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.
With the infusion of funds from the Treasury, GMAC will now be in a position to start lending to consumers to buy cars as well as to some GM and Chrysler dealers to stock up cars and parts that would help the battered auto makers revive sales that plunged by 40 per cent this year.
GMAC, however has kept quiet on the Friday deadline for converting 75 per cent of its $38 billion debt into stock, which was one of the main conditions imposed by the Federal Reserve to allow the auto financier being allowed to convert itself to a bank holding company.
GMAC had earlier set a deadline of 26 December for bondholders to agree to the swap but the voting results have not yet been made public, although the company said the results would be released soon.
GMAC, which is one of the biggest auto financiers for buying GM vehicles, had about $161 billion of unsecured and secured debt as of 30 September, having lost $2.52 billion between July and September this year, with total losses piling to $7.9 billion in the past five quarters.
GMAC did not have the funds to make fresh loans to GM's consumers and dealers. Its mortgage lending unit Residential Capital had warned earlier that it could default on its loans by this year end due to declining auto sales and the slump in the housing mortgage industry.
Among the stringent rules applied by the US Federal Reserve for GMAC to convert into a bank holding company was a stake reduction by its owners. GM had to reduce its 49-per cent stake in GMAC to below 10 per cent, while private equity firm Cerberus Capital Management that owned the rest, had to reduce its holding to less than 33 per cent and cut its voting rights down to 14.9-per cent.