GM loosening consumer credit as bailout funds flow

By Jamie Sturgeon | Financial Post | Dec. 30, 2008

General Motors Corp.'s lending arm, GMAC Financial Services LLC, said Tuesday it has immediately loosened consumer access to credit in the U.S. after Washington bought US$5-billion worth of preferred equity in the company.

The U.S. Treasury waded further into the waters in which the American automotive industry is treading late Monday, using cash originally set aside to aid failing banks to buy the 8%-dividend paying stake in GMAC "as part of a broader program to assist the domestic automotive industry in becoming financially viable."

"The actions of the federal government to support GMAC are having an immediate and meaningful effect on our ability to provide credit to automotive customers," said Bill Muir, president of GMAC, in a statement. "We will continue to employ responsible credit standards, but will be able to relax constraints we put in place a few months ago due to the credit crisis."

General Motors Crop. said in a conference call it would begin offering 0% financing up to 60 months on certain 2008 and 2009 models in an attempt to turn plummeting U.S. sales around. The company also signalled it could resume leasing.

"It is something we are looking at," said Mark LaNeve, chief executive of North American sales.

The implications for Canada, where governments have already extended $4-billion in taxpayer-backed loans to GM and Chrysler, are uncertain.

"This is a positive situation, but I don't know how positive it is," said Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc. in Richmond Hill, Ont. "U.S. consumers aren't buying, fixing GMAC should help them come back to the marketplace."

It is another sign though that Washington is unwilling to let GM, Chrysler LLC or Ford Motor Co. fail.

Treasury officials said money for the equity purchase in GMAC has come from a new, separate fund within its Troubled Asset Relief Program dedicated wholly to the auto industry.

More than US$17-billion has already been made available to the Detroit Three from TARP funds as they restructure, a move that received proportionate backing for their Canadian operations from Ottawa and the province of Ontario on Dec. 20.

Most analysts say it likely isn't enough to see the companies through their restructuring as market conditions continue to slump, meaning more capital will be needed from Washington, and in turn, Ottawa.

Still, Himanshu Patel, auto analyst at J.P. Morgan said the GMAC bailout reduces the chances of a bankruptcy filing at GM.

"While an eventual GM Chapter 11 cannot be entirely dismissed if various stakeholders fail to meet required concessions, federal aid to GMAC suggests the government is probably now so entangled ... a Chapter 7 liquidation seems highly unlikely," he wrote in a note to clients.

Financial difficulties at GMAC as well as Chrysler Financial have directly hit GM and Chrysler sales, Michael J. Jackson, chief executive of AutoNation Inc., told the Wall Street Journal.

GMAC, which engaged in pushing riskier adjustable-rate mortgages that fueled the U.S. subprime housing boom, has restricted credit and raised lending standards in recent months as its own finances have deteriorated.

The lender, which was approved by the U.S. Federal Reserve last week to become a bank-holding company therefore qualifying for TARP, is the traditional source for many GM buyers.

GM of Canada sales were down 23% in November. Sales were off more than 40% year-over-year in the U.S.

"Consumer credit is the jet fuel of the auto business," Mr. Jackson said in a recent interview. "The majority of consumers can't buy a car without getting a loan."

The U.S. Treasury said it would also give an additional US$1-billion to GM to allowing it to participate in an equity offering by GMAC as it tries to raise more capital. The loan adds to the US$9.4-billion the U.S. Treasury is lending GM, the largest automaker in North America.