Friday, December 26, 2008

Federal Reserve grants GMAC ability to seek bailout funds

The Federal Reserve gave an early Christmas present to General Motors' finance arm, allowing the ailing provider of auto loans to qualify for the government's $700 billion rescue fund.

The Fed announced late Wednesday that it had approved GMAC Financial Services' request to become a bank holding company. That designation makes GMAC eligible to receive a portion of the bailout fund and get emergency loans directly from the Fed. The plan also significantly reduces the ownership stakes of GM and Cerberus Capital Management, LP., in GMAC.

Analysts had speculated that without financial help, GMAC would have had to file for bankruptcy protection or shut down, dealing a serious blow to GM's own chances for survival. The Fed cited "emergency conditions" in justifying its decision.

Before the Fed's decision, GMAC was facing a crucial deadline Friday to complete a deal with its bondholders that would allow it to exchange debt for equity. GMAC was struggling to convince investors to provide the capital that it desperately needed to win approval to become a bank holding company. The U.S. central bank acted before the debt deal deadline, which GMAC says still stands and will expire on Friday.

The Fed's move to provide government aid to one of the nation's biggest suppliers of auto loans was just the latest extension of the federal bailout program, initially designed to shore up ailing banks. As the credit crisis kept ballooning, the program expanded to include insurers, credit card companies, and the automakers themselves. Just last week, President George W. Bush ordered an emergency bailout of the industry, offering $17.4 billion in rescue loans, and citing imminent danger to the national economy.

"To make the auto package complete they had to do something with the financing," said David Cole, chairman of the Center for Automotive Research. "It's really tied to the whole survival of the industry."

"GMAC was basically frozen," he said. The Fed's move "has a huge impact on dealers and consumers. ... The Fed wanted to avoid a disaster in the automotive sector very, very badly for the cascading factor it would have on the overall economy."

In a statement, GMAC praised the Fed's action.

"This is a very significant positive step for the company, and it marks a key turning point in our 89-year history," said spokeswoman Gina Proia. "GMAC believes becoming a bank holding company is the best long-term solution to provide automotive and mortgage financing to consumers and business, including auto dealers."

She said the change in status would provide the company with "improved access to funding."

GMAC provides financing for both GM dealers and customers as well as home mortgage loans through its Residential Capital LLC division. If forced to file for bankruptcy, funding would have been cut off to roughly 85 percent of GM's North American dealers.

The company is 51 percent owned by Cerberus. General Motors Corp. owns the remaining 49 percent. But because those companies' businesses are mainly outside banking, they must cut their ownership so that GMAC qualifies as bank holding company.

GM has committed to reducing its ownership in GMAC to less than 10 percent. Cerberus was ordered to reduce its stake to 33 percent of total equity in the company.

The Fed's decision was announced after the close of a shortened trading day on Wall Street. GM shares closed up more than 8 percent earlier Wednesday.

The Fed said the plan will "benefit the public by strengthening GMAC's ability to fund the purchases of vehicles manufactured by GM and other companies and by helping to normalize the credit markets for such purchases."

Earlier this week, analysts suggested that the government was working behind the scenes to save GMAC, as the company struggled to get bondholders to convert 75 percent of their debt into equity of the company, a prerequisite for becoming a bank holding company.

Meanwhile, the future of Chrysler Financial, Chrysler's financing arm, is also uncertain. Earlier this month, the company that provides financing for 75 percent of Chrysler dealers said it could be forced to temporarily suspend funding for showroom inventories if dealers keep pulling large amounts of their money out of an account used to fund those loans.

Ford Motor Credit Co., which expects to report its first year of losses in 2008, has applied for an asset-backed securities loan facility administered by the Federal Reserve. It has already drawn on 25 percent, or $4 billion under the commercial paper funding facility.

Ford Motor Credit spokeswoman Brenda Hines said the company has no intentions of going through the process to become a bank holding company.

"We just don't think it's necessary from our standpoint," she said.

The decision to change the status of GMAC to a bank holding company follows the Fed's action on Monday granting the request of CIT Group to become a bank holding company so that it could qualify for federal rescue funds.

The Fed also has granted bank holding status to Goldman Sach's Group Inc., Morgan Stanley and American Express Co., all of which have changed their status in an effort to get access to more support after the financial crisis erupted with force in September.

Congress approved the bailout program on Oct. 3 with the original intent of buying up troubled mortgage assets.

That part of the program has never been implemented. Instead, Treasury Secretary Henry Paulson switched course. He began an effort to use $250 billion of the $700 billion fund to make direct purchases of bank stock, to inject more funds into financial institutions and fight the most severe financial crisis in seven decades.

But the effort has come under attack from critics who say that the Bush administration is not overseeing the program sufficiently to make sure that the banks actually increase their lending.

Many lawmakers are also upset that the program has already obligated half of the $700 billion total without making a serious effort to help troubled homeowners avoid a rising tide of mortgage foreclosures.

How to protect budget from credit crunch

I was laid off from my job for a couple of weeks but returned to work. I have a bank credit card. I called the bank inquiring about all types of economic hardship programs they might have. They told me that they didn't have anything to help me and said the best course of action was to cancel my credit card.

I asked why they were going to cancel and they told me it was for the best interest of the company. I have never missed a payment and I always send in an extra $50 with my payment. I was only inquiring about assistance. Can they cancel my credit card just because I inquired about help?

I've got the answer:
Most cardholder agreements are structured so the credit issuer can cancel the card at its discretion. During a credit crunch, any hint of trouble making payments is likely to cause concern for the card issuer, who may choose to cancel your account.

Past lending practices have led to huge losses, with more expected in the future. As a result, many lenders are justifiably concerned and are tightening up credit standards (hence the term "credit crunch") to try to reduce future losses.

If past performance is any indication of what's in store, expect them to over-tighten access to credit just as they over-loosened it before. If your account is canceled, you will be allowed to pay off the balance under your current terms.

If you've relied on credit in the past to fill in temporary gaps in your budget, it is now time to switch tactics. Start an aggressive savings plan. When an unexpected expense crops up, reach into your financial first-aid kit and pull out actual greenbacks and not a plastic card.

To be successful, such a plan should be automatic and painless. I suggest using automatic payroll deduction into a separate emergency account and then allocating half of any future raises, refunds or other windfalls to the account until you have accumulated six to 12 months of living expenses.

If you need help getting started, contact a nonprofit credit counseling agency. The agency can help you set up a budget based on your income that incorporates savings. The good news is that the best agencies offer services for free. The Association of Independent Consumer Credit Counseling Agencies and the National Foundation for Credit Counseling offer lists of qualified agencies.

Contact one of these agencies to learn what assistance is available for credit card accounts (and mortgage or car loans) without tipping your hand to skittish lenders. A third-party credit counseling or housing counseling agency does not need to mention your specific account details when accessing information about assistance.

These professionals have seen it all and are nonjudgmental. Don't be embarrassed about revealing your financial essentials to them.

Seek help early if you're worried about meeting a credit card, car loan or mortgage obligation. Despite well-meaning advice to the contrary, more options are available before a default than after.

Creditors are still in a tightening cycle. Keeping your credit looking good and staying a step ahead of any problems helps you maintain access to the credit you currently have.

A word of advice to those who may face a job layoff before the economy has a chance to turn around. To help "layoff-proof" your finances, follow these steps:

5 steps to protecting finances from a layoff:
1. Create a just-in-case bare bones budget that includes only essentials. Save any extra money in an emergency account for use in the event of a job loss.
2. Stop adding to credit card balances and begin an aggressive pay down of credit card debt.
3. Get a free copy of your credit report at Make sure it's accurate. Keep your credit looking good, as many employers pull reports during the hiring process.
4. Pay your mortgage and car loans first if you find you can't meet all your credit obligations.
5. Get professional help early. This is no different than seeing a doctor when you have early symptoms. Plus, you can often do this over the phone or Internet without a co-pay.

With patience, planning and a good savings account balance, you will get through this credit crunch. And yes, as my father used to say to me (even as I rolled my eyes), tough times help build character!