GMAC, now officially a bank in the eyes of the US Treasury, will receive $6 billion in emergency loans from the government. The money is meant to keep the financial firm out of bankruptcy, while giving them more opportunity to provide consumer loans.
GMAC, the former lending institution for General Motors, will receive $6 billion in loans from the U.S. Treasury. Already on the virge of collapse, the move will make GMAC more liquid.
GMAC has lost over $8 billion since 2006. Going into bankruptcy could have been a death blow for GM, as the financing firm has lended to 75% of GM dealers. Bankruptcy would mean calling in those loans, and likely reposessing cars on dealer lots, making it nearly impossible for GM to sell vehicles.
The loans to GMAC are separate to the automotive bailout granted by the U.S. White House. On Christmas Eve, GMAC's status as a bank holding company was approved by the Federal Reserve, giving the company access to the $700 billion fund created as a bailout of the finance sector.
One condition of the new status is that GM parent Cerberus must authorize the sale of much of its stake in GMAC. Cerberus must also give its investors more voting rights in GMAC.
GMAC's government-backed loan includes a provision for the Treasury to purchase $5 billion in preferred shares, with annual dividend payments of 8%. An additional $1 billion will go to General Motors for the purpose of buying GMAC common shares, which can be recalled by the Treasury at will. This gives back to Cerberus some of its loss required as part of the bank holding authorization. Although not given voting rights in the deal, the Treasury can cap executive salaries.
Private equity firm Cerberus Capital Management has a 49% stake in GMAC. Cerberus chairman John Snow was current president George W. Bush's second Secretary of the Treasury. One of the company's leaders and top lobbyists is former Vice President Dan Quayle, who served under President George H. W. Bush.
Much of the losses suffered by GMAC come from the housing sector, which was at one time a huge profit generator for GMAC.
Other auto lenders will likely receive similar deals from the U.S. Treasury. The department should announce another rescue plan that provides lenders with more cash, thus being able to authorize more loans to potential car purchasers.