Tuesday, December 30, 2008

GMAC to Get $6 Billion Aid Deal

--Fed invested $5 bil prf equity and $1 bil loan to stablized GMAC as its second part to support auto industry --GMAC hleped financed 80% of purchase of GM cars by dealers and its restricted lending resulted in 45% sales plunge in Oct. --The bailout for GMAC helped to ease auto issues and home mortgage strain. --The bailout is conditional that GMAC has to raise $30 bil by debt-equity swaping 75% of debt issued. By DAMIAN PALETTA and JOHN D. STOLL WASHINGTON -- The federal government Monday deepened its involvement in the U.S. automotive industry by committing $6 billion to stabilize GMAC LLC, a financing company vital to the future of struggling car maker General Motors Corp. In a sign the government's role in the industry could become open-ended, the Treasury Department said Monday it had set up a separate program within the Troubled Asset Relief Program, a fund originally designed to help banks, to make investments directed at the auto industry. A Treasury official said the new program didn't have a specific dollar limit. The Treasury purchased $5 billion in senior preferred equity in GMAC and offered a new $1 billion loan to GM so the auto maker could participate in a rights offering at GMAC. That loan comes in addition to the recent $17.4 billion emergency plan to rescue GM and Chrysler LLC. The move represents the second tranche of government aid that redounds to the benefit of giant private-equity firm Cerberus Capital Management, which owns Chrysler and, until these recent moves, a majority stake in GMAC. John Snow, a top player at Cerberus, was the Bush administration's Treasury secretary before Henry Paulson. In bailing out GMAC, Treasury officials aren't just stabilizing an auto-finance company but a major player in the housing market's boom and bust. GMAC played a big role in pushing riskier adjustable-rate mortgages. The collapse of the housing market put additional strain on GMAC. The difficulties of GMAC and Chrysler's financing arm, Chrysler Financial, are a big reason GM and Chrysler have suffered steep drops in auto sales and fallen into financial trouble in the past few months, said Michael J. Jackson, chief executive of AutoNation Inc., the country's largest chain of auto dealerships, in a recent interview. Both financing companies have been restricting credit as their own finances worsened. "Consumer credit is the jet fuel of the auto business," Mr. Jackson said. "The majority of consumers can't buy a car without getting a loan." GMAC finances about 80% the wholesale purchases of GM's cars by dealers world-wide. It has traditionally been the largest source of financing for the actual buyers of those vehicles once they reached the showroom. The car company said last month that a 45% sales skid for October was fueled by GMAC's restricted lending, which cost GM anywhere from 45,000 to 60,000 sales in the month. About 25% of GM vehicle sales were financed through GMAC last month, down from more than 40% a year ago. The move by Treasury is the second part of a two-step rescue by the government of GMAC. Last week, the Federal Reserve approved the finance company's application to become a bank-holding company, a move sought by other companies, too, to take advantage of new government programs aimed at stabilizing banks. The Fed's approval was conditional on GMAC raising new capital, which the company tried to do through a debt-equity swap that expired Friday. The company's goal was to raise $30 billion by converting 75% of its issued debt into preferred-stock holdings. Last week, less than 60% of bondholders had signed on and the offering had been extended four times. At the same time as the Treasury announcement Monday, GMAC said it had raised enough capital to satisfy the Fed's conditions. It wasn't clear whether the government's intervention prompted or followed GMAC's meeting the capital requirement. Cerberus bought 51% of GMAC in 2006. GM has a 49% stake in GMAC. As a result of the Fed's move, Cerberus must reduce its interest to a maximum of 14.9% in voting shares and 33% in total equity. It will do this by distributing its positions in GMAC directly to Cerberus investors. GM will transfer part of its stake in GMAC to a trust whose trustee will be approved by the Treasury. Treasury has now spent virtually all the first half of a $700 billion financial-market rescue package Congress approved in early October. Treasury Secretary Paulson said two weeks ago that the first half of the bailout fund was essentially spent and that Congress would soon need to release the second installment. The Treasury official who briefed reporters on the plan Monday wouldn't break down how all of the money had been allocated, but said "from a short-term cash-flow basis" the department hasn't exceeded the first $350 billion installment. It is "not fair to say we've overcommitted the 350" billion, he said. Treasury officials briefed members of President-elect Barack Obama's transition team on the new plan, a Treasury spokeswoman said. Treasury said GMAC would pay an 8% dividend as part of the $5 billion investment, which the government said was "part of a broader program to assist the domestic automotive industry in becoming financially viable." Treasury will receive warrants from GMAC, which will be additional preferred equity equal to 5% of the preferred-stock purchase that will pay a 9% dividend if exercised. Treasury's investment doesn't carry any direct requirement to lend any of the money. A similar lack of conditions for funds loaned to banks has been a source of criticism, especially among congressional Democrats who charge as a result that the bailout isn't working. As part of the deal, GMAC agreed to limit compensation on its top 25 executives including a ban on severance packages for the top five employees. The limits won't apply to executives at Cerberus. Cerberus spokesman Peter Duda said the firm had no comment on Treasury's investment. GM officials couldn't be reached. GMAC said in a statement that becoming a bank-holding company improved its ability to make consumer and business loans. "In particular, the company 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," the company said. As a federally chartered bank, GMAC can have its debt temporarily guaranteed by the Federal Deposit Insurance Corp. GMAC also could get access to the Fed's discount window for inexpensive, short-term emergency loans. —Neal Boudette and Sharon Terlep contributed to this article. Write to Damian Paletta at damian.paletta@wsj.com and John D. Stoll at john.stoll@wsj.com

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