The U.S. Department of the Treasury said Wednesday that it will provide troubled lender GMAC Financial Services with an additional capital infusion of $3.8 billion and assume a majority stake in the company.
The new capital infusion, the third the company has received from the U.S. government, aims to fill a capital shortfall of $5.6 billion identified at GMAC following the government's stress tests conducted earlier in the year. The Treasury said that as part of the stress tests conducted in May on the largest U.S. banks, a capital shortfall of $5.6 billion was identified at GMAC. The tests were to determine whether firms would need more capital to continue lending if the economy deteriorated in 2009 and 2010.
However, GMAC's capital needs have turned out to be somewhat less than originally anticipated, partly because the restructuring of automakers General Motors and Chrysler were accomplished with less disruption to GMAC than was originally projected.
The Treasury noted that the commitment of $3.8 billion of new capital to GMAC rather than the $5.6 billion originally announced will result in a $1.8 billion reduction in the Treasury's previously forecast TARP expenditures. The third capital infusion had earlier been postponed by the Treasury on advice from the company, until the management along with the company's new chief executive Michael Carpenter assessed the current financial needs, so as advise on the appropriate amount and form of such funding.
Detroit-based GMAC, the the former lending arm of automaker General Motors Corp., has already received two rounds of federal aid totaling $12.5 billion as it struggled with losses at its home mortgage operations, which include its ailing mortgage unit, Residential Capital LLC. The additional aid brings the total government investment in GMAC to $16.3 billion and raises the government's ownership interest in the company to 56% from the previous 35%.
The willingness by the Treasury to provide additional aid to GMAC reflects the troubled company's importance to the revival of the auto industry. GMAC is the primary lender to most GM and Chrysler dealers and customers.
GMAC obtained bank holding status last December, making it eligible for Treasury aid. The Treasury has authority to provide funds to GMAC through TARP, the $700 billion program authorized by Congress at the height of the financial crisis.
The capital infusion to GMAC will be the first big infusion to a single company in several months. The Treasury has been working to wind down many of the TARP programs as the financial crisis eases, and it has already seen $175 billion returned from banks. According to the Treasury, the $3.8 billion of new capital to GMAC will be provided in the form of $2.54 billion of Trust Preferred Securities or TRUPs that pay 8% and which are senior to all other capital securities of the company, and $1.25 billion of Mandatory Convertible Preferred Stock or MCP that pay 9%. The Treasury will also receive warrants to purchase an additional $127 million of TRUPs and $63 million of MCP which it will exercise immediately at the closing of the transaction.
In addition, the Treasury will convert $3.0 billion of its existing MCP that it invested in May 2009, into common equity to boost the quality of the capital supporting GMAC. Following the conversion, the Treasury's equity ownership of GMAC will increase to 56% from the current 35.4%. Corresponding with this increase in ownership of GMAC, the Treasury will have the right to appoint two additional directors to the company's board of directors. Four of nine directors will, thus, ultimately be appointed by Treasury. The Treasury said it intends to nominate its new directors in time for GMAC's annual meeting at the end of April.
In order to enable GMAC to meet its requirements for Tier 1 capital as part of the stress tests, the Treasury will exchange $5.25 billion of preferred stock into MCP, in substantially the same form as its existing MCP. As a result of this transaction and the conversion, the Treasury will hold $11.4 billion of MCP in the company.
The Treasury said, "These actions offer the best chance for GMAC to complete its overall restructuring plan and return to the private capital markets for its debt financing and capital needs in 2010."
The Treasury also said that GMAC will continue to be subject to a variety of other covenants and requirements, including the executive compensation. As an ongoing recipient of "exceptional" assistance, GMAC will also remain subject to the oversight of the government's pay czar Kenneth Feinberg. In a separate statement, GMAC said that the capital infusion will minimize further adverse effects on the company related to Residential Capital LLC, or Rescap, and improve its access to the capital markets overtime. Further, the company said that the actions position it to explore strategic alternatives for ResCap and the mortgage business, and are expected to accelerate the timetable for repayment of the U.S. government's investment.
GMAC said that ResCap will receive about $2.7 billion in additional capital. Further, the company said it has written down about $2 billion in mortgage-related assets at ResCap as a result of decision to sell certain mortgage-related assets and thereby reduce volatility in the company's financial results. GMAC also recorded a repurchase reserve expense of approximately $500 million associated with the mortgage servicing business.
"These actions, inclusive of estimated operating losses for the period, required a total capital contribution to ResCap of approximately $2.7 billion in the form of mortgage loans acquired by GMAC from Ally Bank, GMAC debt forgiveness and cash. With the capital contribution, ResCap's net worth will exceed the minimum level required to meet certain covenants, " GMAC said.
The company said that following these transactions, it does not expect to incur additional substantial losses from ResCap and will be better positioned to explore strategic alternatives with respect to mortgage operations.
GMAC had set the end of the year as a deadline for deciding ResCap's fate after losses from loans made to borrowers with shaky credit dragged down GMAC's results in 2009. The mortgage unit lost $2.7 billion through the first three quarters of 2009 following $9.96 billion of losses in 2008 and 2007.
Meanwhile, Ally Bank, GMAC's online bank, will recognize a $1.3 billion pre-tax charge after GMAC purchased certain higher risk mortgage assets from the bank at fair value of approximately $1.4 billion. Ally Bank will be recapitalized with a $1.3 billion cash infusion from GMAC.
GMAC noted that Ally Bank would also remain in compliance with its regulatory agreements and have the necessary capital to support its auto financial services business, which is the company's highest strategic priority. The Federal Deposit Insurance Corporation, Ally Bank's regulator, was consulted regarding the actions, the company said. Ally Bank was created after GMAC received approval in late 2008 to convert to a bank holding company and qualify for government money under TARP. GMAC said it will recognize a pre-tax charge of approximately $3.8 billion, with $3.3 billion related to the mortgage write-downs at ResCap and Ally Bank, and $500 million related to the repurchase reserve expense. Michael Carpenter, Chief Executive Officer of GMAC said, "These decisive balance sheet actions and resulting capital infusions are intended to minimize the impact on GMAC and Ally Bank of any significant future losses related to ResCap's legacy mortgage business. By protecting the financial performance and strength of our core automotive finance operations, we expect to increase the pace at which we can fully repay the U.S. taxpayer. These actions will also allow GMAC to pursue strategic alternatives for ResCap and the mortgage business."
GJM closed Wednesday's regular trading session at $19.08, up $0.23 or 1.25% on a volume of 9,480 shares. In the past 52 weeks, the stock has been trading in a range of $5.16-$19.19.
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June 05, 2026 16:18 ET A busy week for economic news flow saw a slew of reports being released that reflected the trends in the U.S. labor market. In Europe, economic growth and inflation data gained attention as the European Central Bank and Bank of England head for policy session later in the month. In Asia, the monetary policy session of the Indian central bank was in focus as the country, a major oil importer, reels under the pressures of a weaker rupee and rising inflation.