GMAC Gets Fed Approval To Tap Bailout Funds
GMAC LLC, the financing lender of General Motors Corporation, got a welcome shot in the arm recently when the Federal Reserve gave approval for its conversion to a bank holding company, thereby providing access to much-needed sources of new funding, including the government’s $700 billion bailout fund.
Detroit-based GMAC, which provides financing for GM dealers and customers, as well as home mortgage loans via its Residential Capital LLC unit, has been plagued by money problems lately. In the past year, GMAC has racked up nearly $8 billion in losses. Without the Fed’s financial lifeline, it’s likely the auto financing company would have filed for bankruptcy.
As part of GMAC’s deal with the Fed, both GM, which owns 49% of GMAC, and Cerberus Capital Management LP, which owns the remaining 51%, will significantly reduce their ownership stakes in the company. GM will reduce its equity share to less than 10%, Cerberus to 33%.
GMAC’s access to the government’s $700 billion bailout fund also bodes well for GM. In the past year, the automaker has been forced to absorb about $1.2 billion in losses from its stake in GMAC.
In becoming a bank, GMAC could receive up to $6.3 billion in capital through the Fed’s Troubled Asset Relief Program (TARP). The lender also may issue as much as $17.5 billion of guaranteed debt under the government-backed Temporary Liquidity Guarantee Program.
Meanwhile, GMAC still faces a midnight deadline to swap $38 billion of debt to satisfy capital requirements to become a bank. However, given that the Fed has pre-approved GMAC’s conversion via the use of its emergency powers, it’s unlikely such details will hold up the process.
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