The Financial Bailout Fiasco

The Treasury Agreed Thursday May 14th to provide GMAC with an additional$7.5 billion in loans. The new aid marks the second time the government has stepped in to prop up the former lending unit of General Motors Corp. Last December the Federal Reserve agreed to reclassify GMAC Financial Services as a bank holding company and injected $5 billion into it's newest "bank".

In addition, the Federal Deposit Insurance Corp. took the rare step of allowing the low-rated company to gain access to its debt guarantee program. The program normally is limited to companies with investment-grade debt ratings but GMAC carries a rating below that. GMAC will be allowed to issue as much as $7.4 billion in debt, guaranteed by the FDIC in case the company defaults on payment.

GMAC fell short of funds in last weeks "Bank Stress Test".

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

In exchange for the latest round of aid, the government will receive 157.5 million preferred shares of the lender, according to a regulatory filing Friday. The Treasury said it won't immediately hold an equity stake in GMAC but will soon exercise its right to swap an $884 million loan to General Motors Corp. for an equity share in GMAC.

The Treasury said it expects to exercise that right "in the very near future," giving it a 35.4 percent stake in the company. That stake could climb to more than half if the government converts its latest $7.5 billion investment into equity.

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