Treasury keeps car loans flowing with $6 billion rescue of GMAC

GMAC's president says the federal money will have an immediate impact on the credit it can offer General Motors customers.

By , Staff writer of The Christian Science Monitor

  • close
    Credit continues: The bailout of GMAC will allow the company to continue extending financing to buyers of General Motors cars, like this customer in Dearborn, Mich.
    View Caption

The US Treasury has expanded its economic stabilization efforts by making a $6 billion rescue of GMAC, the big issuer of car loans.

After months in which such government interventions have become commonplace, this one carries a natural logic: infusing General Motors Acceptance Corp. with cash will help two hard-hit sectors: the credit business and the car business.

Government bailouts lately have focused on aiding these two distressed industries. If GMAC had been forced into bankruptcy, it would have added to the already large woes of General Motors. The finance company's troubles threatened the ability of many consumers to access credit needed to buy General Motors cars.

Recommended: Could you pass a US citizenship test?

The rescue comes amid signs that the bailouts and loans extended by the Treasury and the Federal Reserve throughout the financial sector are doing some good. Credit-market stress has declined since October, although conditions are not back to normal.

The move to help GMAC won't solve the auto industry's problems, but it will help keep credit flowing.

"It keeps a bad problem from getting a lot worse," says Peter Morici, a University of Maryland economist who follows the auto industry.

A recent decline in gasoline prices also provides a marginal boost to the Detroit automakers. But US vehicle sales remain far below their pre recession levels.

The Treasury's help for GMAC comes in two parts.

A $1 billion loan goes to General Motors, so the carmaker can inject additional capital into the finance company. The move helps GMAC raise capital to reorganize as a bank holding company – which makes the lender eligible for more emergency assistance.

Then, the Treasury said it will put $5 billion of its own money into GMAC, by purchasing preferred stock, "as part of a broader program to assist the domestic automotive industry in becoming financially viable." In return, the Treasury will get an 8 percent annual dividend.

GMAC, originally created by GM, is owned jointly by the carmaker and Cerberus, a private investment firm.

GMAC has also coaxed bondholders to exchange some of their debt positions for an equity stake.

All these moves come in the wake of a $17.4 billion package of direct assistance for automakers GM and Chrysler, which was announced in mid-December.

The Detroit carmakers face a difficult restructuring, expected to occur under close oversight of Congress and the incoming Obama administration.

Bill Muir, GMAC's president, said in a statement that the federal money will have an immediate impact. "We will continue to employ responsible credit standards, but will be able to relax the constraints we put in place a few months ago" that prevented loans for people with credit scores between 621 and 700, he said.

Key indicators of stress in credit markets have eased somewhat in recent weeks. Private short-term borrowing markets "have thawed significantly," economist Michael Darda of MKM Partners wrote in a report this week.

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...