Business and Finance

GMAC Inc., the auto and home lender bailed out twice by the U.S. government, received a third rescue package valued at $3.79 billion that gives taxpayers a majority stake in the Detroit-based company.

The infusion will bolster lending at GMAC as it absorbs $3.8 billion in new pretax charges and decides what to do with its loss-plagued home mortgage unit, according to statements from the agency and the company yesterday. The aid comes on top of about $13.5 billion previously earmarked for GMAC, which regulators have said is crucial to the U.S. auto industry.

Chief Executive Officer Michael Carpenter is struggling to return the lender to profitability amid losses at the Residential Capital mortgage unit, known as ResCap, which GMAC may close or sell. GMAC is the primary lender to General Motors Co. and Chrysler Group LLC, the automakers that went into bankruptcy during the recession.

“We needed the capital in this order of magnitude; we weren’t arguing for less,” Carpenter said in a phone interview. “As the business becomes proportionally more and more of an auto-finance business, one of the lowest-risk businesses there is, my hope is that the capital ratios we need will get relaxed over time.”

The rescue package calls for the Treasury to buy $2.54 billion of trust preferred securities that pay 8 percent, and $1.25 billion of mandatory convertible preferred stock, known as MCP, at 9 percent, according to the statements. The government also received warrants to buy more securities.

‘They Need GMAC’

“The Obama administration has decided to keep GM alive one way or the other and they need GMAC to do it,” said David Olson, president of mortgage research firm Wholesale Access in Columbia, Maryland. The firm counts GMAC as a client. “To bail out the car companies you need to bail out the finance companies.”

The Treasury’s current holding of non-convertible preferred stock will be swapped for $5.25 billion of the new MCP, and $3 billion of Treasury’s existing MCP will be converted into common, GMAC said.

The conversion of preferred into common “somewhat deleveraged” the company, Carpenter said. When coupled with improved conditions at the mortgage operations, it “will improve access to the capital markets in the near term” and lead to a quicker repayment of government funds, he said.

GMAC Stakeholders

The U.S. stake will rise to 56.3 percent from 35.4 percent. The U.S. also controls General Motors, GMAC’s former parent, whose stake shrinks to 6.7 percent. The stake held by Cerberus Capital Management LP, the New York-based investment firm, falls to 14.9 percent from 22 percent. An independent trust for the benefit of GM holds about 9.9 percent, GMAC said. GMAC doesn’t have publicly traded shares.

“In May, the Treasury Department made a commitment to all institutions that engaged in the stress tests that we would ensure their capital needs are met,” Treasury Department spokesman Andrew Williams said in an interview. “We are making good on that promise.”

GMAC was the only company of 19 that underwent stress tests that wasn’t able to raise capital in the private sector, Williams said. Still, the Treasury said the aid was less than originally planned because restructurings at GM and Chrysler caused less disruption at GMAC than regulators expected. Tim Price, a partner at Cerberus, didn’t return a call for comment.

ResCap’s Fate

GMAC affirmed that it’s looking at “strategic alternatives” for ResCap, ranked among the nation’s 10 biggest home lenders and once one of the largest marketers of subprime mortgages. The parent company wrote down $2 billion in ResCap mortgage assets in preparation for selling them and set up a $500 million reserve tied to the servicing unit that does billing and record-keeping for home loans.

“There will be individual asset sales in the near future but whether some larger concept evolves is a matter of time,” Carpenter said. “We think ResCap and the mortgage business is stable and that we don’t have to do anything crazy. We have no urgency.”

GMAC is being approached “every day with interesting ideas” for the unit, Carpenter said. The shoring up of ResCap allows the government to keep a stake in a company making home loans, said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management, which owns GMAC bonds.

GMAC contributed $2.7 billion of capital to ResCap in the form of mortgage loans acquired from the Ally Bank unit, debt forgiveness and cash, according to the company statement. GMAC “does not expect to incur additional substantial losses from ResCap,” the company said.

Mortgage Assets

At the Ally unit, GMAC bought “certain higher-risk mortgage assets” at fair value of $1.4 billion, which triggered an estimated $1.3 billion pretax charge. Those assets were contributed to ResCap. GMAC also gave $1.3 billion of cash to Ally to maintain its capital, the statement said.

The infusion is the final dose of capital needed to close a shortfall found by Federal Reserve stress tests in May. GMAC asked the Treasury Department to delay providing the cash when Carpenter was named CEO, replacing Alvaro de Molina on Nov. 16. The deadline for meeting the requirements had been Nov. 9.

GMAC got $12.5 billion in two previous government bailouts and another almost $1 billion that was funneled through GM, which used it to invest in GMAC. The U.S. will name two additional board members in conjunction with its increased stake, according to the statements.

The latest capital infusion and restructuring weren’t enough to stabilize ResCap and assure a return to profitability, according to Moody’s Investors Service.

While the changes were positive, ResCap “has been unprofitable on a quarterly basis for three years, its liquidity position is tenuous, capital insufficient and franchise impaired,” Moody’s said in a statement. GMAC didn’t guarantee continued support for ResCap, and without such help, “we believe ResCap would eventually default,” Moody’s said.

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