WASHINGTON (AP) - Auto lender GMAC Financial Services will
receive $7.5 billion in additional government aid to keep loans
flowing to would-be buyers of GM and Chrysler vehicles and shore up
its capital postion - marking the second time the government has
stepped in to prop up the lender.
To help GMAC raise additional funds, the Federal Deposit
Insurance Corp. took the rare step Thursday of allowing the
junk-rated company to gain access to its debt guarantee program.
GMAC will be allowed to issue as much as $7.4 billion in debt,
guaranteed by the FDIC in case the company defaults on payment.
In addition, the Federal Reserve waived rules to give GMAC's new
bank, called Ally Bank, more leeway to make loans to GM customers.
Analysts suggest that the new government support will make GMAC
a lending powerhouse that will give GM and Chrysler a huge
advantage over their competitors - including U.S. rival Ford Motor
Co., which hasn't taken any government aid. It would have the power
to offer better loan terms to buyers of GM and Chrysler cars and
trucks as a way of steering business to those automakers.
GMAC received $5 billion in December from the Treasury
Department's $700 billion financial bailout program in exchange for
5 million common shares and the promise to extend financing to
dealers of Chrysler LLC, which is restructuring under Chapter 11
After failing the government's bank stress test, the Treasury
Department mandated earlier this month that GMAC raise $11.5
billion in additional capital, including $9.1 billion of new Tier 1
capital. But GMAC, which reported a first-quarter loss of $675
million, has seen rising defaults in its auto finance division.
That, combined with soured assets in its Residential Capital LLC
mortgage unit, made it difficult for the company to raise capital
from private investors.
So in addition to $4 billion in aid to support GMAC's new loans
to Chrysler dealers and customers, the government agreed to inject
$3.5 billion to help the company bolster its capital cushion.
"This new arrangement with GMAC will help provide a reliable
source of financing to both auto dealers and customers seeking to
buy cars," Treasury Secretary Timothy Geithner said Thursday.
GMAC is expected to detail its plans to raise the rest of its
capital needs by the government's June 8 deadline. GMAC Chief
Executive Alvaro G. de Molina said Thursday the Treasury's latest
action marked "another major step in stabilizing and
strengthening" the company.
The Treasury said it won't immediately hold an equity stake in
the lender but will soon exercise its right, under an earlier
agreement, to swap an $884 million loan it made to General Motors
Corp. for an equity share in GMAC. The Treasury said it expects to
exercise that right "in the very near future," giving it a 35.4
percent stake in the company.
The government also has instructed GMAC to assemble a new,
smaller board of directors, which the company has been putting
together. It eventually will include the CEO, two trustees
appointed by the Treasury Department to represent the government's
interest, and three independent directors to be elected by the rest
of the board.
The government has a vested interest in seeing GMAC, GM and
Chrysler succeed, in order to recoup the billions in aid it has
doled out to the companies. General Motors has received $15.4
billion in federal loans and Chrysler has received $5.8 billion. GM
is currently negotiating to give the government a 50 percent equity
stake in exchange for wiping out a portion of its debt as the
company faces a June 1 deadline to restructure or head into Chapter
11 bankruptcy reorganization. It has requested up to $30 billion in
additional loans from the Treasury Department to sustain its
Chrysler said last week it intends to terminate franchise
agreements of about a quarter of its 3,200 U.S. dealerships by June
9. GM has told some 1,100 of its dealers - about 20 percent - that
they would be dropped by late next year. Auto dealers say the swift
closing of dealerships could lead to significant job losses and
leave many dealers with large inventories of unsold vehicles.
Sen. Kay Bailey Hutchison, R-Texas, said the new $7.5 billion
injection for GMAC would help remaining Chrysler dealerships buy
vehicle inventories from dealerships whose franchise agreements are
scheduled to end.
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