When the Obama administration committed $81 billion of taxpayer money to save General Motors and Chrysler this past spring, it insisted it had no intention of bailing out the companies any further.
President Obama vowed they would not “be kept afloat on an endless supply of taxpayer money.”
Four months later, a critical auto lender appears set to receive its third bailout with no assurance that the additional funds will suffice. The administration has already conceded that taxpayers will never fully recover their investment in the two automakers.
The Treasury Department confirmed Wednesday it was discussing $2.8 billion to $5.6 billion of additional aid to GMAC Financial Services, the Detroit-based former finance arm of General Motors, on top of the $12.5 billion the lender has received since December.
The proposed financing, through preferred stock, could make the United States the biggest shareholder of yet another major auto-related corporation if the preferred shares are exchanged for common stock. The government already owns nearly 61 percent of GM, 35 percent of GMAC and 8 percent of Chrysler.
The move reflects deep concern that auto sales would collapse without GMAC’s core business of lending to both consumers and to dealers restocking their lots and showrooms. GMAC has 15 million auto loans in its portfolio.
Car dealers report that their biggest problem selling cars today is getting loans approved for buyers. GMAC, which lost $3.9 billion in the second quarter, lent less than half as much money to car buyers during that period as it did the previous year.
“We have always been clear that having financing available for dealers and consumers was critical to the overall efforts to restructure the automotive sector,” a Treasury official said.
The government’s aid to GMAC has always been part of the $205 billion financial services bailout, not the auto bailout. However, critics note this was only possible because the company was allowed to make an emergency conversion to a bank holding company in December.
An $11.5 billion capital shortfall for GMAC was revealed by the Treasury’s financial “stress test” in the spring.
The auto lender is troubled mainly by subprime mortgage loans but also by loans to Chrysler, Jeep and Dodge dealers whose inventory is worth less than what they paid for it.
GMAC was facing a mid-November deadline to raise sufficient capital from investors, but may have been hampered by the fact that it is not a public company. GMAC is owned by the Treasury, private equity firm Cerberus Capital Management, certain Cerberus investors and GM itself, which holds a 10 percent stake in the lender.
Treasury spokesman Andrew Williams said all of the other 18 banks to take the stress test were able to tap private investors for the funds and some have repaid taxpayers.
“GMAC is the only one to need additional government capital,” he said.
“This is not a new or unexpected development. When we released the results of the stress test in May, we made clear - and have continued to make clear since - banks have a variety of tools to meet their capital requirements, including access to government capital,” Mr. Williams said.
“These discussions have been ongoing since the stress tests themselves were announced. We do not expect these discussions to result in any needs beyond the identified stress test needs in May,” he said.
Some analysts note that GM and Chrysler can hardly be saved if their customers can’t borrow money to buy cars.
“It underlines the importance of liquidity in the financial system,” said Jeremy Anwyl, chief executive officer of auto information site Edmunds.com.
“It’s a critical factor, in this case, of GM and Chrysler’s ability to sell cars. This doesn’t seem like a high-risk thing for the government to be doing. The likelihood of getting some type of return on investment in a timely manner is pretty high.
“Car loans never got to the point of home loans. They are straightforward and relatively secure,” Mr. Anwyl said. “I’m a little surprised they couldn’t just go out and float some bonds, but I guess there are still issues in the securitized-loan market.”
Critics were not mollified.
Henry Blodget, editor-in-chief of the Business Insider online magazine, rapped the Treasury for shoveling “more taxpayer money down the rat hole.”
He pointed out that the use of preferred stock instead of common stock or secured debt gives the taxpayers no upside if the company recovers and no senior claim on assets if the company fails.
“Tim Geithner developed his bail-out-everyone strategy two years ago, before he even took over Treasury, and he’ll presumably be damned if he’s going to modify that strategy now,” Mr. Blodget wrote.
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