Government giving GMAC $7.5B in new aid

May 21, 2009 8:41:18 PM PDT
The government deepened its support of the battered domestic auto industry on Thursday, providing auto lender GMAC Financial Services with $7.5 billion in additional aid to keep loans flowing to would-be buyers of GM and Chrysler vehicles. "This new arrangement with GMAC will help provide a reliable source of financing to both auto dealers and customers seeking to buy cars," said Treasury Secretary Timothy Geithner. Strengthening GMAC will help stabilize the country's auto financing market, which should help the economy, he said.

It marked the second time the government has stepped in to shore up the mammoth Detroit-based lender, which received $5 billion in December from the Treasury's $700 billion financial bailout program. GMAC, which reported a first-quarter loss of $675 million, has seen rising defaults in its auto finance division. That, combined with soured assets in its Residential Capital LLC mortgage unit, made it more difficult for the company to raise capital from private investors.

GMAC Chief Executive Alvaro G. de Molina said the government's latest action marked "another major step in stabilizing and strengthening" the company.

The Treasury Department said Thursday it won't immediately hold an equity stake in GMAC but will soon exercise its right, under an earlier agreement, to exchange an $884 million loan it made to General Motors Corp. for an equity share in GMAC. Treasury said it expects to exercise that right "in the very near future," giving it a 35.4 percent stake in the company.

In return for giving GMAC aid in December, the government got 5 million shares and told the company it must extend financing services to bailed-out Chrysler LLC - which filed for bankruptcy protection on April 30.

Of the new $7.5 billion injection, $4 billion will go to support GMAC's new loans to Chrysler dealers and customers. The remaining $3.5 billlion will go toward boosting GMAC's capital base - still short of the $11.5 billion the government's "stress test" showed the company needs to stay afloat in the event of further economic decline.

GMAC is expected to detail its plans to bolster its capital position by the government's June 8 deadline. As mandated by the Treasury Department, new capital must represent $9.1 billion of GMAC's total effort.

To help GMAC raise the remaining capital, the Federal Deposit Insurance Corp. on Thursday took the rare step of allowing the junk-rated company to gain access to its debt guarantee program. GMAC will be allowed to issue as much as $7.4 billion in FDIC-backed debt. The FDIC guarantees the debt that GMAC would issue in case the company defaulted on payment.

In addition, the Federal Reserve waived rules to give GMAC's new bank, called Ally Bank, more leeway to make loans to GM customers. The government also has mandated that GMAC assemble a new, smaller board of directors, which the company has been putting together. It eventually will include the chief executive, two trustees appointed by the Treasury Department to represent the government's interest, and three independent directors to be elected by the rest of the board.

Analysts suggest that the new government support, along with the merger with Chrysler's financial arm, will make GMAC a lending powerhouse that will give GM and Chrysler a huge advantage over their competitors - including U.S. rival Ford Motor Co., which hasn't taken any government aid. It would have the power to offer better loan terms to buyers of GM and Chrysler cars and trucks as a way of steering business those automakers.

The government has a critical vested interest in seeing GMAC, GM and Chrysler succeed, in order to recoup the billions in aid it has doled out to the companies. General Motors has received $15.4 billion in federal loans and Chrysler has received $5.8 billion. GM is currently negotiating to give the government a 50 percent equity stake in exchange for wiping out a portion of its debt as the company faces a June 1 deadline to restructure or head into Chapter 11 bankruptcy reorganization.

Chrysler said last week it intends to close about a quarter of its 3,200 U.S. dealerships by June 9. GM has told some 1,100 of its dealers - about 20 percent - that they would be dropped by late next year. Auto dealers say the swift closing of dealerships could lead to significant job losses and leave many dealers with large inventories of unsold vehicles.

Sen. Kay Bailey Hutchison, R-Texas, said the new $7.5 billion injection for GMAC would help remaining Chrysler dealerships buy vehicle inventories from dealerships scheduled to close. ----

AP Auto Writer Kimberly S. Johnson in New York contributed to this report.

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