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Treasury Bails Out GMAC

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Taxpayers enter the auto-loan business.

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The US taxpayer is now in the business of making subprime car loans.

Yesterday, the Treasury department announced it bought $5 billion of preferred equity in GMAC, the finance arm of General Motors (GM). The new cash -- along with a $1 billion loan to GM -- is aimed at boosting the availability of auto loans to credit-strapped consumers.

Cerebrus Capital Management, the private equity firm that owns Chrysler, holds 51% of GMAC, while GM owns a 49% stake. Cerebrus has now double-dipped into the Treasury Department's coffers, having been bailed out for 2 massive bets gone awry.

According to the Wall Street Journal, GMAC responded to the capital injection by lowering the minimum credit score needed for retail financing to 621, down from 700. Seeking an immediate impact from its second round of federal money, GM also announced it would offer 0% financing on certain car models through next Monday.

Taxpayer support of GMAC comes on the heels of news the Federal Reserve approved the finance company's plans to become a chartered bank, giving it access to Federal Reserve borrowing. The Fed had originally required that GMAC raise $30 billion in capital to become a bank, which it had failed to do as of Friday. But accompanying the news of the Treasury's investment yesterday was an announcement by GMAC that it had managed to scrounge up the requisite capital.

GMAC didn't just have its hands in auto loans - it was a major player in the subprime mortgage boom. As big industrial companies reached for fat margins in the housing market, they got burned when the mortgage market collapsed last year. General Electric (GE), which purchased subprime lender WMC Mortgage from Apollo Management in 2004, was forced to shutter the lender in 2007 as losses overwhelmed its operations.

Ford (F), GM, GE and other industrials which Toddo often refers to as "financials in drag" are reeling from their exposure to the turmoil in the credit markets. In addition to higher borrowing costs, these firms relied heavily on their finance arms to drive revenues by offering customers loans to buy their products. Now that cheap financing is all but nonexistent, these and other firms reliant on credit-flush consumers are struggling to unload their wares.

Meanwhile, Washington is spraying money around the economy in the hopes it will land in the wallets of would-be consumers. But banks, hoarding cash to offset bad debt, are reticent to start lending again. Until they do, the billions of dollars being poured into the financial system are simply plugging existing leaks.

Thus far, it has. But there are ony so many holes the government can fill at once.

No positions in stocks mentioned.

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