GM may get a a bailout even if lawmakers deny the Detroit automakers their own special bailout. This morning it announced that its financing unit, GMAC Financial Services, has applied to the Federal Reserve for designation as a bank holding company. That’s the first step in applying for a capital injection from the Treasury Department’s TARP.
There has been a lot of speculation that GMAC would make this move. The unit, once highly profitable, is now in deep trouble. The company has been eliminating auto loans to all but the most credit worthy customers and it’s residential mortgage company has suffered deep losses amid the mortgage crisis. GM has warned its financing arm may not survive this crisis.
The move could be risky for GMAC, however. If it is denied bank holding company status or later denied TARP funds, it is done for. Treasury Secretary Hank Paulson has said that the Treasury will not inject TARP money into failed companies, and GMAC could well be a candidate for him to prove this thesis.
GMAC’s application to become a bank holding company could be complicated by its relationship with Cerberus. The private equity company, which also owns Chrysler, has a majority stake in GMAC.
Subscription only website Briefing.com explains how the Cerberus relationship may throw a wrench into the plans.
“There has been some doubt as to whether GMAC could apply for this status since it’s 51% owned by Cerberus Capital Management. GMAC does have a banking subsidiary that offers certificates of deposit by telephone and the web. Cerberus purchased the stake back in 2006 and due to the special circumstances of the acquisition and GMAC Bank’s status as an Industrial Loan Company (ILC), the FDIC had to approve the deal. Part of that agreement was that within two years, GMAC would divest the bank; terminate its insured status; become a registered bank or thrift holding company; or apply to be subject to the same laws and regulations of similar companies. The end date for this deal is November, which is likely why we are seeing application being filed now.
Clearly, none of these options put forth by the FDIC were viable. GMAC couldn’t sell the bank in the current macro condition; ResCap needed GMAC Bank as a funding source; and terminating its status wasn’t an option. Now with the application, Cerberus, which is also the majority owner of Chrysler LLC, will have to open up its books.”
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