GMAC gains access to Treasury lifeline

GMAC, the ailing consumer lender owned by General Motors and Cerberus, the private equity firm, gained access to the US government’s $700bn rescue fund for the financial industry this week after it won a bank charter from the Federal Reserve.

The company could obtain up to $6.3bn in capital from the US Treasury, according to estimates from CreditSights, though GMAC has not disclosed how much it has applied for. A bank charter also grants GMAC eligibility to issue debt guaranteed by the Federal Deposit Insurance Corporation of up to $17.5bn.

In depth: Detroit in distress - Dec-21Lex: Banking on GMAC - Dec-15Lex: Last chance saloon - Dec-19Video: Dan McCrum on the Detroit rescue - Dec-19Broader access to the Fed’s discount lending window and greater ability to gather deposits are further benefits of operating under the tighter regulatory framework of a bank charter.

The Fed approved GMAC’s application to become a bank holding company late on Wednesday in spite of slow progress on the lender’s attempts to raise capital through a $38bn debt restructuring. Banks have to maintain higher regulatory capital levels than other lenders, forcing GMAC into its second multibillion-dollar debt restructuring in a year and exposing bondholder reluctance to accept further losses on GMAC debt.

The key banking regulator said the application had been accelerated because of “emergency conditions” driven by “unusual and exigent circumstances affecting the financial markets”.

The Fed also pointed to the Treasury’s decision to provide emergency loans to GM to help “stabilise” and “improve [GM’s] viability” as contributing to its decision. GM and GMAC are highly dependent on each other, with GMAC’s recent pronounced pullback in lending making it much more difficult for GM to sell cars.

However, the Fed granted the charter on the condition GMAC change its ownership structure, dealing another blow to private equity forays into auto finance. The regulators insisted Cerberus and GM reduce their stakes substantially and put control of GMAC into the hands of company management and a reconfigured board.

A Cerberus-led consortium of funds which owns 51 per cent of GMAC will have to distribute the equity to its respective investors until its stake is reduced to 14.9 per cent of the voting shares or 33 per cent of the total equity of the company.

GM, which owns 49 per cent of GMAC, agreed to reduce its stake to less than 10 per cent of voting shares and total equity interest and transfer the remainder to a trust. The trust will dispose the remainder of the GM holding in three years.

The car and mortgage lender joins a string of non-bank financial institutions given bank charters from the Fed allowing them to tap into government assistance.

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