Lifeline given to GMAC with bank holding company status

26 December 2008

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.

Last month the Federal Reserve permitted American Express to change its structure to become a bank holding company, a development that will cut its borrowing costs and give it access to the Treasury's $700-billion 'Troubled Assets Relief Program', as it had piled huge credit card defaults and found trouble sourcing cheap funds. As a bank it will be able to avail of government funding and lending programs, including access to the central bank's emergency loan window. (See: AmEx to become a commercial bank, get access to federal funds) 

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.