GMAC Didn't Need Bank Status, After All

The net effect is nearly the same, but there's a real twist in the fine print of the agreements by which GMAC Financial Services became a bank holding company and qualified for a government bailout.

Under the GMAC bailout, the U.S. Treasury Department on Dec. 29 said it was buying $5 billion in preferred shares of GMAC. Treasury also loaned GM another $1 billion to be invested in GMAC.

The surprise is that in one sense -- despite a lot of drama about the process â€" it turns out that GMAC didn't need to become a bank holding company first, at least not as a pre-condition to getting the bailout.

GMAC applied to become a bank holding company in November. At the time, it was the only way for GMAC to get a bailout from Treasury's Troubled Asset Relief Program. Treasury Secretary Henry Paulson at the time insisted on limiting money from the $700 billion TARP fund to financial institutions, namely bank holding companies.

As part of the process of becoming a bank holding company, GMAC offered to swap $38 billion in old bonds for new bonds of lesser value or cash. GMAC estimated it needed 75 percent of its bondholders to participate, for the bank-holding-company application to fly. But the initial response was slow. GMAC published a couple of updates, reminding bondholders that their participation was crucial.

That's what I mean by the "drama" part of the process. Standard & Poor's said at the time that if the bond swap failed to go through, GMAC would probably have to declare bankruptcy. On Dec. 24, the Federal Reserve approved GMAC's application to become a bank holding company.

That seemingly paved the way for the TARP bailout. However, that's not quite how it went despite the apparent cause-and-effect relationship between the Fed approval and the Treasury bailout.

That's because meanwhile, the U.S. Senate had shot down a bailout plan for GM and Chrysler, and the White House directed Paulson to release TARP funds to the automakers. To do that, Treasury created an exception to the "financial-institutions-only" rule for TARP, which Treasury called the "Auto Industry Finance Program."

And that's how GMAC qualified for TARP funds, under the Auto Industry Finance Program, and not because it had become a bank holding company. The differences are more than just a label, said Brookly McLaughlin, a spokeswoman for the Treasury Department.

Under the auto industry program, GMAC must pay a higher dividend than non-automotive financial institutions, under TARP. GMAC also agreed to tougher restrictions on executive compensation, and other limitations. It also turns out, GMAC never did achieve the 75-percent participation among its bondholders that GMAC had said previously was so important.

GMAC spokeswoman Gina Proia said GMAC will remain a bank holding company. To be fair, GMAC said all along there were other motivations to become a bank holding company besides the TARP bailout. As a bank holding company, GMAC gets greater access to cheaper funds, like customer deposits.

"Being a bank holding company is the right long-term strategy," the spokeswoman said.