NEW YORK (AP) -- The U.S. government could eventually own a majority stake in GMAC Financial Services following its latest $7.5 billion aid package to the ailing auto financing company.
To keep loans flowing to would-be buyers of GM and Chrysler vehicles and shore up its capital position, the Treasury Department agreed Thursday to provide GMAC with $7.5 billion in loans. The new aid marks the second time the government has stepped in to prop up the former lending unit of General Motors Corp.
In addition, the Federal Deposit Insurance Corp. took the rare step of allowing the low-rated company to gain access to its debt guarantee program. The program normally is limited to companies with investment-grade debt ratings but GMAC carries a rating below that. GMAC will be allowed to issue as much as $7.4 billion in debt, guaranteed by the FDIC in case the company defaults on payment.
In addition, the Federal Reserve waived rules to give GMAC's new bank, called Ally Bank, more leeway to make loans to GM customers.
In exchange for the latest round of aid, the government will receive 157.5 million preferred shares of the lender, according to a regulatory filing Friday. The Treasury said it won't immediately hold an equity stake in GMAC but will soon exercise its right to swap an $884 million loan to General Motors Corp. for an equity share in GMAC.
The Treasury said it expects to exercise that right "in the very near future," giving it a 35.4 percent stake in the company. That stake could climb to more than half if the government converts its latest $7.5 billion investment into equity.
The government could ultimately sell its stake in GMAC if the lender holds a public stock offering, according to Friday's filing. If GMAC holds an offering, the government would begin liquidating its stake within seven years in increments of 10 to 20 percent per year.
Analysts suggest that the new government support will make GMAC a lending powerhouse that will give GM and Chrysler a huge advantage over their competitors -- including U.S. rival Ford Motor Co., which hasn't taken any government aid. It would have the power to offer better loan terms to buyers of GM and Chrysler cars and trucks as a way of steering business to those automakers.
GMAC received $5 billion in December from the Treasury Department's $700 billion financial bailout program in exchange for 5 million common shares and the promise to extend financing to dealers of Chrysler LLC, which is restructuring under Chapter 11 bankruptcy protection.
After failing the government's bank stress test, the Treasury Department mandated earlier this month that GMAC raise $11.5 billion in additional capital, including $9.1 billion of new Tier 1 capital. But GMAC, which reported a first-quarter loss of $675 million, has seen rising defaults in its auto finance division. That, combined with soured assets in its Residential Capital LLC mortgage unit, made it difficult for the company to raise capital from private investors.
So in addition to $4 billion in aid to support GMAC's new loans to Chrysler dealers and customers, the government agreed to inject $3.5 billion to help the company bolster its capital cushion.
"This new arrangement with GMAC will help provide a reliable source of financing to both auto dealers and customers seeking to buy cars," Treasury Secretary Timothy Geithner said Thursday.
GMAC is expected to detail its plans to raise the rest of its capital needs by the government's June 8 deadline. GMAC Chief Executive Alvaro G. de Molina said Thursday the Treasury's latest action marked "another major step in stabilizing and strengthening" the company.
The government also has instructed GMAC to assemble a new, smaller board of directors, which the company has been putting together. The new nine-member board will include three independent directors and two trustees appointed by Treasury to represent the government's interest. Those two are Robert Blakely, a former chief financial officer of mortgage finance company Fannie Mae, and Kim Fennebresque, a former investment banker.
De Molina will remain on the board as will Stephen Feinberg, the founder and head of Cerberus Capital Management LP, the private equity firm that jointly owns GMAC with General Motors.
Five GMAC directors have resigned from the board, the company said: T.K. Duggan, Douglas A. Hirsch, Robert Hull, Samuel Ramsey and Robert W. Scully.
The government has a vested interest in seeing GMAC, GM and Chrysler succeed, in order to recoup the billions in aid it has doled out to the companies. General Motors has received $15.4 billion in federal loans and Chrysler has received $5.8 billion. GM is currently negotiating to give the government a 50 percent equity stake in exchange for wiping out a portion of its debt as the company faces a June 1 deadline to restructure or head into Chapter 11 bankruptcy reorganization. It has requested up to $30 billion in additional loans from the Treasury Department to sustain its turnaround effort.
Chrysler said last week it intends to terminate franchise agreements of about a quarter of its 3,200 U.S. dealerships by June 9. GM has told some 1,100 of its dealers -- about 20 percent -- that they would be dropped by late next year. Auto dealers say the swift closing of dealerships could lead to significant job losses and leave many dealers with large inventories of unsold vehicles.
Sen. Kay Bailey Hutchison, R-Texas, said the new $7.5 billion injection for GMAC would help remaining Chrysler dealerships buy vehicle inventories from dealerships whose franchise agreements are scheduled to end.
Marcy Gordon wrote from Washington. AP Economic Writer Jeannine Aversa in Washington and AP Auto Writer Kimberly S. Johnson in New York contributed to this report.