US Federal Reserve allows GMAC to become a bank holding company, making it likely to receive federal aid. The move gives GM more breathing room, providing liquidity in its finance arm and allowing more credit to flow to consumers for vehicle sales.
The Federal Reserve Bank of the United States has granted a request from GMAC LLC, GM's financial arm, to become a bank holding company and, hence, making it eligible for funds from the government's bailout of the financial system.
The move comes as a relief to GM dealers who have been having trouble finding financing for their inventory and their customers. GM dealers use GMAC to finance the purchase of their inventories. Customers use GMAC financing to buy their cars.
GMAC is now eligible for funds from the 700 billion US dollar Troubled Asset Relief Program, TARP, which was appropriated by the Congress in order for the Treasury to bailout troubled financial institutions. GMAC, like GM, is in trouble, having lost 2.5 billion US dollars in the third quarter of this year and unable to find cash for its lending operations.
But the aid from the US government will come at a price for GMAC's two owners, GM and Cerberus Capital Management, who also own Chrysler. They will be required to relinquish control of the company.
The US government is putting stringent conditions on GM and Chrysler, the two automakers currently receiving emergency aid. One of those conditions is that both companies come up with realistic plans by next March to prove their long-term viability. Otherwise, the government will have the power to force them into bankruptcy.