For Bailout Money, GMAC Agrees to End Deal With GM
Saturday, January 3, 2009
The auto financing giant GMAC relinquished its exclusive right to provide financing to people buying General Motors vehicles in exchange for up to $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 yesterday. 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 Bethesda-based Fitzgerald Auto Malls.
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.
Chrysler Financial, that automaker's credit arm, also has applied for aid under the Troubled Asset Relief Program. Yesterday, Chrysler said it received a $4 billion loan from the Treasury through the auto rescue package signed into law by President Bush two weeks ago.
Under the GMAC deal, the government received 5 million preferred shares in GMAC that pay an 8 percent dividend -- a larger payout to taxpayers than the 5 percent dividend on its investments in banks -- in return for a $5 billion capital injection in the company. Treasury said it would also lend up to $1 billion to GM so that the automaker would invest in the firm and support its reorganization.
The financial crisis has hit GMAC hard, and losses have mounted in both its mortgage and auto loan businesses. Overall, GMAC lost $5.59 billion in the past three quarters. Unable to find other funding sources and running low on cash, the finance arm shrunk its ability to make loans. GM's auto sales have suffered as a result.
Bank holding status gives GMAC a chance at survival by providing it with access to new sources of funding. But, as a bank holding company, this wholly owned division will also need to change. The Fed has required GM and Cerberus Capital Management, which own the lender, to divest a significant chunk of their ownership because commercial companies are not allowed to own banks.
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, it 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 worried that, as a bank holding company, GMAC might stray too far from its roots. Captive financing companies like GMAC are critical to marketing vehicles in large volumes, he said.
"GM has had all the benefits that Ford Motor Credit provides to the Ford Motor Company," he 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."