The US Federal Reserve has approved General Motors' severly cash-strapped finance arm, GMAC LLC, proposal to convert itself into a bank holding company, paving the way for it to avail the $700 billion bailout fund under the Roubled Assets Relief Programme, saving it from filing for chapter 11 bankruptcy protection.

This move by the Federal Reserve has opened doors for GMAC to find other sources of funding thereby making it able to lend money to dealers and consumers when other sources for loans are just not available due to the tight credit market.

Saying that it had made the decision due to the "emergency conditions," the Federal Reserve Board has asked both the stakeholders of GMAC, GM and Cerberus Capital Management to reduce their stake in the company.

GM owns a 49-per cent stake in GMAC LLC with private equity firm Cerberus Capital Management owning the remianing majority, which the Fed has told GM to reduce to less than 10 per cent and Cerberus to less than 33 per cent and maintain a 14.9-per cent voting interest. 

"Today's announcement marks a key turning point in GMAC's history," GMAC CEO Alvaro de Molina said in a news release. "As a bank holding company, GMAC will be competitively positioned for the long-term to provide financing to auto and mortgage consumers and businesses such as automotive dealers. GMAC has been a leader in these sectors and it is critically important to our company and the broader economy to resume responsible lending to consumers and businesses."

GMAC was also saved from a Friday deadline where it had to allow bondholders to exchange debt for equity and was trying to persuade investors to provide capital so that it may get the necessary approvals for becoming into a bank holding company.

GMAC, which is one of the biggest lenders to consumers for buying GM vehicles, had lost $2.52 billion between July and September this year and piled up a total loss of $7.9 billion in the past five quarters.

GMAC did not have the funds to make fresh loans to GM's consumers and its dealers. Residential Capital, the mortgage lending unit of GMAC had warned earlier that it could default on its loans by this year end due to declining auto sales and the housing mortgage industry which has slumped.

On Monday, the Fed's had granted the request of CIT Group to become a bank holding company so that it could avail of federal bailout funds much in the same lines as when it granted bank holding status to Goldman Sach's, Morgan Stanley and American Express.

 After the outgoing US president, George Bush persistently refused to bail out the Big Three automakers and the US Senate vetoed an aid package, the Bush dministration in an about turn last week offered up to $17.4 billion in emergency loans to US automakers General Motors and Chrysler. (See: Bush offers $17.4 billion to bail out GM, Chrysler)