United States taxpayers now have a majority share in GMAC after the government granted its third wave of bailout funds at the end of December. The latest influx of cash in the amount of $3.8 billion raises the government’s stake in the former financial division of General Motors from 35% to 56% and the total bill for the American taxpayer to $16.3 billion.
GMAC was very involved in sub-prime mortgages, much like Fannie Mae, Freddie Mac and American International Group (AIG) were. The U.S. government now has control of Fannie and Freddie, and has a majority stake in AIG and General Motors.
Funding for the bailouts comes from the U.S. Troubled Asset Relief Program (TARP), which was created to rescue ailing companies and strengthen the economy during the credit crisis. Other companies that received TARP funds are already repaying the loans; GMAC, however, is still floundering. The rush to repay helps companies that received federal money get out from under hiring and pay restrictions imposed by TARP program funding rules.
In the first nine months of 2009, GMAC lost $5.3 billion. It will take another $3.3 billion hit in mortgage related write-downs for the fourth quarter of 2009, which is another sign that the mortgage crisis is far from over. Because of continued difficulty, GMAC is considering shutting down or selling the residential mortgage division.
GMAC provides many loans to Chrysler and GM dealers, which allows them to stock dealerships with vehicles for sale. Its survival is considered a key part of the survival of the auto industry, and the Obama administration is fervently hoping it can hold on, even if it means additional bailout funds.
Even though overall sales for the auto industry fell by 24% in the U.S. last year, the auto financing division of GMAC actually posted a profit of $395 million for the third quarter. Ally Bank, also owned by GMAC, is gaining billions of dollars in deposits for customers attracted to the high interest rates offered.
GMAC would not have been able to participate in the TARP program had it not been granted bank holding status a year ago. The government did a financial stress test, which the company failed due to mortgage business losses, and it was forced to raise another $11.5 billion in capital but was unable to do so. At that point, the government stepped in again.
The U.S Treasury says that it will leave day to day operations in the hands of GMAC management, but it does have the right to seat four directors on the board. Al de Molina, who was chief executive, resigned in November and has been replaced by Michael Carpenter, who was an executive with Citigroup.
Carpenter said the additional funds will help to stabilize GMAC and allow it time to examine options for the mortgage division. By protecting the financial performance and strength of our core automotive finance operations, we expect to increase the pace at which we can fully repay the U.S. taxpayer.