US gives $6bn bail-out for GMAC

The US Treasury has unveiled a $6bn (£4.1bn) rescue package for GMAC – General Motors’ troubled car loan arm, co-owned by Chrysler’s owner, Cerberus.

The move – to encourage GMAC to offer funding to would-be vehicle buyers – is the latest aimed at easing the severity of the economic downturn.

Earlier this month the White House agreed a $17.4bn bail-out GM, Chrysler and Ford to help stave off collapse.

GMAC recently gained approval to become a bank holding company.

This gave it access to emergency government funds offered to other financial institutions.

Fewer loans

Under the terms of the rescue, the US Treasury will buy $5bn in shares in GMAC, and will increase a loan to one of GMAC’s co-owners, GM, by an extra $1bn.

This increased loan will help fund GM’s purchase of shares as part of GMAC’s reorganization as a bank holding company, and comes on top of the bail-out for the car industry.

The Treasury said it was dipping into the $700bn financial bail-out fund which was approved by Congress in early October to fund this rescue.

GMAC’s solvency is considered crucial to GM’s own survival.

The car loans firm has lost $7.9bn over the last five quarters as the credit crisis has raised its borrowing costs sharply and the value of many of its assets plunged.

GMAC has traditionally provided the bulk of financing for car buyers at GM dealerships and the loans that dealers rely on for their inventories of GM cars and trucks.

But its ability to provide both kinds of financing has been sharply limited over the past several months because of the broader credit crisis and as GMAC’s ability to borrow has lessened.

‘Act quickly’

GM’s US sales plunged 41% in November and the carmaker said the squeeze on GMAC’s own financing was on reason for the downward spiral in sales.

GM said earlier this month, that while GMAC had been able to provide financing to nearly half of GM car buyers just a year ago, that share had dropped to 6% now.

In a statement, GMAC said it intended “to act quickly to resume automotive lending to a broader spectrum of customers”.

GMAC agreed to restrictions on dividend payments and executive pay as part of the equity injection.

The bonus pool available to its top 25 executives has been cut by 40% from 2007 levels.

GM and Cerberus will both see their holdings in GMAC reduced as a result of GMAC becoming a bank holding company.

GM will end up with 10% stake, while Cerberus will have a 30% share in GMAC.
Source: BBC