Raw Finance

In an effort to to restore consumer access to automobile loans, the U.S. Treasury Department will make a $5 billion investment in GMAC LLC, General Motor’s financing company, using funds from the Troubled Asset Relief Program (TARP).  According to a statement issued by the Treasury, the investment will be made in the form of a purchase of senior preferred equity with an 8 percent dividend.  GMAC will also offer the Treasury warrants in an amount equal to 5 percent of the preferred stock purchase that, if exercised, would pay a 9 percent dividend.  Considering that the federal government is practically borrowing money for free (the 12-month U.S. Treasury Note is currently yielding .33 percent), an 8 or 9 percent return-on-investment is a great deal for taxpayers.  However, that presupposes that GMAC will survive and be able to pay the dividend.

Perhaps that is why the Treasury, in conjunction with the investment in GMAC, is offering General Motors a new $1 billion loan from the TARP.  The loan is designed to allow GM to participate in a rights offering at GMAC, which recently won approval from the Federal Reserve to reorganize as a bank holding company.  According to the Treasury’s statement, “This loan will be exchangeable at any time, at Treasury’s option, into the GMAC equity interests being acquired by GM in the rights offering. Furthermore, this loan will be secured and will have other terms and conditions as outlined in the attached term sheet. The ultimate level of funding under this facility will be dependent upon the level of current investor participation in the rights offering at GMAC.”

The Treasury’s announcement may be read here.

The Federal Reserve’s announcement and Order granting GMAC’s application to become a bank holding company on December 24, 2008, may be read here.