By Neil Irwin and Binyamin Appelbaum
Washington Post Staff Writers
Tuesday, December 30, 2008
The government will invest $6 billion to prop up GMAC, the auto financing giant, the Treasury Department said last night, expanding its bailout of the troubled U.S. auto industry.
The Treasury said it would use $5 billion from the $700 billion financial rescue fund it oversees to buy preferred stock from the company. It said it would also lend $1 billion to General Motors, which owns 49 percent of GMAC, to allow it to invest further in the firm.
GMAC provides financing for most GM dealers and many customers, making its continued operations critical for the automaker. But the financing company has struggled in recent months to borrow the money it needs to keep making loans.
Last week, the Federal Reserve approved the firm's application to become a bank holding company, giving it access to new sources of funding, including a direct investment by the Treasury.
In return, GMAC will be subject to additional regulation, and it must cut some of its extensive ties to GM.
At a time when the government has allowed major financial firms to fail, and pushed others to sell themselves -- in each case denying the companies financial assistance -- the rescue of GMAC highlights how far it is willing to go to support the auto industry. Earlier this month, the government announced $17 billion in loans to GM and Chrysler.
The new loans push the government's planned investments under the financial rescue beyond the $350 billion that Congress has authorized; in order to make all the investments that Treasury Secretary Henry M. Paulson Jr. has agreed to, Congress would need to approve a second $350 billion infusion into the so-called Troubled Asset Relief Program.
A Treasury official said last night that the government has not committed all of the money in the $250 billion pot set aside to make investments in financial institutions, so the Treasury has leeway to direct some of that cash to GMAC.
"It's not fair to say we've overcommitted," said the official, adding that many of the expected bank investments are still being reviewed by bank regulators.
GMAC spokeswoman Toni Simonetti said the investment was "very significant" for the company, but added that much work remains to turn the auto financier into a full-fledged bank.
"We're not resting on our laurels here," she said.
Simonetti said that the company would pursue additional funding from private investors through a Federal Deposit Insurance Corp. program that guarantees short-term bank debt and that GMAC would start pursuing consumer deposits more aggressively.
The company will also add to its capital through the completion of a program to restructure its existing debt. GMAC initially said it needed 75 percent of its bondholders to participate in the program simply to become a bank, but after bondholders balked, the company convinced the Fed to accept its application without securing their support.
Simonetti said that the company had now completed negotiations with bondholders and that a final announcement on how many had agreed to participate would come soon.
In exchange for the $5 billion investment, the government is to receive preferred shares that pay an 8 percent dividend, a more generous payout to taxpayers than the 5 percent dividend on the government's investments in banks. GMAC will be required to meet executive compensation restrictions that include cutting its bonus pool for senior executives by 40 percent from 2007 levels.
GMAC also will get an investment of $1.25 billion from General Motors and Cerberus, the private equity firm. Cerberus, which owns 51 percent of the company, will invest $250 million. General Motors will invest $1 billion that it is borrowing from Treasury.
The deal is lopsided -- such investments are generally proportional to existing ownership stakes -- and it could have the effect of restoring GM to majority ownership of GMAC.
The distinction would be short-lived, however, because the Federal Reserve has required both companies to divest most of their ownership stakes as a condition of allowing GMAC to become a bank holding company.