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The U.S. government is negotiating to provide GMAC Financial Services with approximately $3.5 billion in bailout funds in addition to the $12.5 billion the company has already received, according to multiple reports.
The U.S. Treasury told the company to raise additional capital as part of government-led stress tests of large banks conducted earlier this year. The tests were designed to identify banking firms that would need more capital to continue lending if the economy faltered in 2009 and 2010.
While the government views GMAC's survival as critically important to the revival of the auto industry, the company's financial troubles are actually linked to its mortgage lending unit Residential Capital LLC, or ResCap.
GMAC had proposed to decide ResCap's fate by the end of the year. The mortgage unit lost $9.96 billion in 2007 and 2008 and $2.7 billion through the first three quarters of 2009. Meanwhile, the auto finance unit showed a profit.
That has some analysts questioning whether GMAC really needs the money.
"If you look at where the losses are coming from, it's not coming from the core automotive business, it's coming from the legacy portfolio at ResCap," CreditSights Inc. analyst Adam Steer told Bloomberg News in an interview. Steer has called on GMAC to place the unit in bankruptcy or cut the home lender loose.
The additional government funding will likely allow GMAC to avoid doing either, anonymous sources told Bloomberg.
An announcement granting the loans is expected to coincide with GMAC taking accounting losses related to its mortgage operations. The cleanup is designed to return the Detroit-based finance company to profitability in the first quarter of 2010, Bloomberg reported.
"GMAC has been conducting a strategic review of its business and evaluating options to address the challenges in its mortgage operation," a GMAC spokeswoman told The Wall Street Journal.
While the spokeswoman declined to comment on potential further government loans she said GMAC wants to prepare itself to repay the U.S. government.
The Treasury is authorized to distribute further funding to GMAC through the $700 billion Troubled Asset Relief Program (TARP), even though the government has been winding down the program. About $175 billion has been returned from banks as the financial crisis has abated.
The Treasury lent GMAC $5 billion in December 2008, and another $7.5 billion in May after the stress tests were complete. The government is GMAC's largest stakeholder with 35.4%, which is likely to increase with the new funding, giving the government more seats on its board.
The government also controls General Motors Corp. (NYSE: GRM), the company's biggest customer. Because GMAC accepted TARP funding, it is subject to pay restrictions imposed by the government's pay czar.
News & Related Story Links:
- Bloomberg News:
GMAC Said to Discuss U.S. Aid Package of $3 Billion or More
- Wall Street Journal:
GMAC Set for Another Cash Infusion
- Money Morning:
Bank Stress Tests: The Results Are in; Now What?
- Money Morning:
Executive Pay Cuts Rekindle "Say-on-Pay" Flame in Washington.