Asia-Pacific

US govt gives GMAC $3.8B in new aid, boosts stake

(Agencies)
Updated: 2009-12-31 09:29

WASHINGTON: The US government gave GMAC Financial Services another $3.8 billion in cash and took a majority stake in the auto lender, aiming to stabilize the company as it struggles with big losses in its home mortgage unit.

The fresh infusion is on top of $12.5 billion in taxpayer money Detroit-based GMAC has already received from the government. The new aid will boost the federal government's ownership in GMAC to 56 percent, from 35 percent, and means the US now holds a majority stake in three companies that it bailed out with taxpayer funds - GMAC, General Motors and insurer American International Group Inc. The government also has taken control of mortgage giants Fannie Mae and Freddie Mac.

Shoring up GMAC has been a major component of the Obama administration's massive effort to rescue ailing automakers General Motors and Chrysler. The lender provides critical wholesale financing to thousands of GM and Chrysler auto dealers, allowing them to stock their showroom floors with vehicles.

GMAC needs much of the aid to prop up its mortgage division Residential Capital LLC, dubbed ResCap, which struggled with big losses on mortgages gone bad as the housing market collapsed. The company said it would take $3.3 billion in mortgage-related write-downs, part of a $3.8 billion expected charge in the fourth quarter. GMAC is also preparing to sell off mortgage assets in an effort to reduce volatility.

Even with the government upping its stake, Treasury officials said the government intends to stick to its policy of leaving day-to-day business decisions about financing to GMAC management. Still, with the additional stake, the government will have the right to appoint two additional directors to the company's board, bringing the total to four of nine, Treasury officials said.

GMAC will continue to be subject to executive pay restrictions imposed by the government's pay czar.

GMAC was obligated by the Treasury Department to raise $11.5 billion in additional capital earlier this year after failing the government's stress test for banks, largely because of ResCap's big losses.

The stress tests were to see whether banks had enough capital even if the economy worsens next year. However, GMAC had difficulty raising money because of its financial woes, making an extra government infusion necessary.

"By protecting the financial performance and strength of our core automotive finance operations, we expect to increase the pace at which we can fully repay the US taxpayer," Michael Carpenter, GMAC's chief executive, said in a statement on Wednesday.

The Treasury Department said the new aid, which comes from a taxpayer-financed bailout fund, is less than the roughly $6 billion the government had earlier thought GMAC would need to steady the company. That's because the impact from General Motors' bankruptcy filing wasn't as severe as originally projected. It marked the third time the government has thrown GMAC a lifeline.

Even after the latest capital infusion, the government will likely take steps to help GMAC as it tries to ensure the recovery of GM and Chrysler, said Kirk Ludtke, senior vice president at CRT Capital Group LLC. That includes helping GMAC refinance its debt as it comes due, he said.

"The government has come this far, it is not going to destabilize GMAC at this point," he said.

GMAC still remains on shaky financial ground. Last month, it reported a quarterly loss of $767 million, though the results were an improvement over a giant loss a year ago. ResCap lost $747 million during the third quarter as homeowners continued to default on their mortgages in large numbers.

GMAC, which also provides financing to car buyers, has also been hurt by the rapid decline of the US auto industry after sales crumbled due to the recession and financial woes at big automakers. Sales of cars and trucks were down 24 percent through November compared with the same period last year. The industry is expected to sell around 10 million cars this year, one of the worst performances for autos sales in decades.

Despite the drop in auto sales, GMAC's auto lending business has shown some signs of revival. The auto financing division earned a profit of $395 million during the third quarter. The company's online consumer banking unit, Ally Bank, has also been a bright spot by bringing in billions of dollars in new deposits by offering relatively high interest rates. It now accounts for about 29 percent of GMAC's assets.