GMAC Financial Services' transition into a bank holding company should buy the troubled lender some time to turn itself around, but the cost is a loss of control for its owners General Motors Corp. and Cerberus Capital Management. It also raises a number of questions, including who will control GMAC going forward and how much its business model might change.
GMAC, which is 49-percent owned by GM, provides auto financing to GM customers and dealerships. The Federal Reserve on Wednesday approved GMAC's application to become a bank holding company — allowing the lender to qualify for the government's $700 billion rescue fund. The approval order indicates that GMAC plans to diversify its activities.
The Fed order says GM will reduce its stake to less than 10 percent of the voting and total equity interest of GMAC. GM's remaining equity interest in GMAC will be transferred to an independent government-accepted trustee who must dispose of the equity held in the trust within three years of the trust's creation. Cerberus, which led an investment group that bought a 51-percent stake in GMAC from the automaker for $14 billion in 2006, will reduce its stake in GMAC to no more than 33 percent of the lender's total equity.
The Fed said GM "for some time" will remain a major business partner of GMAC, providing funding to customers and dealerships to enable them to buy and lease vehicles from GM. However, the Fed said, GMAC plans to diversify its activities and has significantly modified its agreement with GM to provide customer and dealership financing.
Analysts have speculated that without financial help, GMAC would have to file for bankruptcy protection or shut down, dealing a serious blow to GM's own chances for survival.
GMAC spokeswoman Gina Proia said Thursday that GMAC has submitted an application to the Treasury Department for money from the government rescue fund, though she declined to say how much the company is seeking.
She said that GMAC's operations will continue on much the same path.
"GMAC was founded in order to support the sale of GM vehicles," she said. "That's our history. That's our core business. We intend to continue to do that and we think we're actually in a better position now to do that."
At the same time, Proia noted that GMAC's designation as a bank holding company will help it further diversify its operations.
"As a bank holding company, we intend to ramp up our deposit-taking activity," she said. "To the extent that we're able to get improved access to funding, we intend to grow our overall business."
Proia declined to say if GMAC, as a commercial bank, will seek to buy other deposit-gathering banks. On that issue, the Fed's approval documents say only that "applicants do not propose to acquire any additional depository institution as part of this proposal." A representative at the Fed's Washington offices, which were closed for the Christmas holiday, did not immediately respond to a request for further comment Thursday.
Proia declined to discuss GMAC's future ownership structure, or whether GMAC's transition to a bank holding company dispels the threat of bankruptcy. However, she said that the Fed's decision will put GMAC in a better long-term competitive position, adding that "there's no plan" for any management changes.
Before the Fed's decision, GMAC was facing a crucial Friday deadline to complete a deal with its bondholders that would allow it to exchange debt for equity. GMAC was struggling to convince investors to provide the capital that it desperately needed to win approval to become a bank holding company. The U.S. central bank acted before the deadline, which GMAC says still stands and will expire on Friday. GMAC will disclose the results of the exchange after it expires, Proia said.
According to the Fed, GMAC has committed to amend its existing agreements with GM to remove any restrictions on GMAC's ability to engage in transactions with unrelated third parties and to ensure that GMAC has complete discretion to set the terms of its financing arrangements.
Each Cerberus fund that holds interests in GMAC will distribute its equity interests in GMAC to its respective investors. As a result of the distribution, the total direct and indirect investments controlled by Cerberus and its related parties would not be more than 14.9 percent of the voting shares or 33 percent of the total equity of GMAC. The Fed also said that no investor would, after this distribution, own, hold or control 5 percent or more of the voting shares or 7.5 percent of the total equity of GMAC.
Additionally, Cerberus employees and consultants would stop providing services to GMAC. Neither Cerberus nor any affiliated entity will have an advisory relationship with GMAC or any investor regarding the vote or sale of shares or management or policies of GMAC, according to the Fed.
The Fed's move making government aid possible for one of the nation's biggest suppliers of auto loans — which also provides home mortgage loans through its Residential Capital LLC division — was just the latest extension of the federal bailout program, initially designed to shore up ailing banks. As the credit crisis kept spreading, the program expanded to include insurers, credit card companies, and the automakers themselves.