GMAC Begs for More Aid

| About: GMAC LLC (GMA)

GMAC Inc. (NYSE:GMA), the former finance arm of General Motors, has asked for further government help of $3.5 billion to meet buffer requirements. This plea followed the company’s inability to raise funds from external sources.

If granted, this Government aid will constitute as a third taxpayer bailout in the past year, after having received $5 billion and $7.5 billion during Dec. 2008 and May 2009, respectively, under the Troubled Asset Relief Program (TARP). The company has been in talks with the Treasury for months over an additional funds infusion.

The aid of $3.5 billion, if approved – which seems very likely – will be made by the government in the form of preference shares. The U.S. which currently holds 35.4% of the controlling stake in the company due to its earlier cash infusion, will have its share substantially increased if the existing preferred shares are converted into equity. This will lead to greater governmental control over the firm, including a right to appoint directors on the company’s board and executive pay restrictions.

In May 2009, the government stress test revealed that the company needed a further $11.5 billion to survive, which it has to raise within six months. Though it was helped with $7.5 billion by the government at that time, more than half of that was allotted to provide financing Chrysler dealers and customers as part of the auto industry bailout.

As a result, the company again fell short of $5.6 billion capital requirement which it was supposed to raise by Nov. 2009. However, the bank was unable to secure financing from private sources or public aid.

Traditionally, GMAC has served as the financing arm for General Motors’ vast network of dealers and thousands of car buyers. But the company’s Residential Capital unit branched out into subprime mortgage lending. The company has been facing operating losses due to souring subprime mortgages and other real estate loans it made at the height of housing bubble. This, along with the drop in auto sales demand, pushed the company further into the red. In the most recent quarter, the company reported $671 million of loss from continuing operations, compared with $2.5 billion in the year earlier period.

This move is in sync with management's efforts to restructure the company’s mortgage business operations to improve its financial performance. It is very likely that the company will get the third aid as the Obama Administration regards the lender as crucial to the survival of the U.S. auto industry.

Though GMAC has asked for yet another government bailout, a number of banks such as

Citigroup

(NYSE:C),

Bank of America

(NYSE:BAC) and

Wells Fargo

(NYSE:WFC) have recently repaid their bailout money. Many others have been able to secure external financing. The 90-year-old institution seems to have trouble surviving without government support.

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