Another $7.5 billion bailout for GMAC

Auto lender to GM and Chrysler gets big investment from Treasury. Aim is to shore up depleted funds and boost Chrysler lending.

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NEW YORK (CNNMoney.com) -- The Obama administration announced Thursday that it has invested $7.5 billion in GMAC, aiming to prop up the troubled lender and boost its ability to make loans to Chrysler dealers and customers.

GMAC is the main source of financing for General Motors (GM, Fortune 500) customers and was recently tapped by the administration as the main lender for Chrysler.

The company, which is also a home mortgage lender, has been wracked by huge losses in recent quarters and hit hard by the decline in auto sales and turmoil in the housing market.

"Over the past several months, the contraction of credit in the auto finance markets has helped drive our auto industry into a historic crisis," Treasury Secretary Tim Geithner said in a statement. "This new arrangement with GMAC will help provide a reliable source of financing to both auto dealers and customers seeking to buy cars."

Government involvement: GMAC had already received about $6 billion from the government under the Troubled Asset Relief Program, or TARP.

The new $7.5 billion investment will be in the form of preferred equity. The Treasury Department said it will also soon exchange a previous $884 million loan to GM for common shares in GMAC. As a result, Treasury would hold 35.4% of the common equity of GMAC.

The new injection, however, also can be converted into common equity at a later date if GMAC's financial health deteriorates further. The government's ultimate ownership stake remains to be seen.

Some $4 billion of the new investment will go toward supporting financing for Chrysler dealers and customers. The remaining $3.5 billion will be used to boost GMAC's capital levels, as required under Treasury's recent stress tests of the nation's largest banks and lenders.

GMAC must still raise $5.6 billion to meet regulators' requirements about its financial health. The company has until June 8 to present a plan to obtain the remaining funds.

"This provides a downpayment on that, but doesn't meet the entire need," said a senior administration official.

GMAC also said Thursday that it had been approved to participate in a powerful program that lets companies issuing debt backed by the Federal Deposit Insurance Corp. GMAC will be able to borrow as much as $7.4 billion.

"These actions represent another major step in stabilizing and strengthening GMAC," GMAC Chief Executive Officer Alvaro G. de Molina said in a statement.

Past and future: GMAC and was once a major driver of General Motors' earnings before GM sold a majority stake to private equity firm Cerberus Capital Management LP and other investors in 2006.

The company had approximately $180 billion in assets and serviced 15 million customers around the world, as of March 31.

GMAC's auto finance business will get a boost this month as it becomes the preferred lender to Chrysler LLC customers as part of the Obama administration's agreement with that bankrupt automaker. Chrysler Financial, also owned by Cerberus, will no longer provide loans to Chrysler dealers and customers.

Chrysler and GM are both facing critical deadlines in coming days. A federal bankruptcy judge who holds the fate of Chrysler's restructuring plan is set to hold a key hearing next week. And GM is racing toward a June 1 deadline imposed by President Obama to devise a viable survival plan.

On Thursday, the United Auto Workers union said it has reached a deal with Treasury and GM to alter its labor contract - one of the key obstacles that needed to be cleared for GM to potentially avoid being forced into bankruptcy in the next two weeks. To top of page

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