GMAC granted authority to seek bailout funds

WASHINGTON — General Motors' chances of survival improved Wednesday after its financing arm became eligible to tap into federal bailout funds.

The Federal Reserve approved GMAC Financial Services' request to become a bank holding company, allowing it to apply for a portion of the $700 billion bailout fund and get emergency loans directly from the Fed. The GMAC Bank also has received approval from the Utah Department of Financial Institutions to convert to a state bank, the company said in a news release Wednesday.

Analysts had speculated that without financial help, GMAC would have had to file for bankruptcy protection or shut down, dealing a serious blow to GM's own chances for survival. The Fed cited "emergency conditions" in justifying its decision.

The move to rescue an auto financing company was just the latest extension of the federal bailout program, which was designed to shore up ailing banks but has grown to include insurers and credit card companies.

GMAC provides financing for both GM dealers and customers as well as home mortgage loans through its Residential Capital LLC division. The company is 51 percent owned by Cerberus Capital Management LP, the investment fund that also owns Chrysler. GM owns the remaining 49 percent of the company.

Under the Fed's order, Cerberus and GM, whose businesses are mainly outside banking, would both have to significantly reduce their ownership stakes in GMAC. GM has committed to reducing its ownership in GMAC to less than 10 percent. Cerberus was ordered to reduce its stake to 33 percent of total equity in the company.

A GMAC bankruptcy filing would have cut off financing to the roughly 85 percent of GM's North American dealers it does business with.

The future of Chrysler Financial, Chrysler's financing arm, is also uncertain. Earlier this month, Chrysler Financial, which provides financing for 75 percent of Chrysler dealers, said it could be forced to temporarily suspend funding for dealer vehicle inventories if dealers keep pulling large amounts of their money out of an account used to fund those loans.

The Fed's decision was announced after the close of a shortened trading day on Wall Street. GM shares closed up more than 8 percent earlier Wednesday.

The Fed said the plan will "benefit the public by strengthening GMAC's ability to fund the purchases of vehicles manufactured by GM and other companies and by helping to normalize the credit markets for such purchases."

In a statement, GMAC praised the Fed's action.