While Chrysler and Cerberus are now separated, the hedge fund still owns part of its new finance company, which is being propped up by the government.
The U.S. Department of the Treasury has strengthened the weak balance sheet of GMAC Financial Services by adding $7.5 billion in capital to the ailing finance company and bank.
The troubled lender had a first-quarter loss of $675 million, up from $599 million a year ago.
GMAC sold $7.5 billion of mandatorily convertible preferred (MCP) membership interests and warrants to the U.S. Treasury. The U.S. Treasury immediately exercised the warrants and GMAC issued an additional $375 million of MCP. The investment included $4 billion of MCP related to GMAC’s agreement with Chrysler LLC to provide automotive financing to Chrysler, and $3.5 billion of MCP toward the Supervisory Capital Assessment Program (S-CAP) requirement.
This reduces the new capital required to $5.6 billion after GMAC failed a Treasury audit earlier this month. After analyzing GMAC’s books, Treasury determined that it would need an additional $11.5 billion in capital in order to ensure survival as the Great Recession continues on. By failing the so-called stress test GMAC was put under the Supervisory Capital Assessment Program (S-CAP).
The latest loans are only part of the actions the U.S. government is taking to prop up GMAC, which is vital to its auto bailout plans. The company has been designated as the wholesale and retail lender for GM and Chrysler when it emerges from protection of the U.S. Bankruptcy court in New York. GM will almost certainly file for similar protection by June.
The Federal Deposit Insurance Corporation is now involved in assisting GMAC, by guaranteeing as much as $7.4 billion in new debt to be issued by GMAC as part of S-CAP.
“These actions represent another major step in stabilizing and strengthening GMAC,” said GMAC Chief Executive Officer Alvaro G. de Molina, who will also be faced with a new board of directors that includes two Treasury Department appointees.
The Chrysler finance agreement was approved by the U.S. Bankruptcy Court on May 12, 2009. GMAC will begin offering wholesale and retail credit to Chrysler dealers and customers immediately. GMAC has also made a deal with Chrysler LLC and the U.S. Treasury to aid in “managing the risks related to expeditiously extending credit to Chrysler dealers and customers.” The agreement provides GMAC with credit support for certain losses that may be incurred during the transition period, which allows time for GMAC to evaluate the creditworthiness of each Chrysler dealer.
“With nearly 90% of our U.S. dealers now activated for retail business through GMAC Financial Services,” said Jim Press, Chrysler Group Vice Chairman and President, “we’re very pleased about the U.S. Department of the Treasury’s announcement yesterday to invest in GMAC, to originate new loans to Chrysler dealers and consumers. As Chrysler transitions our dealer network, we are also very pleased with the speed and professionalism that GMAC Financial Services has demonstrated to Chrysler and our dealers. We look forward to a successful partnership that benefits both our consumers and dealers.”
GMAC intends to submit a Capital Plan to the Federal Reserve Bank of Chicago by June 8, 2009 explaining how it will raise the remaining $5.6 billion in capital. The U.S. Treasury has said that it may be willing to provide additional new capital. GMAC will also evaluate other alternatives to meet its capital requirements, but the lending markets remain largely frozen.
The MCP issued to the U.S. Treasury has an annual distribution rate of nine percent payable quarterly. These interests convert to common membership interests after seven years and may be converted in advance of that time by GMAC with the approval of the Federal Reserve — if such conversion would not result in the U.S. Treasury owning in excess of 49% of GMAC.
GMAC’s approval to become a bank holding company by the U.S. Government last fall required changes in the board of directors. The new GMAC board will now consist of nine directors, two named by the U.S. Treasury and two current directors. The two Treasury appointees are Robert T. Blakely and Kim S. Fennebresque. GMAC CEO Alvaro G. de Molina will remain on the board along with Stephen Feinberg as the Cerberus appointee. Existing independent and GMAC management directors on the board, T.K. Duggan, Douglas A. Hirsch, Robert Hull, Samuel Ramsey and Robert W. Scully, have resigned, effective immediately.
GMAC is an example of how tangled financial engineering becomes when debt, leverage and inadequate reserves are employed. On November 30, 2006, GM sold a 51% controlling interest in GMAC to a consortium of investors led by Cerberus Capital Management, L.P., a private investment firm, who has now given its leveraged position in Chrysler LLC to U.S. taxpayers in order to get out from under its failed investment there.
The consortium also included Citigroup Incorporated, which consumed billions upon billions in taxpayer money to prevent its own failure, when it couldn’t cover its losses from sub-prime mortgages and other leveraged securities.
Others in the GMAC group are Aozora Bank Ltd. and a subsidiary of The PNC Financial Services Group, Inc. On Dec. 24, 2008, GMAC was approved as a bank holding company under the Bank Holding Company Act, which allowed the government to prop it up by supplying cash, as part of the $700 billion Troubled Asset Relief Program that taxpayers financed.