U.S. to give GMAC a $5-billion bailout
In a move that could free up badly needed financing for car buyers, the federal government said Monday that it would provide $5 billion in assistance to automotive lender GMAC as part of the ongoing effort to prop up the nation’s faltering auto industry.
The Treasury Department said it also agreed to lend as much as $1 billion to General Motors Corp., which owns 49% of GMAC, so the automaker could participate in a rights offering at GMAC as part of the lender’s reorganization as a bank holding company.
“The pieces of our strategy are starting to fall into place,” GMAC spokeswoman Toni Simonetti said, noting that the lender was also receiving capital infusions from GM and an affiliate of Cerberus Capital Management, which owns 51% of GMAC. “We still have some work to do, but these are significant developments for GMAC.”
In particular, the company said it “intends to act quickly to resume automotive lending to a broader spectrum of customers to support the availability of credit to consumers and businesses for the purchase of automobiles.”
The Federal Reserve last week approved GMAC’s application to become a bank holding company, making it eligible for funds from the government’s $700-billion Troubled Asset Relief Program, or TARP.
GMAC, weighed down by bad loans, has been struggling for its financial life. The company provides credit to about 5,000 auto dealers to finance showroom inventory and has about 15 million auto and residential loan customers.
The prospect of a GMAC failure was seen as potentially disastrous to the struggling auto industry, especially to GM, which relies on the lender to finance most of its customers. Tight credit conditions have been blamed for much of the recent plunge in auto sales in the U.S. In addition, dealers have estimated that 2,000 to 2,500 dealerships might fail if GMAC filed for bankruptcy.
The Treasury Department, in announcing the financial assistance to GMAC, said the moves were “part of a broader program to assist the domestic automotive industry in becoming financially viable.” The government agreed this month to provide $17.4 billion in financial assistance to keep GM and Chrysler afloat.
In return for its $5-billion investment, the government will get preferred shares in GMAC that pay an 8% dividend and warrants to buy more shares.
GMAC said Monday that it had accepted all bonds tendered in an exchange aimed at reducing its debt burden. Completing the debt-for-equity swap is considered crucial to meeting the government requirement that GMAC have at least $30 billion in assets to maintain its status as a bank holding company.
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