Finance News

GMAC is going to become a bank holding company

GMAC, the financing arm of General Motors Corp., is taking steps to become a bank holding company, potentially giving it greater access to the government's $700-billion financial bailout package, according to sources familiar with the matter.

The lender, 49% owned by GM, is currently regulated as an industrial bank by the Federal Deposit Insurance Corp. but might switch to a commercial bank holding charter regulated by the Federal Reserve, said the people, who did not want to be identified because they were not authorized to speak about the effort.

The change is expected to give GMAC greater access to the government's rescue plan that Congress approved this month - called the Troubled Asset Relief Program - and other financing options.

The relief program provides funds to buy bad loans from lending institutions. Unlike other auto lending arms, GMAC originated mortgages as well as auto loans, which have weighed heavily on its financial performance.

On Monday, GMAC was approved by the Fed for access to its new short-term commercial paper backstop, potentially providing it with as much as $10 billion in funding.

Like other lenders, GMAC is finding it increasingly difficult to raise capital in the current economy. Its borrowing costs have risen, and that in turn has forced it to tighten lending to GM dealers and potential car buyers. This month the company said it would only make auto loans to people with excellent credit.

Cerberus Capital Management is the majority owner of GMAC, with a 51% stake. One of the chief concerns with becoming a bank holding company is whether such a move would subject the notoriously secretive private equity firm to greater scrutiny from the Fed.

Rick Carnell, professor of law at Fordham University and a former counsel in the Federal Reserve system, said that entities with a controlling interest in a bank holding company are subject to regulation, including facing strict capital requirements.

Companies that hold 25% or more of a bank holding company are subject to such oversight, meaning that GM could face regulation.

GM has been in talks with Cerberus about merging with Chrysler. Cerberus also owns an 80% stake in Chrysler. The idea would be to cut billions in costs by streamlining operations of the two automakers, but analysts say a combined GM-Chrysler would need at least $10 billion to finance a deal.

Currently, GMAC is an industrial loan company, a charter also held by General Electric Co., American Express Co. and Target Corp. As a bank holding company, GMAC could have its debt temporarily guaranteed by the FDIC, get capital from the Treasury's capital purchase program and turn to the Fed for cheap, short-term loans.

In the short term, the most appealing aspect of a change in status would be increased access to the $700-billion asset-purchase program. A large portion of the mortgages originated by GMAC are underperforming loans given to subprime borrowers; in the second quarter, the company lost $1.9 billion on mortgages.

Source: Washington Post
Date: 31.10.2008 [ID: 205]

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