The auto lending arm of GM, known as GMAC has been granted status of bank holding company by the Federal Reserve. More from The Detroit Free Press:
Fed’s bank ruling buoys GMAC, GM
Dealers rejoice as bank status lets lender tap bailout funds
BY BRENT SNAVELY and JEWEL GOPWANI • FREE PRESS BUSINESS WRITERS • December 25, 2008
The Federal Reserve granted a request Wednesday from GMAC LLC to become a bank holding company, a designation that helps General Motors’ lending arm avert a potential bankruptcy, significantly improves GM’s chances of survival and provides an immediate sense of relief to auto dealers.
“I just got the best Christmas gift in the world,” said Joe Serra, who owns 37 automotive franchises.
The Federal Reserve Board said it made the decision under “emergency conditions,” and is requiring both of GMAC’s owners — GM and Cerberus Capital Management L.P. — to give up control of the company.
GMAC’s future has been viewed as a wild card in GM’s restructuring plan. A bankruptcy by GMAC could have wiped out the main lender to GM dealers, potentially derailing a turnaround at the Detroit automaker.
The Federal Reserve’s move offers GMAC a lifeline, opening the door to GMAC for several funding options to lend money to dealers and consumers during a time of frozen credit markets brought on by the meltdown of the nation’s financial institutions.
“General Motors is pleased that GMAC has won bank approval,” Steve Harris, GM’s vice president of communications, said late Wednesday. “Over time, if this makes credit for GM customers and dealers more available, it is obviously a good thing for GM.”
GMAC spokeswoman Gina Proia said Wednesday, “We’re very pleased about the news. It’s a significant positive step for the company and really marks a turning point in our history.”
Becoming a bank makes GMAC eligible to tap the $700-billion Troubled Asset Relief Program. GMAC has applied separately to the U.S. Treasury for money and is awaiting approval. Congress passed the TARP in October in an effort to bail out the nation’s financial institutions and unfreeze the credit markets.
In addition to applying for money from TARP and being able to accept deposits, as a bank GMAC also plans to apply for a program to sell bonds that are backed by the Federal Deposit Insurance Corp.
“It provides GMAC with what we think is the best long-term solution for us to support the automotive finance business both for consumers and dealers,” Proia said.
GMAC, which lost $2.52 billion during the three months that ended Sept. 30, is in such bad financial shape that it is having difficulty funding auto loans to consumers as well as financing dealer inventory plans. In November, GMAC warned that Residential Capital LLC, its mortgage lending unit, could default on its loans by year’s end.
Without approval to become a bank, analysts said GMAC faced a bankruptcy filing that would have cut off financing to the roughly 85% of GM’s North American dealers with which it does business.
Most of GM’s auto dealers rely on GMAC for “floor planning,” an industry term that refers to a loan that allows dealers to buy vehicles from the manufacturer until they are purchased by consumers.
Serra said he got the news while in church on Christmas Eve. About 65% of Serra’s dealerships are GM franchises. Several months ago, Serra, president of Serra Automotive, said he put his vehicle inventory financing out for bid to other banks.
“But with what was going on recently …no other lenders were interested in taking all of my inventory,” he said. “Without floor planning, you cannot conduct business.”
Losing loans from GMAC could have snowballed into a steep sales decline for GM, which already has been pushed to the brink of insolvency by the financial meltdown, frozen credit markets and national recession.
Allowing GMAC to fail potentially would have undone progress GM could make with the $13.4 billion in loans it is getting from the federal government, announced by the Bush administration last week.
One of the biggest immediate consequences is that the plan requires Cerberus and GM to give up most of their ownership stakes in the financing arm.
Cerberus, which owns 51% of GMAC, would cut its ownership stake to as little as 33%, maintaining voting interest of as much as 14.9%. To cut its stake, Cerberus would distribute its stock in GMAC to its investors. GM, which owns 49% of GMAC, would cut its stake to less than 10% of GMAC.
The news was released after the market closed Wednesday. Shares of GMAC dropped 36 cents or 6.6% Wednesday to close at $5.11.