GMAC, the former lending arm of General Motors Co., is in talks with the Treasury Department for a third injection of taxpayer aid, a further sign of the U.S. government's entrenchment in the auto industry.
The Treasury Department mandated earlier this year that GMAC Financial Services raise an additional $11.5 billion in capital by next month after undergoing a "stress test" along with 18 other banks. While other banks deemed undercapitalized have been able to raise funds from private investors, GMAC has been forced to go back to the government.
GMAC is a crucial player in the U.S. auto industry, providing wholesale financing to many General Motors and Chrysler dealerships to pay for the vehicles on their lots. The company also operates a mortgage lending unit — Residential Capital — which has been pummeled by the housing market downturn. It also runs an insurance unit and an online banking unit called Ally Bank.
"Having a healthy GMAC is important to us," GM CEO Fritz Henderson said in Washington on Wednesday. Henderson, who said he was not involved in the discussions for more aid to GMAC, called the lender "the source of financing" for GM and Chrysler.
A Treasury Department spokesman confirmed that the department is in talks with GMAC about a third helping of aid. The government already owns a 35 percent stake in GMAC after providing $12.5 billion to the lender. It also owns a majority stake in GM and a smaller stake in Chrysler.
The Treasury spokesman declined to comment on whether the government's ownership stakes in GM and Chrysler make it more willing to again help prop up GMAC. But Kirk Ludtke, a senior vice president of CRT Capital Group LLC in Stamford, Conn., said "a viable GMAC is critical to the success of GM and Chrysler."
Citing people familiar with the matter, The Wall Street Journal first reported late Tuesday that the U.S. government could hand over another $2.8 billion to $5.6 billion to GMAC, which is based in Detroit. The latest capital infusion would be in the form of preferred stock, the paper said. The government's stake could rise if the new preferred shares were ever converted into common stock.
A GMAC spokeswoman declined to comment.
Thomas Ferguson, an analyst with KDP Investment Advisors, said the fact that GM is privately held rather than publicly traded makes it more difficult for it to meet the government's stress-test benchmark.
"In Washington the company is viewed as an integral part of the U.S. auto industry's restructuring," Ferguson wrote in a report. "Today's news is consistent with our view that the government will continue as a financial backstop for GMAC."
Last December, the government gave GMAC $5 billion in exchange for 5 million shares and GMAC's agreement to extend financing services to bailed-out Chrysler LLC. Then in May, the Treasury Department announced a new $7.5 billion injection for GMAC — short of the $11.5 billion the government's stress test showed the company would need to stay afloat if the economy worsens.
To help GMAC raise the remaining capital, the Federal Deposit Insurance Corp. took the rare step earlier this year of allowing the junk-rated company to gain access to the FDIC's debt guarantee program. The FDIC agreed to guarantee up to $7.4 billion in GMAC-issued debt in case the company defaulted on payment, and has already backed about $4.5 billion worth.
According to the Journal, the FDIC told GMAC Tuesday that it would guarantee the remaining $2.9 billion in debt to prevent the company from being forced to reduce its lending volume.
GMAC in August posted a wider second-quarter loss of $3.9 billion. Midway through the quarter, GMAC became the preferred lender for Chrysler. Last week, the Treasury Department informed Chrysler's former lender, Chrysler Financial, that it would have to shut down by the end of 2011.
GMAC is scheduled to report third-quarter results next week.