Auto finance company gets direct investment from government in return for equity stake and dividends.NEW YORK (CNNMoney.com) -- The Treasury Department is taking a $5 billion stake in GMAC in order to bail out the financing arm of troubled auto giant General Motors, officials said Monday night.
In exchange, the government will receive preferred equity shares, paying an 8% dividend.
GMAC also 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.
The government also broadened its $17.4 billion bailout of the auto industry, saying it would lend an additional $1 billion to GM so it could invest in GMAC as the financing company reorganizes. This moves helps the financing arm meet the conditions of becoming a bank holding company.
The Federal Reserve last week approved GMAC's conversion to a bank holding company - a necessary step to receiving bailout funds - subject to certain conditions.
GMAC is currently 51% owned by Chrysler's parent company Cerberus Capital Management and 49% by GM.
General Motors (GM, Fortune 500) and Chrysler were expected to receive $4 billion each in emergency aid from the Treasury Department's Troubled Asset Relief Program (TARP) on Monday. However, that delivery of the loan was stalled. An industry source told CNN that the the loan was delayed due to the complexity of the transaction and that the automaker expects the funds to come Tuesday.
GMAC's viability is critical to the automaker's recovery. GMAC has lost $7.9 billion over the past five quarters, mostly from risky subprime mortgage bets made by its Residential Capital division. The holdings plummeted in value when the housing market began to decline in 2007.
Despite lacking sufficient capital, GMAC won approval from the Federal Reserve last Wednesday to become a bank holding company. The Fed cited "emergency conditions" for its approval, saying the company was important to the future success of GM.
As part of the conditions outlined by the Fed, Cerberus must reduce its stake in GMAC to 33% and GM's share must drop to less than 10%. Cerberus will distribute the remainder of its stake to its investors and GM's stake will go into an independent trust to be sold off within three years.
The status in change opened the door for GMAC to receive the much-needed funds from TARP and other government bailout programs
http://money.cnn.com/2008/12/29/news/companies/gmac/index.htm
Topic: Treasury bails out GMAC - $5 billion (Read 439 times)