Money Matters, Simplified.
GMAC gets $3.8 billion in 3rd round of funding
by Jamie Anderson - December 31, 2009 - comments
With the latest funding, the government has hiked its stake to 56 percent in GMAC. Cerberus Capital Management, the private equity firm that bought a majority stake in GMAC in 2006 will now hold 14.9 percent stake. Third-party lenders will own 12.2 percent, and 16.6 percent will be owned or managed indirectly by G.M.
New York, December 31 -- GMAC may not have been able to garner sufficient capital on its own, but the erstwhile part of General Motors, known as General Motors Acceptance Corporation for years, has found a knight in shining armor in the Treasury Department.
In what will be the third round of government financing, the Treasury Department has announced that it would give another $3.8 billion in aid to GMAC.
This will bring the taxpayers’ total investment to $16.3 billion in the besieged lender that finances customers and dealers of both General Motors and Chrysler.
GMAC gets more than Chrysler
With the latest round of funding, the government’s stake in GMAC will rise to 56 percent, up from the current 35 percent.
Ironically, the treasury has now pumped in more money in the global financial services company GMAC than in automobile behemoth Chrysler. It may be recalled that GMAC converted itself to a bank holding company an year back so that it could benefit from the TARP funds.
Brian Bethune, the chief United States financial economist at the research firm IHS Global Insight, averred, “The TARP program was originally intended for the banks, but most of the banks have found a way to escape out of that.”
“At this point, most of the government’s risk is concentrated in automotive,” added Bethune.
GMAC finds itself in a quagmire primarily because it focused exclusively on automobile financing and mortgage lending. GMAC lost as much as $5.3 billion in the first three quarters of the current calendar year itself.
Funding was essential for stability
"We said, if you do not go raise capital from the private markets, if you are unable to, we will put capital into you because it is important to the stability of the system," Treasury Secretary Timothy F. Geithner said of the move.
“These actions fulfill Treasury’s commitments made in May to GMAC in a manner which protects taxpayers to the greatest extent possible,” the Treasury added.
GMAC now stands a good chance to consummate its overall restructuring plan and then turn to the private capital markets for the financing its needs for the next year.
The latest round of funding entails that $2.54 billion would be converted into preferred securities. These securities will be considered senior to other capital securities. The rest of the $1.25 billion would be converted into preferred stock.
The financing will enable GMAC to get rid of loss-making mortgage assets at a discount. Such a sale may result in GMAC incurring huge charges upfront; however, it will make the company more attractive to investors.
“By protecting the financial performance and strength of our core automotive finance operations, we expect to increase the pace at which we can fully repay the U.S. taxpayer,” GMAC’s chief executive, Michael A. Carpenter, said of the company’s plans.