The wait is over for government funding at GMAC.  The Treasury announced that they will in fact, inject capital into GMAC.  The Treasury stated they will purchase $5 billion in senior preferred equity with an 8% dividend from GMAC LLC. 

The Treasury’s approval ends weeks of uncertainty over the fate of GMAC.  Earlier last week, the Federal Reserve moved the potential for this action along by approving GMAC’s application to become a bank-holding company.  The bank holding company status was essential for GMAC to receive money from the Treasury’s TARP program.  There were several conditions for bank holding company status and this afternoon’s press release form the Treasury does not specify whether or not the conditions were met but it must be assumed that GMAC met the Federal Reserve conditions for bank approval before the Treasury issued the announcement.

The Federal Reserve’s approval for bank holding company status has some statements that may make a capitalist skin crawl, such as “In addition, the Board has carefully considered information from GMAC about the organization’s business strategy, as well as its business plans for the holding company and bank, and the actions it is taking and proposing to take to strengthen the organization’s risk-management infrastructure and to diversify its customer base and sources of income.”  The Fed’s evaluation of GMAC’s risk management sounds suspicious. GMAC has been collecting losses in the mortgage division like it was a contest to see who can lose the greatest sum of money in real estate.  GMAC was bleeding money in mortgages when most firms were cutting their operations down to the bare bones.

The Fed further added in the holding company approval release, “The Board also has considered carefully the future prospects of GMAC and GMAC Bank, including their business plans, in light of all the facts and circumstances, and the actions they already have taken and plan to take to strengthen their financial condition and management systems and to diversify their business operations.”  Yikes.  In the third quarter of this year GMAC reported a net loss of $2.5 billion and $5.6 billion for the three months and nine months ended September 30, 2008, respectively.  Results were attributable to a significant loss at ResCap, the mortgage division, caused by continued adverse conditions in the mortgage business.  Losses were also attributed to and increased provision for credit losses related to deterioration in used vehicle prices and weaker consumer and dealer credit performance.

GMAC, has total consolidated assets of approximately $211.3 billion.  The firm engages in automotive financing, commercial financing, mortgage financing, insurance, and other activities both in the United States and abroad.  GMAC Bank has total consolidated assets of approximately $33 billion and controls deposits of approximately $17 billion. GMAC Bank engages primarily in lending and other financing activities and taking deposits of the type that are permissible for an industrial loan company.

The announcement by the Treasury on December 29, 2008 stated the following.  The Treasury Department today announced that it will purchase $5 billion in senior preferred equity with an 8% dividend from GMAC LLC as part of a broader program to assist the domestic automotive industry in becoming financially viable.

Under the agreement GMAC must be in compliance with the executive compensation and corporate governance requirements of Section 111 of the Emergency Economic Stabilization Act, as well as enhanced restrictions on executive compensation.

GMAC will issue warrants to Treasury in the form of additional preferred equity in an amount equal to 5% of the preferred stock purchase that will pay a 9% dividend if exercised.

Additionally, the Treasury has agreed to lend up to $1 billion to General Motors so that GM can participate in a rights offering at GMAC in support of GMAC’s reorganization as a bank holding company. This commitment is in addition to the assistance previously announced for GM on Dec. 19. This loan will be exchangeable at any time, at Treasury’s option, into the GMAC equity interests being acquired by GM in the rights offering. Furthermore, this loan will be secured and will have other terms and conditions as outlined in the attached term sheet. The ultimate level of funding under this facility will be dependent upon the level of current investor participation in the rights offering at GMAC.

Treasury exercised this funding authority under the Emergency Economic Stabilization Act’s Troubled Asset Relief Program (TARP). The preferred stock purchase and the loan to support GMAC’s rights offering are part of an auto industry-focused TARP program that will include the $17.4 billion in assistance for domestic automakers announced earlier this month.

As previously indicated, Treasury will work with Congress and the President-elect’s transition team on the appropriate timing for release of the remainder of the TARP funds to support financial market stability.

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