GMAC will go bankrupt. The U.S lending giant is cut off from all lending sources. Smart depositors will flee its small bank (relative to GMAC itself). And its majority owner, Cerberus, won’t save it. It’s a pure liquidation play now– with the bank going into FDIC receivership, maybe as soon as this Friday. Whether or not all Hell will break loose is an open question, with many answers…

Let’s start with this: GM’s dealers have been hoodwinked by GM execs. The corporate mothership failed to provide their franchisees with fair warning that GMAC was going to pull the plug on all retail lending– never mind removing itself from the leasing business. Yes, GMAC says it will fund prime customers– with a 700+ FICO. And rates now 75 basis points higher (unless subsidized by GM).

Uh, wait a second – GMAC’s regular lending rates were already non-competitive. Now they’re just stratospheric. And again. that’s for good customers. Non-prime customers– those who buy Aveos, Cobalts, HHRs, G5, G6, entry-level Malibus, Saturns and, well ,mostly everything else GM offers other than Cadillacs, Saabs, and high end big SUVs and Hummers– are now mostly shut out of financing altogether, from any source. If you wonder why car sales are tanking, look no further than the lack of credit availability for this group of buyers.

So GMAC’s out of the market. We know that. GM has even announced an incentive program to spiff dealers who get customers financed with anyone else besides GMAC. Meanwhile, GM still owns 49 percent of a soon-to-be bankrupt GMAC. The only saving grace here: GM’s managers won’t have to blame themselves. If you didn’t know that unloading GMAC was a desperate play for cash/time, and most people don’t, they look smart for unloading half of GMAC to the wizards of Wall Street.

Here’s the crux of the matter. GMAC– formerly known as GM’s captive finance arm– used to gush cash. GM founded the subsidiary in 1919 as a means to finance both dealers and customers, so GM wouldn’t have to rely on finicky banks at the time. GMAC became a model copied by every other automaker of size. The early business model was simple: aggregation of loans written at rates higher than the cost of funding. A basic interest rate spread business. When you start writing billions of dollars of loans, the interest rate spread produces big dollars.

Later, captives found an even cheaper source of funds through securitization of receivables (i.e. bypass the banks and go direct to institutional securities buyers). And if that works for auto loans, it also works for mortgages. Soon enough, GMAC became a huge entity that provided a steady stream of profits and dividends for its owner.

There’s one problem with the model. When the music stops, the gig is over. If GMAC can’t borrow from lenders or sell its securities, it can’t make new loans. In a nutshell, that’s where it’s at today. No one in a sane mindset– given the current credit crisis-– would loan money to this finance company.

Bottom line: GMAC now has $173b of debt against $140b of income producing assets (loans and leases), and some of those assets aren’t worth the paper they’re written on. If GMAC liquidated the loans and leases, it couldn’t pay back all of its debt. If you add GMAC Bank’s $17b in deposits (a liability), the situation only gets worse. No point looking at the rating agencies to tell you there’s a problem here. Good thing the FDIC required higher capital ratios for GMAC Bank; it might survive on its own with its higher quality assets. But everyone else is on their own.

By its own admission in an internal memo to employees this week, GMAC says that it has no access to funding. That means more layoffs. No Christmas bonuses. And probably telegraphing the message that the company could go under. Only the government can rescue GMAC now, adding to that to the pile of bigger rescues going on elsewhere. And any rescue can’t be seen benefiting private equity. So Cerberus will get wiped out. GM will have to write down its investment in GMAC, thus taking another enormous hit to its shaky balance sheet. And there will be further downgrades to its credit rating.

GMAC’s collapse may not be the final death blow for GM, but it’s sure gonna leave a mark. GMAC says they’ll still support wholesale floorplan. But one has to wonder for how long that will last? Given that 80 percent of GM’s dealers use GMAC for floorplan, what happens when that song stops playing? How many dealers will go under? Worse, what will happen to GM itself if even a fraction of its dealers cannot replace GMAC with suitable alternatives? To be continued…