GMAC Inc, the home and auto lender that counts the US government as the largest stakeholder, is discussing with the Obama administration a third bailout of $3 billion to $4 billion, said a person familiar with the matter.
The size of the assistance is under negotiation, the person said on condition of anonymity because the talks are private. A deal may be reached in days as Detroit-based GMAC incorporates losses from its home-loan businesses, the person said.
GMAC received two rounds of government aid totaling $13.5 billion as it struggled with losses at home-mortgage operations, which include Residential Capital LLC, known as ResCap. The primary lender to General Motors Co, its former parent, and Chrysler Group LLC is being helped by profits in auto-lending and is working to sell or restructure the ResCap unit.
“We question why GMAC needs this capital,” CreditSights Inc analyst Adam Steer said in an interview. “If you look at where the losses are coming from, it’s not coming from the core automotive business, it’s coming from the legacy portfolio at ResCap.” Steer has called for GMAC to cut ties to the home lender or place it in bankruptcy.
GMAC would like to find a solution to ResCap by the end of the year, Chief Financial Officer Robert Hull said November 4 in the company’s third-quarter earnings call. The lender reported its eighth loss in the past nine quarters in November, while the auto-finance unit had a profit.
“We have been conducting a strategic review of our business and evaluating options to address the challenges at ResCap and at the mortgage operation,” GMAC spokeswoman Gina Proia said yesterday in an interview.
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The Wall Street Journal reported yesterday that GMAC was negotiating a third aid package.
GMAC was ordered by the Federal Reserve in May to raise as much as $9.1 billion in new Tier 1 capital to withstand a possible prolonged recession, after government stress tests of finance companies. The US gave the lender $3.5 billion toward that goal, leaving a capital hole as large as $5.6 billion to be filled by November 9.
“As we stated on November 9, Treasury is in discussions with GMAC to ensure its capital needs, as determined last May by the stress tests, are met,” Treasury Department spokesman Andrew Williams said in an interview.
GMAC asked Treasury in November to delay providing the third round of government aid as outlined in the stress tests until newly appointed Chief Executive Officer Michael Carpenter could assess the company’s needs. Carpenter replaced CEO Alvaro de Molina November 16.
CreditSights’ Steer said it might make more sense for the government to make capital available to GMAC on an as-needed basis rather than forcing the lender to take more bailout funds.
“A more proactive way to deal with this is to make a capital line available to GMAC that it could draw on if it actually needs it rather than putting taxpayer money at risk right away,” Steer said.
The US was considering an injection of $2.8 billion to $5.6 billion, people familiar with the matter said in October. Later that month, US Treasury Secretary Timothy Geithner scaled back the estimate.
The federal government is the biggest owner of GMAC, with a 35.4 per cent stake. The US also controls General Motors, which holds a 9.9 per cent stake. Cerberus Capital Management LP, the New York-based investment firm, holds 22 per cent. GMAC doesn’t have publicly traded shares.