GMAC gets nod to become a bank
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Bloomberg
Oluşturulma Tarihi: Aralık 26, 2008 00:00
SAN FRANCISCO - Auto and home lender GMAC wins approval from the Fed to become a bank holding company. The step is seen as one to salvage General Motors, which received $9.4 billion in emergency loans from the federal government. Becoming a bank will strengthen GMAC’s financial position.
GMAC won Federal Reserve approval to become a bank holding company, a switch that may enable the money-losing auto and home lender to tap U.S. financial bailout programs and help keep General Motors in business.
The Fed used emergency powers Wednesday to grant Detroit-based GMAC’s request, citing turmoil in financial markets and the potential impact on GM, the biggest U.S. automaker, which has warned it’s running out of cash. GM and Cerberus Capital Management, GMAC’s majority owner, will give up control of the lender to comply with federal rules on who can own banks.
Saving GMAC is a step toward salvaging GM, which received a temporary bailout earlier this month. The $9.4 billion loan will sustain GM at least until January, when President-elect Barack Obama must find a more permanent way to save millions of auto industry jobs and avoid deepening the year-old recession. Dealers and analysts say a GM rescue is more likely to work if GMAC is still around to make car loans, which the Fed’s action ensures.
"It will certainly lessen any questions about their survivability," said Ira Jersey, an interest-rate strategist at Credit Suisse Group in New York. "They should be able to change their operations enough that they’ll be able to continue to provide at least some minimal form of financing operations for the auto business."
The Fed order said the plan "would benefit the public by strengthening GMAC’s ability to fund the purchases of GMvehicles." GMAC finances about three-quarters of GM dealers’ inventory, and last year handled about 35 percent of their retail customers. The lender was shut out of credit markets this year after piling up $7.9 billion in losses dating from the middle of 2007.
"We’re pleased," said GMAC spokeswoman Gina Proia. "We think this is a significant positive step."
GM owned all of GMAC until it sold a 51 percent stake in 2006 to a group led by Cerberus, the New York-based private equity firm. As part of Wednesday’s agreement, GM will reduce its ownership in GMAC to less than 10 percent and transfer what remains to an independent trust, which will dispose of the stakes within three years.
Cerberus funds that hold GMAC stakes will distribute them to their investors, the Fed said. Cerberus’s voting control will be cut to less than 15 percent, or 33 percent of GMAC’s total equity. None of the recipients will have more than 5 percent of the votes or 7.5 percent of the total equity. The Fed also required Cerberus to sever ties between its people and GMAC.
In need of capital
The change may make it easier for GMAC to apply for a capital injection through the Treasury’s $700 billion financial bailout fund. Treasury Secretary Henry Paulson allocated $250 billion for buying stakes in banks. Proia said there’s no guarantee that GMAC will get any money from the fund, known as the Troubled Asset Relief Program.
Other benefits of bank status include deposit insurance up to $250,000 per account from the Federal Deposit Insurance Corp. The company already has a banking unit, GMAC Bank, that takes deposits from consumers. The FDIC also has a program insuring the debt issued by banks up to three years.
GMAC’s request was approved even though the lender did not satisfy the capital requirements laid out when it applied to become a bank in November. GMAC, which is also the parent of mortgage lender Residential Capital, said it needed three-quarters of investors that held $38 billion in bonds to swap the notes for new securities as part of a plan to reduce debt. As of Dec. 17, GMAC remained short of its goal.
Investors including Pacific Investment Management balked because the terms would have locked in losses on the existing debt. Pimco runs the world’s biggest bond fund, managed by Bill Gross.
GMAC has said the debt swap was needed to meet demands from the Fed. Proia said the Fed was aware of the status of the swap before the application was approved, and the company still plans to try to raise $2 billion of additional capital.The Fed and GMAC didn’t say what will happen to the mortgage unit, known as ResCap, which also faced speculation about bankruptcy after running up losses of $9.1 billion tied to subprime loans that defaulted. At the height of the real estate boom in 2006, ResCap was the 12th-biggest U.S. subprime mortgage lender. Subprime loans are made to people with the weakest credit, and the market for such loans has collapsed.
The Fed used emergency powers Wednesday to grant Detroit-based GMAC’s request, citing turmoil in financial markets and the potential impact on GM, the biggest U.S. automaker, which has warned it’s running out of cash. GM and Cerberus Capital Management, GMAC’s majority owner, will give up control of the lender to comply with federal rules on who can own banks.
Saving GMAC is a step toward salvaging GM, which received a temporary bailout earlier this month. The $9.4 billion loan will sustain GM at least until January, when President-elect Barack Obama must find a more permanent way to save millions of auto industry jobs and avoid deepening the year-old recession. Dealers and analysts say a GM rescue is more likely to work if GMAC is still around to make car loans, which the Fed’s action ensures.
"It will certainly lessen any questions about their survivability," said Ira Jersey, an interest-rate strategist at Credit Suisse Group in New York. "They should be able to change their operations enough that they’ll be able to continue to provide at least some minimal form of financing operations for the auto business."
The Fed order said the plan "would benefit the public by strengthening GMAC’s ability to fund the purchases of GMvehicles." GMAC finances about three-quarters of GM dealers’ inventory, and last year handled about 35 percent of their retail customers. The lender was shut out of credit markets this year after piling up $7.9 billion in losses dating from the middle of 2007.
"We’re pleased," said GMAC spokeswoman Gina Proia. "We think this is a significant positive step."
GM owned all of GMAC until it sold a 51 percent stake in 2006 to a group led by Cerberus, the New York-based private equity firm. As part of Wednesday’s agreement, GM will reduce its ownership in GMAC to less than 10 percent and transfer what remains to an independent trust, which will dispose of the stakes within three years.
Cerberus funds that hold GMAC stakes will distribute them to their investors, the Fed said. Cerberus’s voting control will be cut to less than 15 percent, or 33 percent of GMAC’s total equity. None of the recipients will have more than 5 percent of the votes or 7.5 percent of the total equity. The Fed also required Cerberus to sever ties between its people and GMAC.
In need of capital
The change may make it easier for GMAC to apply for a capital injection through the Treasury’s $700 billion financial bailout fund. Treasury Secretary Henry Paulson allocated $250 billion for buying stakes in banks. Proia said there’s no guarantee that GMAC will get any money from the fund, known as the Troubled Asset Relief Program.
Other benefits of bank status include deposit insurance up to $250,000 per account from the Federal Deposit Insurance Corp. The company already has a banking unit, GMAC Bank, that takes deposits from consumers. The FDIC also has a program insuring the debt issued by banks up to three years.
GMAC’s request was approved even though the lender did not satisfy the capital requirements laid out when it applied to become a bank in November. GMAC, which is also the parent of mortgage lender Residential Capital, said it needed three-quarters of investors that held $38 billion in bonds to swap the notes for new securities as part of a plan to reduce debt. As of Dec. 17, GMAC remained short of its goal.
Investors including Pacific Investment Management balked because the terms would have locked in losses on the existing debt. Pimco runs the world’s biggest bond fund, managed by Bill Gross.
GMAC has said the debt swap was needed to meet demands from the Fed. Proia said the Fed was aware of the status of the swap before the application was approved, and the company still plans to try to raise $2 billion of additional capital.The Fed and GMAC didn’t say what will happen to the mortgage unit, known as ResCap, which also faced speculation about bankruptcy after running up losses of $9.1 billion tied to subprime loans that defaulted. At the height of the real estate boom in 2006, ResCap was the 12th-biggest U.S. subprime mortgage lender. Subprime loans are made to people with the weakest credit, and the market for such loans has collapsed.