      4,604      18,146

Home equity

     4,238      1      4,239      7,777      54      7,831
 

Total consumer

     24,712      18,137      42,849      37,600      26,363      63,963
 

Commercial

                 

Commercial and industrial

                 

Automobile

     19,601      7,035      26,636      16,913      9,094      26,007

Mortgage

     1,572      96      1,668      1,627      195      1,822

Resort finance

     843           843               

Other

     1,845      437      2,282      3,257      960      4,217

Commercial real estate

                 

Automobile

     2,008      221      2,229      1,941      167      2,108

Mortgage

     121      162      283      1,696      260      1,956
 

Total commercial

     25,990      7,951      33,941      25,434      10,676      36,110
 

Notes receivable from General Motors

     3      908      911           1,655      1,655
 

Total finance receivables and loans (b)

   $ 50,705    $ 26,996    $ 77,701    $ 63,034    $ 38,694    $ 101,728
 

 

(a) Domestic residential mortgages include $1.3 billion and $1.9 billion at fair value as a result of fair value option election as of December 31, 2009 and 2008, respectively. Refer to Note 27 for additional information.
(b) Totals are net of unearned income of $2.5 billion and $3.4 billion at December 31, 2009 and 2008, respectively.

 

28


Notes to Consolidated Financial Statements

 

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

 

     2009     2008  
Year ended December 31, ($ in millions)    Consumer     Commercial     Total     Consumer     Commercial     Total  

Allowance at beginning of year

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

Provision for loan losses

     4,713        898        5,611        2,360        742        3,102   

Charge-offs

            

Domestic

     (2,425     (955     (3,380     (1,714     (478     (2,192

Foreign

     (557     (76     (633     (326     (21     (347

Write downs related to transfers to held-for-sale

     (3,428     (10     (3,438                     
   

Total charge-offs

     (6,410     (1,041     (7,451     (2,040     (499     (2,539
   

Recoveries

            

Domestic

     257        19        276        197        22        219   

Foreign

     71        5        76        67        4        71   
   

Total recoveries

     328        24        352        264        26        290   
   

Net charge-offs

     (6,082     (1,017     (7,099     (1,776     (473     (2,249

Reduction of allowance due to fair value option election

                          (489            (489

Reduction of allowance due to deconsolidation (a)

                          (127            (127

Discontinued operations

     436        (4     432        301        7        308   

Other

     61        7        68        126        7        133   
   

Allowance at end of year

   $ 1,664      $ 781      $ 2,445      $ 2,536      $ 897      $ 3,433   
   

 

(a) During 2008, our Mortgage operations completed the sale of residual cash flows related to a number of on-balance sheet securitizations. Our Mortgage operations completed the actions necessary to cause the securitization trusts to satisfy the QSPE requirements. The actions resulted in the deconsolidation of various securitization trusts.

 

29


Notes to Consolidated Financial Statements

 

The following tables present information about our commercial impaired finance receivables and loans.

 

December 31, ($ in millions)    2009    2008

Impaired finance receivables and loans

     

With an allowance

   $ 1,760    $ 2,780

Without an allowance

     296      106
 

Total impaired loans

   $ 2,056    $ 2,886
 

Allowance for impaired loans

   $ 488    $ 703
 

 

Year ended December 31, ($ in millions)    2009    2008    2007

Average balance of impaired loans during the year

   $ 2,768    $ 1,600    $ 1,066
 

Interest income recognized on impaired loans during the year

   $ 16    $ 9    $ 6
 

We have loans that were acquired in a transfer, which at acquisition had evidence of deterioration of credit quality since origination and for which it was probable (at acquisition) that all contractually required payments would not be collected. The carrying amount of these loans included in the balance sheet amounts of finance receivables and loans, was as follows:

 

December 31, ($ in millions)    2009     2008     2007  

Consumer finance receivables

   $ 318      $ 965      $ 1,641   

Allowance for loan losses

     (37     (147     (121
   

Total carrying amount

   $ 281      $ 818      $ 1,520   
   

For loans acquired after December 31, 2005, we are required to record revenue using an accretable yield method. The following table represents accretable yield activity:

 

Year ended December 31, ($ in millions)    2009     2008  

Accretable yield at beginning of year

   $ 6      $ 98   

Additions

              

Accretions

     (5     (14

Reclassification from nonaccretable difference

     2        (71

Disposals

     (1     (7
   

Accretable yield at end of year

   $ 2      $ 6   
   

Loans acquired during each year for which it was probable at acquisition that all contractually required payments would not be collected are as follows:

 

Year ended December 31, ($ in millions)    2009    2008

Contractually required payments receivable at acquisition — consumer

   $    $ 157

Cash flows expected to be collected at acquisition

          154

Basis in acquired loans at acquisition

          91
 

10. 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 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, servicing rights, and in some transactions, retained interests. The securitization trust issues and sells interests to

 

30


Notes to Consolidated Financial Statements

 

investors that are collateralized by the secured loans and entitle the investors to specified cash flows generated from the securitized loans. The following discussion and related information is only applicable to the transfers of finance receivables and loans that qualify as off-balance sheet.

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 to 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. A servicer appointed within the underlying legal documents performs these functions. 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 sources 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 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 transaction. Principal collections on other loans and/or the issuance of new interests, such as variable funding notes, generally fund these loans; we are often contractually required to invest in these new interests. Additionally, we provide certain guarantees as discussed in Note 30.

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, we have concluded that the fee we are paid for servicing retail automotive finance receivables represents adequate compensation and consequently we do not recognize a servicing asset or liability. We do not recognize a servicing asset or liability for automotive wholesale loans because of their short-term revolving nature. As of December 31, 2009, the weighted average basic servicing fees for our primary servicing activities were 100 basis points and 27 basis points of the outstanding principal balance for sold retail automotive finance receivables and residential mortgage loans, respectively. Additionally, we retain the rights to cash flows remaining after the investors in most securitization trusts have received their contractual payments. Refer to Note 1 and Note 27 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 automotive finance receivables, automotive wholesale loans, and residential mortgage loans, totaled $119 million, $0 million, and $221 million as of December 31, 2009, respectively, and $136 million, $576 million, and $202 million as of December 31, 2008, respectively.

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 27 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.

 

31


Notes to Consolidated Financial Statements

 

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 clean-up call. As servicer, we are able 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 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 pre-specified 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. We purchased $1 million and $2 million of mortgage loans under delinquent loan repurchase options during the years ended December 31, 2009 and 2008, respectively.

As required under GAAP, the loans sold into off-balance sheet securitization transactions are removed from our balance sheet. 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. We classify our retained interest portfolio 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. We report the valuation adjustments related to trading securities as other income (loss) on investments, net, in our 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 on our Consolidated Balance Sheet. We report the realized gains and losses of our available-for-sale securities as other income (loss) on investments, net, in our Consolidated Statement of Income. The valuation adjustments and any gains and losses recognized by our retained interests classified as other assets are reported as other income, net of losses, in our Consolidated Statement of Income. Liabilities incurred as part of the transaction, such as representation and warranty provisions, are recorded at fair value at the time of sale and are reported as accrued expenses and other liabilities on our Consolidated Balance Sheet. Upon the sale of the loans, we recognize a gain or loss on sale for the difference between the assets recognized, the assets derecognized, and the liabilities recognized as part of the transaction.

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

 

December 31, ($ in billions)    2009    2008

Securitization

     

Retail finance receivables

   $ 7.5    $ 13.3

Wholesale loans

          12.5

Mortgage loans (a)

     99.6      126.2
 

Total off-balance sheet activities

   $ 107.1    $ 152.0
 

 

(a) Excludes $237 million and $1.6 billion at December 31, 2009 and 2008, respectively, of delinquent loans held by securitization trusts that we have the option to repurchase as they are included in consumer finance receivables and loans.

 

32


Notes to Consolidated Financial Statements

 

Key economic assumptions used in measuring the estimated fair value of retained interests of sales completed during 2009, 2008, and 2007, as of the dates of those sales, were as follows:

 

Year ended December 31,    Retail finance
receivables (a)
  Mortgage
operations (b)

2009

    

Key assumptions (c)

    

Prepayment speed (d)

   (e)   10.0–12.0%

Weighted average life (in years)

   (e)   4.6–6.3

Expected credit losses

   (e)   11.0%

Discount rate

   (e)   0.6–16.0%
 

2008

    

Key assumptions (c)

    

Prepayment speed (d)

   1.2–1.4%   1.9–30.0%

Weighted average life (in years)

   1.9–2.0   2.4–9.1

Expected credit losses

   1.6–2.5%   0.0–3.5%

Discount rate

   22.0–25.0%   2.8–25.0%
 

2007

    

Key assumptions (c)

    

Prepayment speed (d)

   1.2–1.4%   0.6–43.4%

Weighted average life (in years)

   1.8–1.9   1.1–14.0

Expected credit losses

   1.5–2.1%   0.0–14.5%

Discount rate

   16.0–20.0%   4.3–32.6%
 

 

(a) The fair value of retained interests in wholesale securitization approximates carrying value because of the short-term and floating-rate nature of wholesale loans.
(b) Included within residential mortgage loans are home equity loans and lines, high loan-to-value loans, and residential first and second mortgage loans.
(c) The assumptions used to measure the expected yield on variable-rate retained interests are based on a benchmark interest rate yield curve plus a contractual spread, as appropriate. The actual yield curve utilized varies depending on the specific retained interests.
(d) Based on monthly prepayment speeds for finance receivables and constant prepayment rate (CPR) for mortgage loans.
(e) During 2009, no new off-balance sheet retail finance receivables were sold.

The following table summarizes pretax gains on securitizations and certain cash flows received from and paid to securitization trusts for transfers of finance receivables and loans completed during 2009.

 

     2009  
Year ended December 31, ($ in millions)    Retail finance
receivables
    Wholesale
loans
   Mortgage
operations
 

Pretax gains on securitization

   $      $ 110    $ 21   

Cash inflows

       

Proceeds from new securitizations

                 1,258   

Servicing fees received

     111        39      272   

Other cash flows received on retained interests

     269        1,009      119   

Proceeds from collections reinvested in revolving securitizations

            5,998        

Repayments of servicing advances

     45             1,266   

Cash outflows

       

Servicing advances

     (27          (1,389

Purchase obligations and options

       

Representations and warranties obligations

                 (64

Administrator or servicer actions

     (58            

Asset performance conditional calls

                 (1

Cleanup calls

     (24            
   

 

33


Notes to Consolidated Financial Statements

 

The following table summarizes pretax gains on securitizations and certain cash flows received from and paid to securitization trusts for transfers of finance receivables and loans completed in 2008 and 2007.

 

     2008     2007  

Year ended December 31,

($ in millions)

   Retail finance
receivables
    Wholesale
loans
   Mortgage
operations
    Retail finance
receivables
    Wholesale
loans
   Mortgage
operations
 

Pretax (losses) gains on securitization

   $ (68   $ 269    $ (161   $ 141      $ 511    $ 45   

Cash inflows

              

Proceeds from new securitizations

     4,916             2,333        11,440        1,318      35,861   

Servicing fees received

     165        117      385        96        157      545   

Other cash flows received on retained interests

     301        505      193        284        522      401   

Proceeds from collections reinvested in revolving securitizations

            57,022                    87,985      122   

Repayments of servicing advances

     65             1,145        79             987   

Cash outflows

              

Servicing advances

     (72          (1,195     (90          (1,023

Purchase obligations and options

              

Mortgage loans under conditional call options

                                    (147

Representations and warranties obligations

                 (160                 (457

Administrator or servicer actions

     (62                 (39          (54

Asset performance conditional calls

                 (2                 (101

Cleanup calls

     (6                 (8          (254
   

The following table summarizes the key economic assumptions and the sensitivity of the fair value of retained interests at December 31, 2009 and 2008, to immediate 10% and 20% adverse changes in those assumptions.

 

     2009   2008
December 31, ($ in millions)    Retail finance
receivables (a)
  Mortgage
operations
  Retail finance
receivables (a)
  Mortgage
operations

Carrying value/fair value of retained interests

   $661   $268   $897   $369

Weighted average life (in years)

   0.0–0.9   0.0–4.6   0.0–1.5   0.9–10.4

Annual prepayment rate

   0.2–1.1%WAM   0.6–97.5%WAM   0.6–1.1%WAM   0.1–85.5%CPR

Impact of 10% adverse change

   $(1)   $(20)   $(5)   $(10)

Impact of 20% adverse change

   (2)   (36)   (9)   (21)

Loss assumption

   1.1–4.8% (b)   0.0–100.0%   0.2–3.4% (b)   0.0–59.0%

Impact of 10% adverse change

   $(13)   $(4)   $(23)   $(9)

Impact of 20% adverse change

   (26)   (8)   (46)   (16)

Discount rate

   40%   0.2–102.5%   9.5–33.0%   (1.3) –125.3%

Impact of 10% adverse change

   $(23)   $(10)   $(42)   $(16)

Impact of 20% adverse change

   (44)   (20)   (81)   (30)

Market rate

   (c)   (c)   (c)   (c)

Impact of 10% adverse change

   $—   $(3)   $—   $(2)

Impact of 20% adverse change

     (4)     (3)
 

 

(a) The fair value of retained interests in wholesale securitizations approximates the carrying value of zero and $710 million at December 31, 2009 and 2008, respectively, because of the short-term and floating-rate nature of wholesale receivables.
(b) Net of a reserve for expected credit losses totaling $0 million and $8 million at December 31, 2009 and 2008, respectively. These amounts are included in the fair value of the retained interests, which are classified as investment securities.
(c) Forward benchmark interest rate yield curve plus contractual spread.

 

34


Notes to Consolidated Financial Statements

 

These sensitivities are hypothetical and should be viewed with caution. Changes in fair value based on a 10% and 20% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which may magnify or counteract the sensitivities. Additionally, we utilize derivative instruments to mitigate interest rate and prepayment risks associated with certain of the retained interests; the effects of these hedge strategies have not been considered herein.

Expected static pool net credit losses include actual incurred losses plus projected net loan losses divided by the original balance of the outstandings comprising the securitization pool. The following table displays the expected static pool net credit losses on our securitization transactions.

 

December 31, (a)    2009     2008     2007  

Retail automotive

   2.9   1.9   1.1

Residential mortgage

   0.0–100.0   0.0–59.0   0.0–38.0
   

 

(a) Static pool losses not applicable to wholesale finance receivable securitizations because of their short-term nature.

The following table presents components of securitized financial assets and other assets managed along with quantitative information about delinquencies and net credit losses.

 

     Total finance
receivables and loans
    Amount 60 days
or more past due
   Net credit
losses
December 31, ($ in millions)    2009     2008     2009    2008    2009    2008

Retail automotive

   $ 47,187      $ 55,884      $ 1,224    $ 1,060    $ 1,411    $ 1,034

Residential mortgage

     126,853        154,841        19,135      13,266      7,478      5,247
 

Total consumer

     174,040        210,725        20,359      14,326      8,889      6,281
 

Wholesale

     25,566        35,205        89      157      21      10

Other automotive and commercial

     9,286        13,636        1,262      1,303      793      417
 

Total commercial

     34,852        48,841        1,351      1,460      814      427
 

Total managed portfolio (a)

     208,892        259,566      $ 21,710    $ 15,786    $ 9,703    $ 6,708
 

Securitized finance receivables and loans

     (110,566     (149,919           

Loans held-for-sale

     (20,625     (7,919           
              

Total finance receivables and loans

   $ 77,701      $ 101,728              
 

 

(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).

11. Investment in Operating Leases

Investments in operating leases were as follows:

 

December 31, ($ in millions)    2009     2008  

Vehicles and other equipment, after impairment

   $ 23,919      $ 35,625   

Accumulated depreciation

     (7,924     (9,235
   

Investment in operating leases, net

   $ 15,995      $ 26,390   
   

The future lease nonresidual rental payments due from customers for equipment on operating leases at December 31, 2009, totaled $5,466 million and are due as follows: $3,664 million in 2010, $1,475 million in 2011, $279 million in 2012, $46 million in 2013, and $2 million in 2014 and after.

 

35


Notes to Consolidated Financial Statements

 

Our investment in operating lease assets represents the net book value of our leased assets based on the expected residual value upon remarketing the vehicle at the end of the lease. As described in Note 25, GM may sponsor residual support programs that result in the contractual residual value being in excess of our standard residual value. GM reimburses us if remarketing sales proceeds are less than the customer’s contract residual value limited to our standard residual value. In addition to residual support programs, GM also participates in a risk-sharing arrangement whereby GM shares equally in residual losses to the extent that remarketing proceeds are below our standard residual rates (limited to a floor). In connection with the sale of 51% ownership interest in GMAC, GM settled its estimated liabilities with respect to residual support and risk sharing on a portion of our operating lease portfolio. Based on the December 31, 2009, outstanding U.S. operating lease portfolio, the maximum amount that could be paid by GM under the residual support programs and the risk-sharing arrangement is approximately $1.1 billion and $1.3 billion, respectively, as more fully discussed in Note 25.

In light of the significant declines in used vehicle prices during 2008 in the United States, Canada, and several international markets, we concluded certain triggering events occurred during the year ended December 31, 2008, requiring an evaluation of recoverability for certain operating lease assets within our Global Automotive Finance operations. 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 and 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 year ended December 31, 2008, we reduced our carrying values to equal the estimated fair values and realized impairment charges of $1,234 million. Impairments recognized by our North American Automotive Finance operations consisted of $808 million related to sport-utility vehicles and trucks in the United States and Canada and $384 million related to the car portfolio in the United States. The impairment recognized by our International Automotive Finance operations totaled $42 million for full-service leasing portfolio. During the year ended December 31, 2009, $16 million of the 2008 impairment charges related to the full-service leasing portfolio were reclassified to discontinued operations.

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

Imbedded in our residual value projections are estimates of projected recoveries from GM relative to residual support and risk-sharing agreements. No adjustment to these estimates has been made for the collectability of the projected recoveries from GM. As of December 31, 2009, expected residual values included estimates of payments from GM of approximately $1.0 billion related to residual support and risk-sharing agreements. To the extent GM is not able to fully honor its obligations relative to these agreements, our depreciation expense and remarketing performance would be negatively impacted.

 

36


Notes to Consolidated Financial Statements

 

12. 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 our 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 MSRs carried at fair value.

 

($ in millions)    2009     2008  

Estimated fair value at January 1,

   $ 2,848      $ 4,703   

Additions obtained from sales of financial assets

     807        1,182   

Additions from purchases of servicing rights

     19          

Subtractions from sales of servicing assets

     (19     (797

Changes in fair value:

    

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

     1,120        (1,401

Recognized day-one gains on previously purchased MSRs upon adoption of fair value measurement

            11   

Other changes in fair value (a)

     (1,261     (849

Other changes that affect the balance

     15        (1

Transfer to assets of operations held-for-sale

     25          
   

Estimated fair value at December 31,

   $ 3,554      $ 2,848   
   

 

(a) 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.

We pledged MSRs of $1.5 billion and $1.8 billion as collateral for borrowings at December 31, 2009 and 2008, respectively.

Changes in fair value due to changes in valuation inputs or assumptions used in the valuation models include all changes due to a revaluation by a model or by a benchmarking exercise. This line item also includes changes in fair value due to a change in valuation assumptions and/or model calculations. 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 adjustments, and the extinguishment of mortgage servicing rights related to clean-up calls of securitization transactions.

The key economic assumptions and sensitivity of the current fair value of MSRs to immediate 10% and 20% adverse changes in those assumptions are as follows:

 

December 31, ($ in millions)    2009   2008

Range of prepayment speeds (constant prepayment rate)

   2.4–47.1%   0.7–46.5%

Impact on fair value of 10% adverse change

   $(167)   $(239)

Impact on fair value of 20% adverse change

   (321)   (449)

Range of discount rates

   7.2–15.5%   2.7–130.3%

Impact on fair value of 10% adverse change

   $(82)   $(32)

Impact on fair value of 20% adverse change

   (160)   (62)
 

These sensitivities are hypothetical and should be considered with caution. Changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (e.g., increased market interest rates may result in lower prepayments and increased credit losses) that could magnify or counteract the sensitivities. Further, these sensitivities show only the change in the asset balances and do not show any expected change in the fair value of the instruments used to manage the interest rates and prepayment risks associated with these assets.

 

37


Notes to Consolidated Financial Statements

 

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 that 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 $198 million and $977 million at December 31, 2009 and 2008, respectively. The change in fair value of the derivative financial instruments amounted to a loss of $1 billion and a gain of $2 billion for the years ended December 31, 2009 and 2008, respectively, and is included in servicing asset valuation and hedge activities, net, in the Consolidated Statement of Income. Refer to Note 21 for a discussion of the derivative financial instruments used to hedge mortgage servicing rights.

The components of mortgage servicing fees were as follows:

 

Year ended December 31, ($ in millions)    2009    2008

Contractual servicing fees, net of guarantee fees and including subservicing

   $ 1,071    $ 1,196

Late fees

     77      112

Ancillary fees

     164      144
 

Total

   $ 1,312    $ 1,452
 

Our Mortgage operations that conduct primary and master servicing activities are required to maintain certain servicer ratings in accordance with master agreements entered into with a government-sponsored entity. The servicer ratings provided by certain rating agencies are highly correlated with our Mortgage operations’ consolidated tangible net worth and overall financial strength. At December 31, 2009, our Mortgage operations were in compliance with the servicer-rating requirements of the master agreements.

In certain of our Mortgage operation’s domestic securitizations, the surety or other provider of contractual credit support is entitled to declare a servicer default and terminate the servicer upon the failure of the loans to meet certain portfolio delinquency and/or cumulative loss thresholds. In 2009, our Mortgage operations received notice of termination from surety providers with respect to securitizations having an unpaid principal balance of $4.8 billion. Our Mortgage operations also recorded a loss on its MSRs of $78 million due to existing or anticipated delinquency and/or cumulative loss threshold breaches.

13. Premiums Receivable and Other Insurance Assets

Premiums receivable and other insurance assets consisted of the following:

 

December 31, ($ in millions)    2009    2008

Prepaid reinsurance premiums

   $ 346    $ 511

Reinsurance recoverable on unpaid losses

     670      1,660

Reinsurance recoverable on paid losses

     114      126

Premiums receivable (a)

     388      698

Deferred policy acquisition costs

     1,202      1,512
 

Total premiums receivable and other insurance assets

   $ 2,720    $ 4,507
 

 

(a) Net of a $7 million and $18 million allowance for uncollectible premiums receivables at December 31, 2009 and 2008, respectively.

 

38


Notes to Consolidated Financial Statements

 

14. Other Assets

Other assets consisted of:

 

December 31, ($ in millions)    2009     2008  

Property and equipment at cost

   $ 1,416      $ 1,535   

Accumulated depreciation

     (1,080     (1,104
   

Net property and equipment

     336        431   

Restricted cash collections for securitization trusts (a)

     3,654        3,143   

Fair value of derivative contracts in receivable position

     2,654        5,014   

Servicer advances

     2,180        2,126   

Derivative collateral placed with counterparties

     1,760        826   

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

     1,594        3,160   

Restricted cash and cash equivalents

     1,590        2,014   

Debt issuance costs

     829        788   

Prepaid expenses and deposits

     749        428   

Other accounts receivable

     573        2,300   

Goodwill

     526        1,357   

Investment in used vehicles held-for-sale

     522        574   

Interests retained in securitization trusts

     471        1,001   

Real estate and other investments (c)

     340        642   

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

     336        916   

Accrued interest and rent receivable

     326        591   

Other assets

     1,447        1,611   
   

Total other assets

   $ 19,887      $ 26,922   
   

 

(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 $50 million and $189 million and related accumulated depreciation of $1 million and $2 million for the years ended December 31, 2009 and 2008, respectively.

The changes in the carrying amounts of goodwill for the periods shown were as follows:

 

($ in millions)    North American
Automotive Finance
operations
    International
Automotive Finance
operations
    Insurance     Other     Total  

Goodwill acquired prior to December 31, 2007

   $ 14      $ 527      $ 953      $ 1,541      $ 3,035   

Accumulated impairment losses

                          (1,539     (1,539
   

Goodwill at December 31, 2007

   $ 14      $ 527      $ 953      $ 2      $ 1,496   

Impairment losses (a)

     (14            (42     (2     (58

Foreign currency translation effect

            (37     (44            (81
   

Goodwill at December 31, 2008 (b)

   $      $ 490      $ 867      $      $ 1,357   

Sale of reporting unit

                   (107            (107

Impairment losses (a)

                   (607            (607

Transfer of assets of discontinued operations held-for-sale

            (22     (108            (130

Foreign currency translation

            1        12               13   
   

Goodwill at December 31, 2009 (c)

   $      $ 469      $ 57      $      $ 526   
   

 

(a) During the three months ended December 31, 2008, and the three months ended June 30, 2009, our Insurance operations initiated an evaluation of goodwill for potential impairment, which was in addition to our annual impairment evaluation. These tests were initiated in light of a more-than-likely expectation that a reporting unit or a significant portion of a reporting unit will be sold. The fair value was determined using offers provided by willing purchasers. Based on the preliminary results of the assessments, our Insurance operations concluded that the carrying value of these reporting units exceeded the fair value resulting in an impairment loss during both 2008 and 2009.
(b) Net of accumulated impairment losses of $14 million for North American Automotive Finance operations and $42 million for Insurance operations.
(c) Net of accumulated impairment losses of $649 million for Insurance operations.

 

39


Notes to Consolidated Financial Statements

 

15. Deposit Liabilities

Deposit liabilities consisted of the following:

 

December 31, ($ in millions)    2009    2008

Domestic deposits

     

Noninterest-bearing deposits

   $ 1,755    $ 1,496

NOW and money market checking accounts

     7,213      3,578

Certificates of deposit

     19,861      13,705

Dealer wholesale deposits

     1,041      342
 

Total domestic deposits

     29,870      19,121
 

Foreign deposits

     

NOW and money market checking accounts

     165      9

Certificates of deposit

     1,555      638

Dealer deposits

     166      39
 

Total foreign deposits

     1,886      686
 

Total deposit liabilities

   $ 31,756    $ 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. At December 31, 2009 and 2008, certificates of deposit included $4.8 billion and $1.9 billion, respectively, of domestic certificates of deposit in denominations of $100 thousand or more.

The following table presents the scheduled maturity of total certificates of deposit at December 31, 2009.

 

Year ended December 31, ($ in millions)      

2010

   $ 18,017

2011

     2,148

2012

     611

2013

     307

2014

     333
 

Total certificates of deposit

   $ 21,416
 

 

40


Notes to Consolidated Financial Statements

 

16. Debt

The following table presents the composition of our debt portfolio at December 31, 2009 and 2008.

 

    Weighted average
interest rates (a)
    2009   2008
December 31, ($ in millions)   2009     2008     Unsecured   Secured   Total   Unsecured   Secured   Total

Short-term debt

               

Commercial paper

      $ 8   $   $ 8   $ 146   $   $ 146

Demand notes

        1,311         1,311     1,342         1,342

Bank loans and overdrafts

        1,598         1,598     2,963         2,963

Repurchase agreements and other (b)

        348     7,027     7,375     657     5,278     5,935
 

Total short-term debt

  4.6   6.5     3,265     7,027     10,292     5,108     5,278     10,386

Long-term debt

               

Due within one year

  4.0   4.8     7,429     18,898     26,327     10,279     18,858     29,137

Due after one year (c)

  5.6   5.8     38,331     22,834     61,165     37,101     48,972     86,073
 

Total long-term debt (d)

  5.1   5.6     45,760     41,732