Treasury will give GMAC $5 billion

UPDATED:

The Treasury Department on Monday night provided General Motors‘ financing arm with a $5 billion cash infusion to prevent GMAC from nose-diving into bankruptcy.

The stock investment in GMAC comes on top of $9.4 billion in loans that the Treasury already is providing to the nation’s leading auto manufacturer and is part of a new emergency financing program for Detroit’s Big Three that the Treasury is setting up within the $350 billion bank bailout program.

The move brings the total of bailout funds committed to automakers to $23.4 billion, including loans already announced for Chrysler and GM. Potentially more automakers and their finance arms could apply for assistance under guidelines that the Treasury said it will publish this week.

In a maneuver that is aimed at assisting GMAC in its bid to become a bank, the Treasury said it is providing GM with an additional $1 billion loan that it expects the automaker to use to purchase stock in the finance company after it reorganizes into a bank.

Treasury’s latest in an unprecedented series of bailout measures more than depletes the funds that Congress has made available so far. The move was aimed at averting a collapse at the GM finance arm only days after Treasury pledged to prevent the largest automaker from falling into bankruptcy.

The Federal Reserve approved GMAC’s application to become a bank-holding company last week but made the approval contingent on GMAC raising $30 billion in capital from existing stock and bond investors.

Though GMAC has a troubled mortgage affiliate, the two businesses are closely tied together in galvanizing millions of auto sales each year, and analysts say the failure of either would lead to the downfall of the other.

GMAC “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 on receiving the Treasury cash.

Ironically, Monday’s disbursement for GMAC came before the Treasury’s first loan installment for GM, which was scheduled to go out no earlier than Tuesday.

Although GM’s problems have been widely aired, the woes of its finance affiliate are not so well known. Yet GMAC’s troubles, which caused a $2.5 billion loss in the third quarter, are closely tied to the collapse in auto sales this fall that has been hurting GM, Chrysler and all other car manufacturers to one extent or another.

Since the credit crisis broke out in September, GMAC has been shut out of key credit markets that it tapped to provide funding for loans to GM’s customers as well as the financing GM dealers need to purchase cars to display on their lots and showrooms.

The funding crisis is at the heart of the auto sales crisis. GMAC devised a plan this fall to revive its ability to tap credit markets by transforming itself into a bank. But to do that, it had to meet strict capital requirements laid down by the Federal Reserve to ensure banks have adequate cash cushions to cover their losses on loans.

GMAC was heavily into debt, with $38 billion of bonds outstanding, and had only minimal capital reserves.

The company strived to raise the $30 billion of capital required by the Fed, but apparently fell short in repeated attempts to replace large portions of its debt with stock. Some big company bondholders balked at the proposition, which was GMAC’s main way of raising the capital the Fed required.

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