US takes controlling stake in GMAC in third bailout

The US government threw troubled GMAC a third lifeline, of 3.8 billion dollars, and took a controlling stake in a bid to turn around the mortgage and auto lender.

Updated: Dec 31, 2009, 09:13 AM IST

Washington: The US government threw troubled GMAC a third lifeline, of 3.8 billion dollars, and took a controlling stake in a bid to turn around the mortgage and auto lender.

The Treasury said the move would raise its equity stake in GMAC to 56 percent from 35 percent.

The ailing former finance arm of General Motors became a bank holding company a year ago to access federal aid amid the global financial meltdown.

"Due to a variety of factors, including that the restructurings of General Motors and Chrysler were accomplished with less disruption to GMAC than banking supervisors initially projected, Treasury will commit 3.8 billion dollars of new capital to GMAC rather than the 5.6 billion dollars originally announced," the Treasury said in a statement.

It had injected a total of 12.5 billion dollars in capital into GMAC in two installments. The bailout funds are part of the 700-billion-dollar Troubled Asset Relief Program (TARP) which the Treasury can use to stabilize the US financial system through October 2010.

The Treasury, headed by Secretary Timothy Geithner, also announced a restructuring of its investment in GMAC "to protect taxpayers and put GMAC in a position to raise private capital and pay back taxpayers as soon as practicable."

"These actions offer the best chance for GMAC to complete its overall restructuring plan and return to the private capital markets for its debt financing and capital needs in 2010," it said.

The 3.8-billion-dollar taxpayer-funded capital injection will be in the form of 2.54 billion dollars of trust preferred securities and 1.25 billion dollars of mandatory convertible preferred (MCP) stock.

Treasury said it would also receive warrants for both types of stocks, totalling 190 million dollars, which it would exercise immediately at the close of the transaction.

The Treasury said it would convert 3.0 billion dollars of its existing MCP, which was invested in May 2009, into common equity "to boost the quality of the capital supporting GMAC."

Given the increased ownership, the Treasury will have the right to appoint two additional directors, in addition to the two it has, to the nine-member GMAC board of directors.

The department said it plans to nominate its new directors in time for GMAC`s annual meeting at the end of April.

GMAC plans to step up the pace of its repayments to the government.

"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 chief executive, said in a separate statement.

The Treasury said the smaller taxpayer-funded injection into GMAC will result in a 1.8-billion-dollar reduction in the department`s previously forecast spending under the TARP.

GMAC said it now meets the "capital buffer" required by the Federal Reserve`s Supervisory Capital Assessment Program, but it will also take a 3.3 billion dollar charge, mostly for writedowns at its automobile lender Ally Bank and troubled mortgage business ResCap.

GMAC was the only one of 10 bank holding companies deemed to have fallen short in efforts to raise enough capital to weather adverse economic circumstances, the Fed said last month.

In May, the Fed said that GMAC needed 11.5 billion dollars, to be raised through private investments, or through public aid under the TARP approved last year by Congress.

GMAC was the longtime financial arm of the largest US automaker until 2006, when GM sold a majority stake.

In December 2008, GMAC won permission to become a bank holding company to improve its access to Fed lending amid the global financial crisis.

On May 21, the US Treasury said it had injected an additional 7.5 billion dollars into GMAC to enable it to continue providing loans to auto dealers and consumers.

The new investment came on top of an earlier five-billion-dollar injection as part of an effort to rescue the auto industry and the financial sector.

Bureau Report