General Motors receives $5bn bailout

The US Treasury Department said that it will provide $5 billion to GMAC Financial Services LLC, the ailing financing arm of General Motors, in a move that's expected to stave off a bankruptcy protection filing at the company but also severely limit GM's control over it.

In exchange for the slice of the $700 billion bank rescue package, the government will receive preferred shares that pay an 8 percent dividend and warrants to purchase additional shares in return for the money, the department said.



Treasury also said it will lend up to $1 billion to General Motors so that the company can purchase additional equity that GMAC is planning to offer as part of its effort to raise more capital.



The government aid is also expected to provide a needed boost to domestic auto sales by freeing up more credit for consumers. GMAC said Tuesday that it would immediately resume lending to certain customers it had previously said were too great a risk for auto loans as a result of the tight credit markets.



The assistance is part of a larger government effort to aid the auto industry and is on top of the $17.4 billion in loans the Bush administration agreed to provide to the industry on December 19, a Treasury Department official said.



Analysts had speculated that if GMAC didn't obtain financial help it would have to file for bankruptcy protection or shut down, which would be a serious blow to GM's own chances for survival.



Last week, the Federal Reserve approved GMAC's application to become a bank holding company, which made it eligible to receive money from the financial rescue fund. The Fed's approval was contingent on GMAC raising additional capital.



JPMorgan's Himanshu Patel said the moves show how Treasury is taking a comprehensive look at GM's entire business and make a bankruptcy protection filing and liquidation extremely unlikely.



But at the same time, the automaker is losing control of the financing business, which may or may not have positive results down the road.



"GM is now on a path to become the first global carmaker to have no influence/control over a captive auto finance company — this may prove a disadvantage to GM sales or, if not, it may prompt other (original equipment manufacturers) to follow," Patel wrote in a note to investors.



The analyst said that the moves could allow GMAC to pickup market share in the long term, or may even eventually spur a public offering.



Separately, GMAC said Monday that it has accepted all the bonds tendered in a debt-for-equity swap that was also part of its capital-raising efforts. The company released few details about the results of the swap, but said that the conditions of the offers had been satisfied.



GMAC "intends to act quickly to resume automotive lending to a broader spectrum of customers," the company said in a statement.



The company's goal is to reach $30 billion in capital, the majority of which would come from the debt-for-equity exchange. GMAC has struggled to get bondholders to convert 75 percent of their debt into equity of the company and has yet to say whether it has met its goal.



The Treasury Department's investment in the company does not mean it is "passing judgment" on whether GMAC has met the Fed's requirements to raise additional capital, the official said.



GMAC, meanwhile, said the government's $5 billion investment was completed Monday. The $1 billion loan is still in progress, the Treasury official said.



The Treasury Department said after initially bailing out the auto industry earlier this month that it had committed the first $350 billion of the bank bailout fund, and said Congress should release the second half.



But in several cases the Treasury hasn't actually spent all the committed funds, and the department will use money that hasn't yet been spent to fund the investment in GMAC, the official said. For example, the department allocated $250 billion for a program to inject capital into banks, but has so far spent only about $162 billion of that amount.



General Motors' partial ownership of GMAC has kept the finance arm lending to dealers and car buyers, even as credit from traditional banks has dried up. If GMAC went bankrupt, other institutions would be unlikely to step in to replace the credit lost by GM's dealers and customers.



GMAC said Tuesday that it will resume offering automotive financing to customers with lower credit scores, eliminating restrictions put in place two months ago that mandated a minimum score of 700.



"We will continue to employ responsible credit standards, but will be able to relax the constraints we put in place a few months ago due to the credit crisis," GMAC President Bill Muir said in a statement. "We will immediately put our renewed access to capital to use to facilitate the purchase of cars and trucks in the U.S."



Muir said the change will allow the company to return to "more normal" financing volumes and help stabilize the domestic auto industry.



GM owns 49 percent of GMAC, while the rest is owned by private equity firm Cerberus Capital Management.



As part of its order last week approving GMAC's application for bank holding company status, the Federal Reserve said GM will reduce its stake to less than 10 percent of the voting and total equity interest of GMAC. Cerberus, which led an investment group that bought a 51 percent stake in GMAC from the automaker for $14 billion in 2006, will reduce its stake in GMAC to no more than 33 percent of total equity.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Lou Reed distorted the truth about his upbringing, and since his death in 2013, biographers and memoirists have added to the myths
musicThe truth about Lou Reed's upbringing beyond the biographers' and memoirists' myths
News
people
News
Ed Miliband received a warm welcome in Chester
election 2015
Life and Style
Apple CEO Tim Cook announces the Apple Watch during an Apple special even
fashionIs the Apple Watch for you? Well, it depends if you want it for the fitness tech, or for the style
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: Project Implementation Executive

£18000 - £23000 per annum: Recruitment Genius: They work with major vehicle ma...

Recruitment Genius: Chiropractic Assistant

£16500 per annum: Recruitment Genius: A Chiropractic Assistant is needed in a ...

Recruitment Genius: Digital Account Executive - Midlands

£18000 - £26000 per annum: Recruitment Genius: They work with major vehicle ma...

Recruitment Genius: Web Developer

£28000 - £30000 per annum: Recruitment Genius: This company provides coaching ...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own