GMAC gives up some GM car financing in bailout

The auto financing giant GMAC relinquished its exclusive right to provide financing to people buying General Motors Corp. vehicles in exchange for as much as $6 billion in federal aid.

The deal abruptly ends a 10-year contract between GM and GMAC, according to the lender’s filing with the Securities and Exchange Commission on Friday. In the past, whenever GM offered vehicle financing and leasing specials, such as below-market interest rates, it did so through GMAC. The lender paid an annual fee to GM for the exclusivity and was required to meet sales targets.

Now, over the next two years, the automaker can offer incentive programs through other lenders under certain requirements, the filing said. After that period, the terms will gradually loosen until 2013, when GM will have the right to offer programs through any lender -- including GMAC -- without any restrictions or limitations.

The agreement also releases GMAC from meeting specific sales targets and the obligation to provide leases.

“I don’t see anything negative in this new arrangement, as long as GMAC is still supportive of GM’s effort to sell cars,” said Jack Fitzgerald, owner of Fitzgerald Auto Malls in Bethesda, Md.

The changes, effective Monday, follow the Federal Reserve’s approval of GMAC to become a bank holding company, making the lender eligible for a slice of the Treasury Department’s $700-billion financial rescue package.

The government received 5 million preferred shares in GMAC that pay an 8% dividend -- a larger payout to taxpayers than the 5% dividend on its investments in banks -- in return for a $5-billion capital injection in the company. The Treasury said it would also lend as much as $1 billion to GM so that the automaker would invest in the firm and support its reorganization.

The global credit crunch has battered GMAC. The lender, which is 49% owned by GM and 51% owned by the private equity firm Cerberus Capital Management, posted losses totaling $5.59 billion for the last three quarters. Running low on cash, it announced that it would lend only to customers with credit scores above 700.

But this week, the company showed signs of healing. On Tuesday, GMAC said it would make car purchases easier by offering financing to customers with credit scores above 620.

On Wednesday, the company completed a complicated debt deal to raise cash needed to help it survive this historic auto sales slump. But it fell short of its goal.

The same day, GM received an initial $4 billion of its $13.4-billion bailout from the government.

Despite this recovery, Fitzgerald said he was worried that, as a bank holding company, GMAC might stray too far from its roots. Captive financing companies like GMAC are crucial to marketing vehicles in large volumes, he said.

“GM has had all the benefits that Ford Motor Credit provides to the Ford Motor Co.,” Fitzgerald said. “If GMAC does all that, fine. If it doesn’t, GM will have to create another GMAC of its own. It’s just the way it is.”

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Marr writes for the Washington Post.