(Adds detail on importance of bank holding status in new paragraph 4)
By Emily Kaiser
WASHINGTON Dec 24 GMAC LLC won U.S. approval on Wednesday to become a bank holding company, giving it access to government lending programs and helping it stave off bankruptcy.
The Federal Reserve's approval should allow GMAC to continue financing loans for General Motors Corp (GM.N) cars. GM Chief Executive Rick Wagoner said last week that GMAC's difficulties were "hammering" the car maker's ability to sell autos.
"In light of the unusual and exigent circumstances affecting the financial markets ... the board has determined that emergency conditions exist that justify expeditious action on this proposal," the Fed said in a statement.
Analysts said earlier this month that without bank holding status, GMAC could have trouble staying solvent.
But bank status comes at a cost for GMAC's majority owner Cerberus and its minority owner GM: Both must cut their stakes in the finance company to comply with U.S. bank regulations that prevent many kinds of companies from owning too big a share of a bank.
GMAC is getting the go-ahead to become a bank holding company just days after GM and Chrysler, which is owned by Cerberus, were promised public money from the Treasury-run financial bailout fund to stave off potential bankruptcy.
GMAC has struggled as the credit crunch has lifted its borrowing costs sharply, and the value of many of its assets has plummeted. It has lost $7.9 billion over the last five quarters.
The lender's difficulties forced it to severely curtail financing for dealerships and for consumer purchases of new GM cars and trucks in recent months. Cutting back financing compounded the sales slump at GM, the No. 1 U.S. automaker, whose sales fell an eye-popping 41 percent in November.
Although GMAC completed a $60 billion debt restructuring in June, it launched another debt exchange last month designed to help it raise capital in part through giving debtholders preferred stock.
That debt exchange has not gone as well as GMAC was aiming for. As of the middle of last week, investors had agreed to exchange 58 percent of the company's debt, less than the 75 percent GMAC was aiming for.
But the Fed said on Wednesday that GMAC's efforts to raise capital were "successful," implying that the lender had managed to exchange enough bonds to meet regulators' requirements.
A TURNING POINT
A GMAC spokeswoman called the approval a "key turning point in our 89-year history.
"GMAC believes becoming a bank holding company is the best long-term solution to provide automotive and mortgage financing to consumers and businesses, including auto dealers," spokeswoman Gina Proia said.
Cerberus was not immediately available to comment.
A majority of GM dealers had depended on GMAC, the largest auto finance company in North America, for financing of their own inventory and consumer purchases even after GM sold a 51 percent stake in GMAC to Cerberus in 2006 for $7.4 billion. GM retains the remaining 49 percent.
GM and Cerberus will have to trim back their stakes to no more than 10 percent and 14.9 percent, respectively, to comply with Fed rules that are meant to prevent companies from using banks to fund their businesses.
Detroit-based GMAC already has a banking unit that offers certificates of deposit and online savings accounts, but becoming a bank holding company will make it eligible for government support, including guarantees of new debt that it issues and access to emergency borrowing.
The company could also apply for billions of dollars of capital under the government's $700 billion financial rescue program, and will be able to rely on the Fed as a lender of last resort. (Additional reporting by Dan Wilchins in New York and Soyoung Kim in Detroit; Editing by Jan Paschal and Neil Stempleman)
Our top photos from the last 24 hours.