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Federal Reserve lets General Motors tap bailout fund
By Martin Crutsinger
WASHINGTON – The Federal Reserve has granted a request by the financing arm of General Motors to tap the government’s $700 billion rescue fund, bolstering GM’s ability to survive.
The Fed announced Wednesday that it had approved GMAC Financial Services’ request to become a bank holding company. That designation makes GMAC eligible to receive a portion of the bailout fund and get emergency loans directly from the Fed.
Analysts had speculated that without financial help, GMAC would have had to file for bankruptcy protection or shut down, dealing a serious blow to General Motors Corp.’s own chances for survival. The Fed cited “emergency conditions” in justifying its decision.
GMAC provides financing for both GM dealers and customers as well as home mortgage loans through its Residential Capital LLC division. The company is 51 percent owned by Cerberus Capital Management LP, the investment fund that also owns Chrysler. GM owns the remaining 49 percent of the company.
Under the Fed’s order, Cerberus and GM, whose businesses are mainly outside banking, would both have to significantly reduce their ownership stakes in GMAC. GM has committed to reducing its ownership in GMAC to less than 10 percent. Cerberus was ordered to reduce its stake to 33 percent of total equity in the company.
A GMAC bankruptcy filing would have cut off financing to the roughly 85 percent of GM’s North American dealers it does business with.
The future of Chrysler Financial, Chrysler’s financing arm, is also uncertain. Earlier this month, Chrysler Financial, which provides financing for 75 percent of Chrysler dealers, said it could be forced to temporarily suspend funding for dealer vehicle inventories if dealers keep pulling large amounts of their money out of an account used to fund those loans.
The Fed’s decision was announced after the close of a shortened trading day on Wall Street. GM shares closed up more than 8 percent earlier Wednesday.
In a statement, GMAC praised the Fed’s action.
“This is a very significant positive step for the company, and it marks a key turning point in our 89-year history,” said spokeswoman Gina Proia. “GMAC believes becoming a bank holding company is the best long-term solution to provide automotive and mortgage financing to consumers and business, including auto dealers.”
She said the change in status would provide the company with “improved access to funding.”
The Fed announced Wednesday that it had approved GMAC Financial Services’ request to become a bank holding company. That designation makes GMAC eligible to receive a portion of the bailout fund and get emergency loans directly from the Fed.
Analysts had speculated that without financial help, GMAC would have had to file for bankruptcy protection or shut down, dealing a serious blow to General Motors Corp.’s own chances for survival. The Fed cited “emergency conditions” in justifying its decision.
GMAC provides financing for both GM dealers and customers as well as home mortgage loans through its Residential Capital LLC division. The company is 51 percent owned by Cerberus Capital Management LP, the investment fund that also owns Chrysler. GM owns the remaining 49 percent of the company.
Under the Fed’s order, Cerberus and GM, whose businesses are mainly outside banking, would both have to significantly reduce their ownership stakes in GMAC. GM has committed to reducing its ownership in GMAC to less than 10 percent. Cerberus was ordered to reduce its stake to 33 percent of total equity in the company.
A GMAC bankruptcy filing would have cut off financing to the roughly 85 percent of GM’s North American dealers it does business with.
The future of Chrysler Financial, Chrysler’s financing arm, is also uncertain. Earlier this month, Chrysler Financial, which provides financing for 75 percent of Chrysler dealers, said it could be forced to temporarily suspend funding for dealer vehicle inventories if dealers keep pulling large amounts of their money out of an account used to fund those loans.
The Fed’s decision was announced after the close of a shortened trading day on Wall Street. GM shares closed up more than 8 percent earlier Wednesday.
In a statement, GMAC praised the Fed’s action.
“This is a very significant positive step for the company, and it marks a key turning point in our 89-year history,” said spokeswoman Gina Proia. “GMAC believes becoming a bank holding company is the best long-term solution to provide automotive and mortgage financing to consumers and business, including auto dealers.”
She said the change in status would provide the company with “improved access to funding.”
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Reader Comments
seacat162 wrote on Dec 25, 2008 11:07 AM:
" I agree with you Whiskyecho. I guess they think people are going to start buying again. If maybe they would come down on the prices well who knows. "
perse wrote on Dec 26, 2008 12:49 PM:
" Or they might try producing innovative quality vehicles for which there actually might be a demand. Like actually develop the EV1 they successfully put on the road back in 1997 instead of fighting it every step of the way until they managed finally to kill off the requirement to include non-gasoline powered vehicle in their product lineup. "
pprwrtr wrote on Dec 26, 2008 1:08 PM:
" If they are going to bail out the banks and the auto dealers, who is next? I'm sure they will all be in line when the big, important CEOs of those companies spend or steal all their money too. We have gone for decades knowing we needed other energy sources, but people running the country either were oil men or those with very lucrative investment in oil or in with the oil lobbyists, etc. That's why they have killed everything that has to do with alternative energy sources. Now, it's almost too late and we finally got a president who is actually aware of global warming, energy shortages and need for energy alternatives. We've needed someone who is all there when it comes to running the country. It's about time that we will begin to see alternatives and other things we've needed in America! "
Whiskyecho wrote on Dec 24, 2008 7:32 PM: