If you hoped the auto bailout had ended when Chrysler and General Motors emerged from bankruptcy, you might want to stop reading.
The Detroit News reports, "The Treasury Department plans to inject up to $5.6 billion in new capital in GMAC -- the latest effort to help the auto finance giant, a government official confirmed late Tuesday." The government will accept preferred shares of stock in return. "The new government infusion would be on top of $12.5 billion in government support extended since December. In May, the Treasury Department injected $7.5 billion in GMAC, took a 35.4 percent stake in the company and appointed two directors."
It would be GMAC's third federal bailout loan. The New York Times explains, "as the Obama administration contemplates a third rescue of GMAC, the onetime finance arm of General Motors, federal officials, automotive executives and analysts all say the company is - just like the biggest Wall Street firms - too big to fail."
The company's role in the American auto industry is pivotal. GMAC is now the primary finance company providing loans to those buying General Motors and Chrysler products. Chrysler's former finance arm, Chrysler Financial, is in the process of shutting down and originates very few new loans. GMAC also provides the financing that helps most GM and Chrysler dealers operate, and, in the years before the recent financial collapse, began investing in subprime mortgages.
GMAC, however, is not doing well. CNN Money notes that the company "has lost $4.6 billion so far this year and has posted losses in seven of the past eight quarters, as vehicle lending has plunged along with demand for cars and its subprime mortgage loans have gone bad."
If the government should decline the loan request, the Detroit Free Press reports, GMAC "likely would charge higher interest rates or demand more collateral from dealers when they order vehicles from GM and Chrysler." Those changes could scuttle the fragile recovery seen in the auto sector in recent months.
Others worry, however, that another federal bailout loan extended to GMAC could also hurt public perception of the U.S. auto industry. Autoblog notes that General Motors itself "sold 51% of GMAC to Cerberus Capital Management back in 2006, so the General hasn't even been a majority owner of its finance company for well over three years." But most Americans don't know that, and given the similarity in the names of the two companies, another loan to GMAC, "on the surface...looks like another huge helping hand for GM."
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