Published December 27, 2008

A bank is born, bringing cheer to General Motors

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(New York)
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Converting GMAC to a bank will boost its ability to fund purchases of cars made by GM

DAYS from receiving its first instalment of at least US$9.4 billion in US aid, General Motors (GM) won another victory with the Federal Reserve's approval of lender GMAC LLC's bid to become a bank holding company.

GMAC's shift to a bank eases the threat of a default that threatened to dry up credit for GM dealers who used the company to finance about three-quarters of their inventory. GMAC also handled loans for about 35 per cent of GM's retail buyers in 2007.

'This has a positive impact on GM and also on the auto market,' Tatsuya Mizuno, director of Fitch Ratings in Tokyo, said yesterday in a Bloomberg Television interview. 'The problem is how they can prepare for next-generation vehicles, to restore their competitiveness.'

The Fed used emergency powers on Wednesday to grant GMAC's bank conversion, citing turmoil in financial markets and the potential impact on GM as the biggest US carmaker taps emergency federal loans to stay in business.

That decision was the second lift for GM in less than a week, after President George W. Bush said on Dec 19 that GM and Cerberus Capital Management LP's Chrysler LLC were eligible for US aid to help them avoid running out of cash by early next year, threatening a collapse that would cost millions of jobs. GM is due an initial US$4 billion in loans by Dec 29, and US$5.4 billion more by Jan 16.

GM, which owns 49 per cent of GMAC, and Cerberus, which leads the group holding the rest, will give up control of the Detroit-based lender to comply with federal rules on who can own banks.

Converting GMAC to a bank 'would benefit the public by strengthening GMAC's ability to fund the purchases of vehicles manufactured by GM', the Fed said in its order. GMAC was shut out of credit markets this year after piling up US$7.9 billion in losses dating from the middle of 2007.

GMAC spokeswoman Gina Proia said: 'We think this is a significant positive step in GMAC's history.' GM spokesman Greg Martin said the carmaker was pleased, while Cerberus spokesman Peter Duda declined to comment.

GM gained 25 cents, or 8.3 per cent, to US$3.25 on Dec 24 in New York Stock Exchange composite trading. The shares have plummeted 87 per cent this year, worst among the 30 companies on the Dow Jones Industrial Average.

GM owned all of GMAC until it sold a 51 per cent stake in 2006 to a group led by Cerberus, the New York-based private equity firm. As part of the Fed agreement, GM will reduce its ownership in GMAC to less than 10 per cent and transfer what remains to an independent trust, which will dispose of the stakes within three years.

Cerberus funds that hold GMAC stakes will distribute them to their investors, the Fed said. Cerberus's voting control will be cut to less than 15 per cent, or 33 per cent of GMAC's total equity. None of the recipients will have more than 5 per cent of the votes or 7.5 per cent of the total equity. The Fed also required Cerberus to sever ties between its people and GMAC.

Fed approval of GMAC as a bank 'is a big relief for GM dealers', said Martin NeSmith, a member of GM's National Dealer Council, who has three outlets in Georgia selling Chevrolets, Buicks and Pontiacs.

GMAC cut financing for consumers by about 90 per cent and banks aren't taking up the slack, Mr NeSmith said. He has said previously that a GMAC default might wipe out as many as 40 per cent of GM's dealers. -- Bloomberg