Treasury says it will buy $5 billion in GMAC stock
By Robert A. Rankin | McClatchy Newspapers
WASHINGTON _ The Treasury Department announced Monday night that it will purchase $5 billion in stock in General Motors Acceptance Corp., the financial arm of the giant U.S. automaker that the Bush administration earlier pledged to loan $13.4 billion to in early 2009 to help it avoid bankruptcy.
In addition, Treasury said it would lend General Motors another $1 billion to help GM participate in a GMAC reorganization to become a bank holding company so that it qualifies for loans from the Federal Reserve.
The Treasury announcement said the investment was conditional upon GMAC meeting conditions that apply to the earlier Treasury loan to GM restricting executive pay and other restraints aimed at insuring that taxpayer dollars aren't misspent.
GMAC applied for Treasury relief in late November, seeking a share of the $700 billion in taxpayer funds approved by Congress to relieve the financial industry's autumn meltdown. GM vehicle sales plunged by 45 percent in October, and providing more funds to GMAC could help expand credit to finance vehicle purchases at a time when other financial services firms are wary of lending amid the widespread credit crunch and economic downturn.
In 2005, GMAC financed more than $25 billion in subprime mortgages to the least creditworthy borrowers, whose subsequent inability to pay their debt is at the center of the global financial meltdown. By 2005, mortgage lending and insurance accounted for more than 50 percent of GMAC's lending, instead of vehicle finance.
In 2006, GM sold 51 percent of GMAC to private-equity firm Cerberus Capital Management to help lift its financial services' arm's low credit rating. That deal brought a reported $14 billion in much-needed capital to GMAC, but its low credit rating still forced it to pay higher interest rates for borrowed capital. The Treasury investment is another emergency infusion of desperately needed capital to help GM finance vehicle sales.
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Read the Treasury Department announcement
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