The government announced Monday that it will inject $6 billion into GMAC Financial Services, an automotive financing, insurance and mortgage firm seen as essential to the survival of General Motors Corp.
The Treasury Department will give $5 billion directly to GMAC for equity shares paying an 8% dividend. The Treasury will also lend $1 billion to General Motors to invest into GMAC, which was formerly the financing arm of the auto giant.
The money will allow GMAC to convert to a bank holding company and also to jumpstart its lending operations.
“The company intends to act quickly to resume automotive lending to a broader spectrum of customers to support the availability of credit to consumers and businesses for the purchase of automobiles,” GMAC said in a statement.
This money comes less than two weeks after President George W. Bush announced a $17.4 billion rescue package for General Motors and Chrysler. The president took that step after Congress voted not to fund an auto industry bailout, and after Ford declined any bailout funds.
GMAC is the biggest lender to GM’s 6,500 dealers nationwide. They provide financing for dealers to purchase inventory from the automaker. Without such financing, they would be unable to fill their lots with actual cars. If GMAC were to fail, it could trigger a complete collapse of the dealer system in place, crippling the auto giant.
President George W. Bush announced today a $13.4-billion plan to aid ailing U.S. automakers in order “shield the American people from a harsh economic blow at a vulnerable time.”
After Senate Republicans blocked the passage of a rescue package for the auto industry, the White House took money from October’s $700 billion bailout for the financial industry. Another $4 billion could be authorized in February if President-elect Barack Obama thinks it is necessary.
This news comes on the tails of Chrysler’s announcement that it will shut down all 30 of its US plants for a month over the holidays.
Ford Motor Company said today it would not require or seek a short-term loan from the government.
“We do not face a near-term liquidity issue, and we are not seeking short-term financial assistance from the government,” Ford president and chief executive officer Alan Mulally said in a statement.
Ford is supportive of the rescue package for its competitors in which the government would provide struggling car companies $13.4 in short-term loans so the companies could restructure.
“All of us at Ford appreciate the prudent step the administration has taken to address the near-term liquidity issues of GM and Chrysler,” Mulally said. “The US auto industry is highly interdependent, and a failure of one of our competitors would have a ripple effect that could jeopardize millions of jobs and further damage the already weakened US economy.”
This move does not take bankruptcy off the table for GM and Chrysler. If there is not a major restructuring of the companies and they do not begin to adapt their car models to become more modern and environmentally friendly, they may not be able to recover on their own and the government may not be interested in bailing them out again at a later time.
On the same day that Chrysler announced that it would close down all U.S. factory production for at least 30 days, the White House announced that President George W. Bush and Treasury Secretary Henry Paulson were considering an “orderly” bankruptcy for Chrysler and General Motors. Both companies are seeking billions of dollars in bailout money to avoid having to shut down production longer than the normal two-week holiday break that is scheduled for most years.
Bankruptcy would be one part of an larger rescue package for the companies, part of the “Big Three” American automakers. Ford has announced that they are no longer seeking bailout money or participation in other rescue package.
In order to file for bankruptcy, The New York Times reports that the deal would require concessions from the United Auto Workers union, suppliers, banks, the federal pension board and others.
If the companies filed for Chapter 11 bankruptcy protection, the government would provide enough money for the two companies to operate for several months. Major banks would provide debtor-in-possession financing so that the companies could continue to fuction while under bankruptcy. The cash from the federal government would only be used as a backup, for security.
”I will tell you this: the president is not going to allow a disorderly collapse of the companies,” said Dana Perino, President Bush’s spokeswoman. “Disorderly collapse would be something very chaotic that is a shock to a system. There’s an orderly way to do bankruptcies that provides for more of a soft landing. I think that’s what we would be talking about. That would be one of the options.”
Perino also stressed that no deal has been struck and there was no indication as to the timeline of such a deal.