WASHINGTON — The Federal Reserve has granted a request by the financing arm of General Motors to tap the government’s $700 billion rescue fund, bolstering GM’s ability to survive.
The Fed announced Wednesday that it had approved GMAC Financial Services’ request to become a bank holding company. That designation makes GMAC eligible to receive a portion of the bailout fund and get emergency loans directly from the Fed.
Analysts had speculated that without financial help, GMAC would have had to file for bankruptcy protection or shut down, dealing a serious blow to GM’s own chances for survival. The Fed cited “emergency conditions” in justifying its decision.
Making GMAC a bank holding company “would benefit the public by strengthening GMAC’s ability to fund the purchases of vehicles manufactured by GM,” the Fed said.
The move to rescue an auto financing company was just the latest extension of the federal bailout program, which was designed to shore up ailing banks but has grown to include insurers and credit card companies.
GMAC provides financing for both GM dealers and customers, as well as home mortgage loans through its Residential Capital LLC division. GMAC finances about 75 percent of the financing dealers use to stock their floors with new GM cars and trucks. GMAC also served as a major source of loans to GM car buyers, until it was frozen out of credit markets this Spring after losses totaling $7.9 billion.
“This is a very significant positive step for the company, and it marks a key turning point in our 89-year history,” Gina Proia, a GMAC spokeswoman, said. “GMAC believes becoming a bank holding company is the best long-term solution to provide automotive and mortgage financing to consumers and business, including auto dealers.”
She said the change in status would provide the company with “improved access to funding.”
GMAC is 51 percent owned by Cerberus Capital Management LP, the investment fund that also owns Chrysler. GM owns the remaining 49 percent of the company.
Under the Fed’s order, Cerberus and GM, whose businesses are mainly outside banking, would both have to significantly reduce their ownership stakes in GMAC. GM has committed to reducing its ownership in GMAC to less than 10 percent.
Cerberus was ordered to reduce its stake to 33 percent of total equity in the company.
“Critical” to dealers
GMAC’s survival “is critical to the future of the dealers,” Kimberly Rodriguez, principal of Grant Thornton’s automotive practice, said in a Dec. 19 statement on the bailouts for GM and Chrysler LLC.
The lending arms “need to be able to finance GM and Chrysler dealers, and support vehicle financing to customers in order for the parent auto companies to be viable.”
A GMAC bankruptcy would have cut off financing to the roughly 85 percent of GM’s North American dealers it does business with.
The future of Chrysler Financial, Chrysler’s financing arm, is also uncertain. Earlier this month, Chrysler Financial, which provides financing for 75 percent of Chrysler dealers, said it could be forced to temporarily suspend funding for dealer vehicle inventories if dealers keep pulling large amounts of their money out of an account used to fund those loans.
The Fed’s decision came five days after the Bush administration said it would tap the bailout fund to provide emergency loans to GM and Chrysler to buy them time to reorganize and avoid having to file for bankruptcy.
The Fed approved GMAC’s request, even though the Detroit-based lender didn’t satisfy the capital requirements laid out when it applied to become a bank in November.
GMAC said it needed 75 percent of investors that held $38 billion in bonds to exchange the debt notes as part of a plan to reduce debt.
As of Dec. 17, holders of only 58 percent of eligible notes had tendered. With two days left before the deadline, GMAC hasn’t provided an update.
Investors including Pacific Investment Management Co. 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.
After Pimco balked, possible scenarios emerged for helping GMAC. People in the industry said one scenario involved altering the ownership stakes in GMAC.
Congress approved the bailout program on Oct. 3, with the original intent of buying up troubled mortgage assets.
That part of the program has never been implemented. Instead, Treasury Secretary Henry Paulson switched course. He began an effort to use $250 billion of the $700 billion fund to make direct purchases of bank stock, to inject more funds into financial institutions and fight the most severe financial crisis in seven decades.
But the effort has come under attack from critics who say that the Bush administration is not overseeing the program sufficiently to make sure that the banks actually increase their lending.
Many lawmakers are also upset that the program has already obligated half of the $700 billion total without making a serious effort to help troubled homeowners avoid a rising tide of mortgage foreclosures.
The Associated Press, Bloomberg News, and The Wall Street Journal contributed to this report.
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