Big Lender GMAC asks for billions in U.S. aid

GMAC, the troubled consumer finance company, is seeking billions of dollars in federal aid, a move that would be its third taxpayer bailout and which could give the government a controlling stake in the company, according to people briefed on the situation.

GMAC and Treasury Department officials have been locked in negotiations over how to structure the third bailout as it approaches a crucial deadline in early November for shoring up its finances.

The government already owns about a 35 percent stake in the company from $12.5 billion of investments made over the last year as part of a broader restructuring of General Motors.

Any fresh injection of government money, or the conversion of its existing preferred shares into common stock, would give taxpayers a much larger – perhaps even a majority stake – in the company.

The government’s investment in GMAC would vastly surpass its nearly 34 percent stake in Citigroup, and could reignite the public debate over the Obama administration’s role as a major investor in corporations.

The talks highlight the importance of GMAC, a 90-year-old institution christened as a bank only late last year, to the national economy – and its continued trouble in surviving without government support.

GMAC was designated by the Obama administration earlier this year as a key source of buyer and dealer financing for GM and Chrysler. Many of its problems, however, stem from now-soured sub-prime mortgages and other real estate loans it made at the height of the housing bubble.

GMAC’s financial issues are not new. Following a government-mandated stress test last spring, GMAC was found to need another $11.5 bln of capital – and given six months to raise it.

In May, it struck a deal with federal officials to plug part of that hole with about $7.5 bln of special preferred shares that could automatically convert into common stock. Part of that money, however, was allocated to loans for GM and Chrysler dealers.

As a result, GMAC needs to come up with more than $4 billion of additional capital by November.

With all three helpings of federal aid, it is likely that the government could wind up owning at least half of the company. But GMAC and Treasury officials are discussing ways to structure the investment with an eye toward limiting the government’s ownership interests.

Gina Proia, a spokeswoman for GMAC, declined to comment.

Even with a majority stake, the government would not be able to oust current management. But according to governance guidelines agreed to in May, the government can designate up to four directors if it holds a stake of between 50 and 70.8 percent of GMAC; it can name up to six directors if its ownership stake is over that amount. Currently, the government has appointed two board members.

GMAC is the only one of the 19 banks that underwent the stress test that could not raise additional capital from private investors. Ten of the 19 large banks were deemed healthy enough to need little or no additional money; the eight remaining banks were able to raise enough capital from issuing stock, selling businesses, and strong quarterly earnings.

But as a private company, GMAC struggled to find interested investors. And unlike Citigroup, it did not have enough preferred shares that could be exchanged for new common equity. For most of its history, GMAC served as the financing arm for GM’s vast network of dealers and thousands of car buyers. But the company’s Residential Capital branched out into subprime mortgage lending.

Concurrent drops in the housing and auto sales markets pushed GMAC into the red, running up hundreds of millions of dollars in losses and curtailing its ability to lend out money. The company also struggled to finance its operations in the midst of the credit squeeze, largely unable to attract investors in the capital markets.

The company lost $3.9 billion in the second quarter this year.

GMAC was one of several firms that sought an emergency conversion into a bank holding company last fall, which qualified for a host of federal aid programs including government guarantees of its debt.

© 2009 New York Times News Service