By Neil Irwin and David Cho
Washington Post Staff Writers
Friday, May 22, 2009
The government expanded its rescue of GMAC yesterday, pouring in another $7.5 billion investment, offering the auto finance firm government guarantees on its debt and granting it exemptions from longstanding restrictions on the activities of banks.
The actions make the firm a key part of the government rescue of the auto industry and one of the biggest recipients of federal aid over the past nine months of bailouts.
Government officials envision GMAC, historically tied to General Motors, taking over much of the lending to auto buyers and dealers once provided by Chrysler Financial, which could be wound down over time.
The new investment comes on top of $5 billion in previous government investments and is intended in part to give GMAC the financial flexibility to make loans to consumers buying Chrysler vehicles and to Chrysler dealers who rely on loans to fund their inventories.
The government intends to own 36 percent of GMAC. The new investments do not increase that stake because they are in the form of preferred stock rather than common stock. However, the new investments can be converted into common stock, so if the company's losses continue to mount and it converts the preferred stock, the U.S. government could end up with a majority stake in the bank.
Meanwhile, the Federal Deposit Insurance Corp. said it would guarantee up to $7.4 billion in GMAC debt in a program to back bank debt, called the Temporary Liquidity Guarantee Program. The FDIC had previously resisted allowing GMAC to have debt guarantees, considering it to be too great a financial risk.
Investors have been reluctant to buy GMAC debt without a government guarantee, and the backing should enable the firm to borrow money on much more favorable terms. GMAC will have to pay a fee for the protection, and the FDIC insisted on a longer-term funding plan in exchange for the assistance, which is scheduled to expire in October.
Also last night, sources familiar with the matter said, the Federal Reserve acted to give GMAC greater leeway to provide financing, further blurring a longstanding divide between banking and commercial activity.
The Fed agreed to make the company a bank holding company in December on the condition that it extract itself from commercial relationships with GM, to maintain the principle that banks cannot be owned by regular businesses and vice versa. Last night, the Fed agreed to a temporary exemption from those rules so that GMAC can continue to lend to people buying GM vehicles and to GM dealers.
The actions establish GMAC as a key element of the government strategy for rescuing the U.S. auto industry. As government officials work to find viable long-term options for bankrupt Chrysler and near-bankrupt GM, one risk is that consumers won't be able to get loans to buy one of those companies' cars, or that dealers could go under because they cannot finance inventory. The expanded government support for GMAC is meant to help it fulfill those roles.
"Over the past several months, the contraction of credit in the auto finance markets has helped drive our auto industry into a historic crisis," Treasury Secretary Timothy F. Geithner said in a news release. "This new arrangement with GMAC will help provide a reliable source of financing to both auto dealers and customers seeking to buy cars."
It also makes GMAC one of the biggest recipients of government aid. While it still trails the likes of American International Group, Citigroup and Bank of America in the scale of its rescue, those institutions are much larger than GMAC.