GMAC Applies to Be Bank Holding Co.

The morning after being handed its hat by lawmakers after asking for another bailout, General Motors (GM) announced its financing arm, GMAC Financial Services (GMAC), has submitted a formal application to the Fed for approval to become a bank holding company.

This has long been rumored to be a potential option for GMAC, which is in dire straits. GMAC says it's in discussions with federal regulators regarding its application which, if approved, would enable GMAC to be eligible for the capital repurchase program.

There has been some doubt as to whether GMAC could apply for this status since it's 51% owned by Cerberus Capital Management.  GMAC does have a banking subsidiary that offers certificates of deposit by telephone and the web. Cerberus purchased its GMAC stake in 2006, and due to the special circumstances of the acquisition and GMAC Bank's status as an Industrial Loan Company (ILC), the FDIC had to approve the deal.

Part of that agreement was that within two years GMAC would divest the bank; terminate its insured status; become a registered bank or thrift holding company; or apply to be subject to the same laws and regulations of similar companies. The end date for this deal is November, which is likely why we are seeing the application being filed now.

Clearly, none of these options put forth by the FDIC were viable. GMAC couldn't sell the bank in the current macro condition; ResCap needed GMAC Bank as a funding source; and terminating its status wasn't an option.

Now, with the application, Cerberus, which is also the majority owner of Chrysler LLC, will have to open up its books.

GMAC has been gripped by a cash squeeze caused by the financial crisis.  The company posted its fifth straight loss in November . GM has warned its financing arm may not survive this crisis. 

GMAC has brought up the possibility of converting to a bank holding company over the past few months, and now that lawmakers have all but denied the automakers' request for access to the $700 billion bailout fund, coupled with the real possibility of bankruptcy for GM, GMAC is taking its chances.  It has little choice as all other financing options have evaporated.

It's unclear whether regulators will approve GMAC's application.  The company has been slashing auto loans to customers without stellar credit ratings and has curtailed operations. Its Minneapolis-based home lending subsidiary, ResCap, has been decimated by the housing recession, suffering steep losses.  There have also been rumors GMAC could merge with another auto financing company.

The merger of GM and Chrysler would facilitate this deal; obviously, Cerberus has a high vested interest in both GM and Chrysler not entering bankruptcy.  Today's application does not dilute a potential merger, but the reality is a merger won't solve either companies' systemic problems.