US treasury to acquire stake in GMAC

31 December 2008

The US Treasury Department said yesterday that it would invest $5 billion in GMAC Financial Services, the financial arm of General Motors, from the $700 billion bailout fund under the Troubled Assets Relief Programme, to enable it to reorganise itself as a bank holding company.

The lifeline includes the treasury taking a $5-billion stake in GMAC as preferred equity with an 8-per cent dividend. It will also lend GM $1 billion to enable the carmaker top acquire additional equity when GMAC makes a rights offer in a bid to raise more capital.

"Treasury exercised this funding authority under the Emergency Economic Stabilisation Act's Troubled Asset Relief Program," the department said in a statement. "The preferred stock purchase and the loan to support GMAC's rights offering are part of an auto industry-focused TARP programme that will include the $17.4- billion in assistance for domestic automakers announced earlier this month."

This $1-billion offer to GM is over and above the $13.4 billion the White House agreed earlier this month to lend  GM and Chrysler after the US Senate vetoed the White House-backed $14 billion bailout initiative for ailing US auto majors. (See: Bush offers $17.4 billion to bail out GM, Chrysler)

GMAC, facing bankruptcy was given a lifeline last week when the US Federal Reserve approved the severely cash-strapped company's proposal to convert itself into a bank holding company, paving the way for it to avail the $700 billion bailout fund under the Troubled Assets Relief Programme. (See: Lifeline given to GMAC with bank holding company status)

As part of a broader programme to assist the domestic automobile industry in becoming financially viable, the treasury said that the finance would come from the unused portion of the first half of the $700-billion programme that the US Congress has allowed the treasury to use to recapitalise distressed banks. 

GM and Chrysler said that they were working on completing the necessary paperwork and documentation to receive the loans from the Treasury.