GMAC Receives TARP Funding; Immediately Offers Better Terms
By Chris Haak
The US Treasury announced yesterday that it had approved a $6 billion financial assistance package for GMAC, the heretofore 49% GM-owned/51% Cerberus-owned finance company. The assistance is coming in the form of a $5 billion purchase of preferred GMAC shares and a $1 billion loan to GM so that it can buy additional shares in GMAC. The preferred shares pay an 8% annual dividend.
Under the terms of the capital infusion, which is occurring under the TARP program originally intended to provide assistance to financial institutions (actually, it was originally intended to purchase troubled assets from banks, to get them off of the banks’ balance sheets, but TARP has evolved over the past few months), a new sub-program under TARP has been set up to aid auto finance companies. Treasury also said that this just the first in a series of deals expected in the coming days and weeks to aid other auto-finance firms, hopefully making consumer lending and dealership inventory financing less expensive and more accessible.
Toward that end, today GMAC announced that it had immediately lowered its unfortunately-high bar of requiring a FICO score of 700 and above (in place for the past two months) for approval of any loans to a more reasonable 621 and above. As our own Brendan Moore noted during a brief interview with NPR’s Marketplace radio show today, GMAC had just been out of the game as far as its ability to offer financing to a large swath of the buying public. And, by the way, all of GMAC’s competitors – and therefore GM’s competitors who still have possession of their captive finance arms, like Toyota Financial Services, Ford Motor Credit, and others – were still able to make loans to individuals with FICO scores below 700. According to GM, about 40% of buyers have a FICO score of 700 or greater, so they were shut out of a major slice of the market.
GMAC also jumped into the fold in another way to assist GM, with 0% financing for 60 months on some 2008 models (the Chevy Trailblazer, GMC Envoy, and Saab 9-7x, 9-3, and 9-5. Other rates have been lowered across the board as well, such as 1.9% for 60 months on the 2008 Cadillac CTS (3.9% for 60 months on the 2009 model). Those rates are far more attractive than the ones that GMAC had been giving to customers (and remember, customers with good credit, in the 700+ range) over the past two months. When I was in the car market in late August – even before GMAC’s biggest problems hit – I was surprised that a Cadillac dealer didn’t even mention GMAC when discussing rates; they set me up with an outside bank instead for my loan.
The result of this news is that GMAC may help GM’s January sales results (it’s too late to help December, which will probably be just as dreadful as November’s 47% drop for GM – much of which was attributed to GMAC’s restrictive lending practices as it tried to stave off bankruptcy). We may also see an incentive war, with better-capitalized finance companies such as Honda Financial Services and Toyota Financial Services already offering very low interest rates to help move the metal. GM’s head of sales and marketing, Mark LaNeve, also indicated a slow, cautious return to leasing, which GMAC basically exited (at least in terms of subsidized leases) a few months ago.
Unfortunately for Chrysler, the news isn’t as good. While GMAC received approval to become a bank holding company, which gave it access to TARP funds and other funding sources, Chrysler Financial (which is wholly owned by Chrysler LLC, which itself is 79.9% owned by private-equity firm Cerberus) has not been approved as a bank holding company, and as such, has not received any money from the US Treasury. Therefore, Chrysler Financial is still restricted in its ability to cut financing deals for Chrysler customers and to provide much assistance to Chrysler dealers in financing their inventories. A Chrysler Financial spokesman said that the lender “continues to be restricted in its ability to provide loans to dealers and consumers given the tight credit markets.” Chrysler also got a lot less money than did GM as part of the auto industry bailout, though it’s unclear if that is because they needed less or because the Treasury Department expects Cerberus and its investors to fork over more funds before shipping taxpayers’ money their way.
December 2008 sales results are going to be dreadful, with the overall market likely to be down by a similar factor to what we saw in November. However, with GMAC’s move – and GM and Chrysler averting bankruptcy at least temporarily thanks to the bridge loans – perhaps consumers will again give the two companies’ products some consideration. Kudos go to GM and GMAC for using the TARP funds as intended – to put credit into the hands of consumers – rather than using it simply as a notch on the balance sheet.
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