By Binyamin Appelbaum
Washington Post Staff Writer
Thursday, December 25, 2008
The Federal Reserve gave General Motors a crucial boost yesterday by approving a request from GMAC, which provides funding for most of the automaker's dealers and many of its customers, to become a bank holding company.
The move gives GMAC access to new sources of funding, including a potential infusion of taxpayer dollars from the Treasury Department and loans from the Fed itself.
The financial crisis has limited the company's access to other funding sources even as it struggles with mounting losses in its portfolio of auto and home mortgage loans. That has limited its ability to make loans, constricting GM's ability to sell cars.
In return, the company is subjecting itself to regulations that could force changes in some business practices and limit its future profitability. For example, GMAC will need to hold more money in reserve against its portfolio of outstanding loans. The Fed also required GM, which owns 49 percent of the company, and Cerberus Capital Management, the private-equity firm that bought 51 percent of the company from GM in 2006, to divest much of their ownership stakes, because commercial companies are not allowed to own banks.
"Today's announcement marks a key turning point in GMAC's history," chief executive Alvaro G. de Molina said in a statement. "It is critically important to our company and to the broader economy to resume responsible lending to consumers and businesses."
The Fed's approval ends weeks of uncertainty for GMAC. The company said that it needed 75 percent of its bondholders to agree to change the terms of their investments, but many had balked at the proposed concessions. The company also said that it needed additional investments from other sources to meet the Fed's requirements for the amount of money a bank must have on hand.
A company spokeswoman declined to comment yesterday on how the company had met those capital requirements.
The Federal Reserve Board granted GMAC's application on an emergency basis, shortening its normal review process. Emergency approval has become the Fed's routine practice this fall as it offers shelter to companies including investment banks Goldman Sachs and Morgan Stanley and credit card lenders American Express and Discover Financial Services.
In this case, as in the others, the Fed said the reason was the economic crisis.
"The proposal would benefit the public by strengthening GMAC's ability to fund the purchase of vehicles manufactured by GM and other companies and by helping to normalize the credit markets for such purchases," the board wrote in granting the application.
The Bush administration last week extended $13.4 billion in emergency loans to GM and Chrysler, plus another $4 billion in February if they meet certain conditions, to keep the companies out of bankruptcy long enough to begin carrying out restructuring plans.
GM must now reduce its stake in the auto lender below 10 percent, from 49 percent. GM has three years to sell the rest of its shares, which in the interim will be placed in a trust that the company does not control. The automaker and GMAC also agreed to unwind a number of exclusive agreements, freeing GMAC to offer financing on equal terms to customers of other car companies.
Cerberus and its chief, Steve Feinberg, must reduce their stake below 15 percent, from 51 percent. The private-equity fund plans to distribute its GMAC shares proportionally among its investors.
Opponents of the Fed's action had complained that GMAC's ownership structure violates the traditional separation of commercial and banking companies. GM and Cerberus are likely to remain the largest shareholders in GMAC and could continue to exert significant influence.
As a result, the Fed's decision was not unanimous. The newest member of the Federal Reserve Board of Governors, Elizabeth A. Duke, voted against the application, while four governors voted in favor. Duke is the only member of the board who has worked in the banking industry.