News

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 (U.S.) bailout fund and get emergency loans directly from the Fed.

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 has 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-per-cent owned by Cerberus Capital Management LP, the investment fund that also owns Chrysler. GM owns the remaining 49 per cent 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 per cent. Cerberus was ordered to reduce its stake to 33 per cent of total equity in the company.

A GMAC bankruptcy filing would have cut off financing to the roughly 85 per cent 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 per cent 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 per cent 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.

“This is a very significant positive step for the company, and it marks a key turning point in our 89-year history,” said spokeswoman Gina Proia. “GMAC believes becoming a bank holding company is the best long-term solution to provide automotive and mortgage financing to consumers and business, including auto dealers.”

She said the change in status would provide the company with “improved access to funding.”

The decision to change the status of GMAC to a bank holding company follows the Fed's action on Monday granting the request of CIT Group to become a bank holding company so that it could qualify for federal rescue funds.

The Fed also has granted bank holding status to Goldman Sach's Group Inc., Morgan Stanley and American Express Co., all of which have changed their status in an effort to get access to more support after the financial crisis erupted with force in September.

Congress approved the bailout program on Oct. 3 with the original intent of buying up troubled mortgage assets.

That part of the program has never been implemented. Instead, Treasury Secretary Henry Paulson switched course. He began an effort to use $250-billion of the $700-billion fund to make direct purchases of bank stock, to inject more funds into financial institutions and fight the most severe financial crisis in seven decades.

But the effort has come under attack from critics who say that the Bush administration is not overseeing the program sufficiently to make sure that the banks actually increase their lending.

Many lawmakers are also upset that the program has already obligated half of the $700-billion total without making a serious effort to help troubled homeowners avoid a rising tide of mortgage foreclosures.