Business News
US Treasury to buy stake in GMAC; GM gets additional loan
Dec 30, 2008, 5:32 GMT
Washington - The US Treasury Department announced Monday night that it would commit 6 billion dollars to supporting GMAC LLC, the financing arm of General Motors Corp, to save the ailing car giant from bankruptcy.
The Treasury will buy a 5-billion-dollar stake in GMAC and also lend GM an additional 1 billion dollars so that the largest US carmaker can contribute to the financier's reorganization as a bank holding company.
Last week, the Federal Reserve approved GMAC's application to become a bank holding company, giving it greater access to federal funding. GM owns 49 per cent of GMAC, which is a critical source of financing for car sales.
This funding is in addition to the 13.4-billion-dollar emergency loan agreed to by the White House earlier this month to keep the iconic US car industry alive and avoid an even deeper economic recession in the country.
The 13.4-billion-dollar loan provides GM with 9.4 billion dollars and Chrysler LLC with 4 billion dollars over December and January. GM could get another 4 billion dollars in February.
But the federal funds come with tough conditions. GM and Chrysler will have to prove they can return to viability or the money could be withdrawn by March 31, likely leaving no option other than bankruptcy.
The funds announced Monday will enable GMAC to expand lending to buyers and help rescue GM. The money will come from the government's 700-billion-dollar financial rescue package, which was initially reserved for financial institutions, but is now propping up lenders, the car industry and finance companies.
Car sales have plunged some 40 per cent in the past few months as consumers struggled to get loans in the current financial crisis, adding to the woes of an industry that has already been struggling to keep up with more fuel-efficient and cheaper foreign competitors.
GM's sales dropped 22 per cent this year and GMAC has run desperately low on cash, allowing for only limited loans to buyers with the best credit.
GMAC said in a statement that it 'intends to act quickly to resume automotive lending to a broader spectrum of customers to support the availability of credit to consumers and businesses for the purchase of automobiles.'
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Nick MaceusDec 30th, 2008 - 19:39:57
After the auto industry had to fight tooth and nail to secure the $17 billion it needed to save itself from collapse, the federal government has kindly kicked in another $6 billion. The beneficiary: GMAC, the auto financing company that provides financing for most GM dealers and many of its customers. GMAC has struggled in recent months to borrow the money it needs to make loans, and last week the Fed approved the company's request to become a bank holding company. The change in structure opened it up to new sources of funding, like the billions it's receiving from the $700 billion of TARP funds, but also made it subject to additional regulations, including a requirement to convert 75 percent of its $38 billion in debt into stock. As part of the $6 billion infusion, the Treasury will invest $5 billion, on which it will receive an 8 percent dividend, and loan $1 billion to GM for it to invest in GMAC. GM has a 49 percent ownership of GMAC.
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