Christmas present for GM: Federal Reserve agrees to make GMAC a bank holding company

GMAC has been struggling to avoid bankruptcy and has been trying to raise capital in a bid to become a bank holding company so that it can get access to cheap money from the Federal Reserve and the U.S. Treasury bank bailout. Yesterday the Federal Reserve agreed to approve GMAC's application on an emergency basis. So, GMAC is now a bank.

The approval hinges on GM and Cerberus, each currently owning roughly half of GMAC, divesting most of their ownership of GMAC.

This is a fairly good deal. It dramatically increases GMAC's ability to raise capital to fund consumer car loans for GM customers. It helps push along the restructuring of GM by removing a management distraction and forcing GM management to focus on building profitable vehicles rather than profiting from financing. It helps to rebuild the banking system since GMAC will now be on a level playing field with other banks rather than GM competing with banks for consumer financing.

My biggest concern: With easy access to capital, GMAC Bank may no longer need to pay 3.75% APY interest on my savings account!

GMAC has been struggling to convince debt holders to agree to a debt for equity swap. GMAC has been incrementally sweetening the deal, but PIMCO and others were holding out. There was a hope that enough of the holdouts would agree by Friday. I do not know if the Fed deal was predicated on the swap going through or whether the Fed approval makes the swap easier or harder or unnecessary. But either way, GMAC has reached their main goal of being approved for conversion to a bank holding company.

There may be another casualty of the Fed approval: This may mean the death of 0% interest car loans. It is unclear whether there will be a legal way for GM to subsidize the interest on car loans anymore. That may seem like a raw deal for consumers, but the truth is that the interest was simply bundled in as a higher car price anyway.

Hopefully this deal will help pave the way for other car companies and other industrial finance "arms" to be spun off into separate, formal, and proper banks. CIT also recently was approved for conversion to a bank.

A next step might be for GMAC to be merged in with some other, larger bank.

-- Jack Krupansky