U.S. takes majority stake in GMAC, giving lender $3.8 billion more in aid

By Binyamin Appelbaum
Washington Post Staff Writer
Thursday, December 31, 2009

The federal government said Wednesday that it will take majority control of troubled auto lender GMAC and provide an additional $3.8 billion in aid to the company, which has been unable to raise from private investors the money it needs to staunch its losses.

The Treasury Department has said for months that GMAC would need more federal money, but the decision to increase the government's ownership stake came as a surprise, cutting against the grain of the Obama administration's recent efforts to wind down its bailout of large banks.

What initially appeared to be a closing act now looks more like year-end portfolio rebalancing, with companies including Citigroup and Bank of America allowed to repay aid even as the government deepens its involvement in mortgage financiers Fannie Mae and Freddie Mac -- and now, GMAC.

The government now owns majority ownership stakes in those three firms, General Motors and insurance giant American International Group. It also holds large stakes in Citigroup and Chrysler.

The additional aid for GMAC underscores both its struggles and its importance to the administration's efforts to revive the auto industry. GMAC, which already has taken $12.5 billion in direct federal aid along with other forms of government support, is the largest lender to General Motors and Chrysler dealerships and to their customers.

Treasury said that it will increase its stake in GMAC to 56 percent from 35 percent. The government also will hold about $14 billion in what amounts to loans that GMAC may eventually repay. The government plans to appoint four of the company's nine directors.

Wednesday's announcement is a coda to the stress test of 19 large banks conducted earlier this year. GMAC, which was required to add $9.1 billion to its capital reserves against unexpected losses, was the only bank unable to satisfy regulators by finding private investors.

"We said, if you do not go raise capital from the private markets, if you are unable to, we will put capital into you because it is important to the stability of the system," Treasury Secretary Timothy F. Geithner told the Congressional Oversight Panel earlier this month. "It was never going to be possible for GMAC. They are in a unique and difficult situation."

Congressional Republicans criticized the action Wednesday.

"The government should be releasing its grip on financial institutions, not buying more of them," said Rep. Tom Price (R-Ga.), chairman of the Republican study committee, a conservative House caucus.

GMAC was created to finance GM auto sales, but during the housing boom it focused on mortgage lending. The company, no longer owned by GM, lost $13 billion in the last three years as borrowers defaulted on those loans.

The federal aid will help GMAC sop up those losses and return to its roots. GMAC said Wednesday that it will take a pretax charge of $3.8 billion in the fourth quarter, largely reflecting the decline in the value of its mortgage-related investments. The company also said that it was exploring "strategic alternatives" for its mortgage business, Residential Capital, indicating that the business may be sold.

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