US Offers $6 Billion to Support Auto Lender GMAC

The Bush administration on Monday expanded its bailout of the U.S. auto industry, saying it was buying $5 billion in equity in auto and mortgage finance company GMAC and increasing a loan to General Motors by $1 billion.
CNBC.com
The action was the latest in a lengthy series of emergency government moves aimed at easing the worst credit crisis since the 1930s and limiting the severity of a year-long recession.
The Treasury Department said it would buy $5 billion in senior preferred equity with an 8 percent dividend from GMAC as part of an effort to ensure the solvency of a company considered crucial to GM's survival.
It also said it would lend up to $1 billion to fund GM's purchase of equity in support of GMAC's reorganization as a bank holding company. That loan would come on top of assistance extended to the No. 1 U.S. automaker earlier this month. Sales Decline
The government agreed on Dec. 19 to rescue GM and Chrysler LLC with up to $17.4 billion in loans to stave off a collapse that would have cost hundreds of thousands of jobs and dealt a severe blow to an economy already in recession. Of that amount, $13.4 billion was earmarked for GM.
President George W. Bush said at the time that it would be irresponsible to let the automakers die. The White House moved on its own after Republicans in the Democratic-controlled Congress blocked a deal to provide emergency funds.
U.S. auto sales have plunged to 25-year lows in recent months and are not expected to recover substantially until after 2009 under the most optimistic of outlooks. The recent steep drop in sales, which automakers and analysts have linked to the credit crisis that took hold in September, has pushed both GM and its smaller rival Chrysler to the brink of collapse.
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The Treasury said it was dipping into a $700 billion financial bailout fund approved by Congress in early October to buy the equity in GMAC and extend the loan to GM.
GMAC won Federal Reserve approval to become a bank holding company last week, a move intended to give it freer access to emergency government funds and help it avoid bankruptcy. GMAC has had to raise additional capital to achieve bank holding company status.
The company, co-owned by GM
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and private equity firm Cerberus, has lost $7.9 billion over the last five quarters as the credit crunch raised its borrowing costs sharply and the value of many of its assets plunged. Dividend Restrictions
GMAC agreed to restrictions on dividend payments and executive pay as part of the equity injection. The bonus pool available to the top 25 executives was cut by 40 percent from 2007 levels, a Treasury official told reporters on a conference call.
GMAC said in a statement that GM and a Cerberus management affiliate have agreed to buy $1.25 billion in new GMAC shares. Previously announced separate exchange and cash tender offers have been satisfied, it said.
Representatives of GM and Cerberus could not be reached for comment.