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Fed: GMAC will still need more bailout money

/ Source: The Associated Press

The Federal Reserve said Monday that GMAC is the only one of 19 stress-tested banks that needs more capital to withstand losses if the economy softens.

GMAC, a crucial player in the U.S. auto industry, has been unable to raise the $11.5 billion regulators said it needed after stress test results were announced in May. The Fed says the finance company is expected to close the gap with more money from the $700 billion financial bailout.

GMAC, already the recipient of $12.5 billion in taxpayer infusions, is negotiating with regulators over how much more it will receive.

The Detroit-based lender expects to meet its additional capital requirements under the stress test program, and is in “active dialogue” with Treasury about its next round of bailout money, said GMAC spokeswoman Gina Proia. Those funds will be used to fulfill the stress test requirement “and not to resolve any new matter related to our business,” she added.

GMAC provides 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 runs an insurance unit and an online banking unit called Ally Bank.

Treasury Secretary Timothy Geithner said the success of the other 18 companies showed that the financial sector has become far more stable since January.

“Banks are repaying the taxpayers with interest, and credit is coming back, but we need to reinforce that improvement and ensure that small and medium-sized businesses can borrow to create jobs,” he said in a statement.

The test results in May found that 10 of the 19 largest banks needed an extra cushion of capital to withstand deeper losses they would see if the recession worsened. They were given six months to raise a total of $74.6 billion of capital. The Fed said Monday that they have raised a total of $77 billion.

GMAC could not raise money in part because investors needed to charge high interest rates to offset the risk that the company could fail.

The other nine banks, including Bank of America Corp., Wells Fargo & Co. and Citigroup Inc., raised the money from private investors, by selling assets or by converting preferred equity into common shares.

GMAC was previously owned by General Motors Corp. GM later sold a majority stake and GMAC spread its lending into other areas, such as home mortgages.

Like most financial companies, GMAC struggled to find financing when the credit markets seized up. Its bonds are rated at junk status by major ratings agencies, further complicating its ability to raise new funds. GMAC recently used a Federal Deposit Insurance Corp. program to help it issue debt backed by the government’s top rating.

Analysts have suggested that a further infusion of government aid could help improve GMAC’s financial stability. But it remains dependent on a broader economic recovery in some of its key markets, like autos, Moody’s Investors Service analyst Mark Wasden wrote in a credit research note last week.

“GMAC’s ratings will be constrained as long as recovery in the auto industry remains elusive,” Wasden said.

The stress tests subjected banks’ balance sheets to two economic scenarios. One was meant to look like the recession and recovery analysts expected. The second was envisioned as a much worse recession.

Banks were told to raise enough money to withstand the losses they would see under the harsher scenario. Loss projections were based on an unemployment rate of 8.9 percent in 2009. Unemployment last month reached 10.2 percent.

But other parts of the economy are faring better than the test envisioned. For example, the test had home prices falling 22 percent between the end of 2008 and the end of 2009. Prices only fell 5.5 percent in the first half of 2009, and have been improving for the past three months.

Some analysts have criticized the additional bailout as an equity investment in an otherwise insolvent company. GMAC’s bailouts have come from Treasury’s automaker rescue program, rather than from the pool of money designated to shore up healthy banks.