Here Comes Another Bailout
by Charles Lemos, Wed Oct 28, 2009 at 02:05:45 PM EDT
The Wall Street Journal reports that GMAC Financial Services Inc. and the US Treasury Department are in advanced talks to prop up the lender. It will be the third infusion of cash into the troubled financial services company that was granted an exemption and allowed to become a bank holding company so that it could tap into the TARP money.
The U.S. government is likely to inject $2.8 billion to $5.6 billion of capital into the Detroit company, on top of the $12.5 billion that GMAC has received since December 2008, these people said. The latest infusion would come in the form of preferred stock. The government's 35.4% stake in the company could increase if existing shares eventually are converted into common equity.
The willingness by Treasury officials to deepen taxpayer exposure to GMAC reflects the troubled company's importance to the revival of the auto industry. Founded in 1919, GMAC has $181 billion in assets and is a major financier for 15 million borrowers and thousands of General Motors and Chrysler car dealerships in the U.S.
The new capital would help firm up GMAC's balance sheet and solidify its auto-loan business. GMAC provides the vast majority of wholesale financing for GM dealerships across the country, meaning scores of local distributors would be unable to bring new vehicles onto their lots if GMAC were to collapse.
Federal officials also are moving to shore up GMAC's ability to fund its daily operations, with the Federal Deposit Insurance Corp. telling the company Tuesday the agency will guarantee an additional $2.9 billion in debt, according to people familiar with the discussions. The FDIC guarantee will make it easier for the company to sell debt to investors. The FDIC backed $4.5 billion in GMAC-issued debt earlier this year.
Good thing we get equity for all this crap, not sure if that's a financial term or not. The government's current 35.4 percent stake in GMAC is the result of the Obama Administration's restructuring of the auto industry earlier this year. While GMAC was long General Motors' financing arm, in 2006 GM sold a majority stake to private-equity firm Cerberus Capital Management. Cerberus is a value shop. They look for undervalued companies and hope to turn them around. They are finance professionals. They knew the risk and yet we are paying the price. In effect, a bailout of GMAC is a bailout of Cerberus.
Meanwhile, GMAC's market share in the auto financing market has fallen sharply during the crisis as its cash available for lending declined. Increasingly banks like JP Morgan Chase and Wachovia are making inroads winning market share. GMAC had 3 percent of the auto financing market in the first six months of the year, down by almost half in the same period a year ago, according to Experian Automotive.