Federal Government Gives GMAC $7.5 Billion

June 8, 2009

In a recent move, the Treasury Department has injected an additional $7.5 billion into ailing auto loan financer GMAC to shore up a capital shortage while also maintaining its obligations to GM and Chrysler car buyers.

This latest measure comes with much anticipation since it will mean a serious infusion of available credit to a dry market that has led to drastic drops in car sales. The Federal Reserve has also provided GMAC with an exemption that would allow the financer to continue lending to GM dealerships and retail customers alike, which would not normally be possible since GMAC is now a bank holding company that the automaker has interest in.

The $7.5 billions comes right after a previous $5 billion supplied by the Treasury in December 2008.

Commenting on the new capital for GMAC, Treasury Secretary Timothy Geithner said, “will offer strong credit opportunities, help stabilize our auto financing market, and contribute to the overall economic recovery.”

According to the Treasury, the new investment amount would include $4 billion to assist GMAC with continued lending to Chrysler dealers and retail customers. The remaining $3.5 billion will be used to handle capital shortages within the lender that were identified by so-called “stress tests” that were conducted on 19 of the largest financial institutions.

The Federal Reserve has chosen to invest in GMAC in the form of preferred shares. This means the central bank will not obtain an immediate common equity stake in the lender. At the same time, the Treasury has retained an exclusive right to exchange its $884 million loan to General Motors for common equity in GMAC and would exercise this option “in the very near future.” This would mean the Treasury would hold a 35.4% common equity interest in GMAC.

GMAC has also stated in a separate report that the FDIC has approved an amount up to $7.4 billion in FDIC-guaranteed debt that can be issued by the auto lender.