In its effort to rescue GMAC from collapse, the U.S. Treasury announced Monday evening it would make a $5 billion investment in the struggling financial company. The decision comes just days after GMAC was granted “bank” status, enabling it to take part in the Troubled Asset Relief Program (TARP), which is technically authorized to help banks only.
The strategy is different from the recent bailout of Chrysler and General Motors, because it does not involve short-term loans, but rather a direct investment. The Treasury is expected to receive preferred equity shares, with the possibility of an 8 percent dividend.
In addition to the money already lent to General Motors, the Treasury will give the automaker an additional $1 billion to take part in rights offering intended to support GMAC’s restructuring as a bank.
GMAC, which was spun off from General Motors in 2006, has been hammered by the credit crisis, prompting it to seek government assistance. The company specializes in consumer auto and home loans. It was recently forced to stop lending to consumers with less-than-perfect credit. The hope is today’s bailout will change that.
“The company intends to act quickly to resume automotive lending to a broader spectrum of customers to support the availability of credit to consumers and businesses for the purchase of automobiles,” GMAC said in statement.
As previously noted, General Motors, which owns 49 percent of GMAC, will be forced to reduce its ownership stake to less than 10 percent. Chrysler’s parent company Cerberus, will have to divest itself of its controlling stake in the company. The private equity firm will be forced to cut its stake to 14.9 percent in voting shares and 33 percent in total equity. Cerberus will reduce its ownership by distributing interest in GMAC to its investors. No individual investor will be allowed to hold more than a 7.5 percent stake.