GMAC may not be able to raise the capital to convert to a bank

11 December 2008

GMAC's bid to convert into a bank may fail inspite of repeated extensions of the deadline to raise adequate funds. It probably doesn't have enough capital to become a bank holding company, putting it in an even more precarious position.

The auto loan and mortgage company, which has been closely associated with the ailing General Motors, has been trying to persuade its debt holders to exchange their investments for new equity stakes in the business.

If successful, the swap would boost GMAC's capital enough for it to qualify as a bank holding company under Federal Reserve rules. This would give the firm potential access to government investments that other banks have received in recent months.

However, investors holding less than a quarter of its outstanding debt have so far signed up for the exchange offer. The company needs roughly 75 per cent participation for it to lift capital to the $30 billion minimum required.  GMAC said bondholders so far have agreed to exchange 6.3 billion dollars in its old debt and 2.0 billion of its ResCap debt for capital, far below the 30 billion dollars it needs.

GMAC has extended its offer to Friday at 5 p.m. Eastern time, but warned that if it doesn't get enough investors to agree, the company will withdraw its application to become a bank. This is the third such extension but there seem to be no takers

Gasping at a lifeline
GMAC, the primary lender to General Motors' dealers, is trying to avoid a collapse by becoming a bank and gaining access to the Treasury's $700-billion rescue fund.