GMAC getting $7.5 billion in new aid

WASHINGTON " The government deepened its support of the battered domestic auto industry on Thursday, providing auto lender GMAC Financial Services with $7.5 billion in additional aid to keep loans flowing to would-be buyers of GM and Chrysler vehicles.

"This new arrangement with GMAC will help provide a reliable source of financing to both auto dealers and customers seeking to buy cars," said Treasury Secretary Timothy Geithner. Strengthening GMAC will help stabilize the country's auto financing market, which should help the economy, he said.

It marks the second time the government has stepped in to shore up the mammoth Detroit-based lender, which received $5 billion in December from the government's $700 billion financial bailout program. GMAC, which reported a first-quarter loss of $675 million, has seen rising defaults in its auto finance division. That, combined with soured assets in its Residential Capital LLC mortgage unit, made it more difficult for the company to raise capital from private investors.

Treasury said Thursday it won't immediately expand its 36 percent equity interest in GMAC but will exercise in the near future its right, under an earlier agreement, to exchange an $884 million loan it made to General Motors Corp. for an equity share in GMAC. If the government were to exercise all its options under the rescue deal, it would wind up owning more than 50 percent of the company, senior administration officials said.

In return for giving GMAC aid in December, the government got 5 million shares and told the company it must extend financing services to bailed-out Chrysler LLC " which filed for bankruptcy protection on April 30.

Of the new $7.5 billion injection, $4 billion will go to support GMAC's new loans to Chrysler dealers and customers. The remaining $3.5 billlion will go toward boosting GMAC's capital base " still short of the $11.5 billion the government's "stress test" showed the company needs to stay afloat amid further economic decline.

GMAC is expected to detail its plans to bolster its capital position by the government's June 8 deadline. As mandated by the Treasury Department, new capital must represent $9.1 billion of GMAC's total effort.

To help GMAC raise the remaining capital, the Federal Deposit Insurance Corp. on Thursday took the rare step of allowing the junk-rated company to gain access to its debt guarantee program. GMAC will be allowed to issue as much as $7.4 billion in FDIC-backed debt. The FDIC guarantees the debt that GMAC would issue in case the company defaulted on payment.

In addition, the Federal Reserve waived rules to give GMAC's new bank, called Ally Bank, more leeway to make loans to GM customers.

Analysts suggest that the new government support, along with the merger with Chrysler's financial arm, will make GMAC a lending powerhouse that will give GM and Chrysler a huge advantage over their competitors " including U.S. rival Ford Motor Co., which hasn't taken any government aid. It would have the power to offer better loan terms to buyers of GM and Chrysler cars and trucks as a way of steering business to the troubled automakers.

The government has a critical vested interest in seeing GMAC, GM and Chrysler succeed, in order to recoup the billions in aid it has doled out to the companies. General Motors has received $15.4 billion in federal loans and Chrysler has received $5.8 billion. GM is currently negotiating to give the government a 50 percent equity stake in exchange for wiping out a portion of its debt as the company faces a June 1 deadline to restructure or head into Chapter 11 bankruptcy protection.

GMAC's chief executive officer, Alvaro G. de Molina, said the government's action marked "another major step in stabilizing and strengthening" the company.

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AP Auto Writer Kimberly S. Johnson in New York contributed to this report.