U.S. Orders GMAC to Raise $9.1 Billion in Capital
Friday, May 8, 2009
The federal government reported yesterday that the financing arm of General Motors will need to raise $9.1 billion in new capital to ensure the firm's stability in the face of heavy losses in mortgage and auto lending and, sources said, possibly as much as $4 billion more to cover costs related to loans for Chrysler.
The sum is among the biggest required for any U.S. financial institution subjected to the government stress test, and could prove difficult for GMAC Financial Services to raise because of the limited nature of its business and the poor quality of its loans. The firm has struggled to raise money from private investors in the past and has already received $5 billion in federal assistance.
The government could end up providing much, if not all, of the needed capital, but it remained unclear where that money would come from. Analysts said that if GMAC relies on federal funds to meet new capital requirements, the government could end up owning a majority stake in the firm.
GMAC, which is a separate company from the Detroit automaker, is critical to the success of GM and Chrysler because it provides money to dealers buying cars for showrooms and to consumers purchasing vehicles. Part of the Obama administration's restructuring plan for Chrysler was that GMAC would also begin providing new financing to Chrysler dealers and customers. But a senior financial industry executive said that federal regulators have also calculated that it would cost GMAC $4 billion if it were to ultimately assume Chrysler Financial's existing dealer and consumer business.
The $9.1 billion of new capital would be designed to bolster the existing GMAC against the adverse scenario included in the federal government's recent "stress test" of major financial institutions. Regulators said that GMAC faced substantial risks of new defaults, particularly in mortgage and consumer automobile lending. GMAC's focus on those areas has made the firm more vulnerable to losses during the economic downturn than more diversified banks, said the executive.
GM's restructuring would cause substantial losses as a result of both the closing of hundreds of dealerships and of lower values for repossessed, leased or trade-in vehicles, said sources familiar with the government's stress-test results.
GMAC must give the Federal Reserve Bank of Chicago a financing plan by June 9 and raise the new capital by Nov. 9. The lender said it was considering the sale of shares of common stock or of preferred shares that would later be converted into common shares. "We support the government's efforts to shore-up the banking system and expect that the additional capital raised will further strengthen GMAC and aid in achieving our strategic objectives," GMAC chief executive Alvaro G. de Molina said in a statement.
In addition to raising $9.1 billion in new capital, GMAC is expected to convert the Treasury Department's $5 billion of preferred shares into $2.4 billion of common shares.