If President Barack Obama’s New Year’s resolution was for the federal government to stop taking majority ownership in private corporations, he’s off to a bad start (or he decided to get one more in before 2010).
Yesterday, the government indicated it will provide $3.8 billion in additional aid to GMAC and increase its stake in the company from 35% to a whopping 56%. As The Washington Post reports, the federal government now has ownership stakes in GMAC, Fannie Mae, Freddie Mac, General Motors, and American International Group – and holds large stakes in Citigroup and Chrysler.
And the grand tally of government (read: “taxpayer”) investment in GMAC? $16.3 billion.
Where is the money going? It’s going to pay for GMAC’s billions of dollars in losses it suffered after it moved into the subprime lending business (away from its traditional lending to car buyers and dealers at GM and Chrysler).
From the Detroit Free Press:
All the money will essentially go to shoring up GMAC’s ResCap unit, the arm best known for Ditech.com and other subprime mortgage lending that generated $1 billion in profits in 2004 but has since suffered several billion dollars in losses as U.S. housing prices collapsed.
GMAC said Treasury’s move, along with a $3.3-billion write-down in mortgages at ResCap and Ally Bank, should allow it to explore a sale or other action for ResCap and return to profit by the first quarter of next year. It had asked the government last month for more time to decide what to do with ResCap.
The additional funding for GMAC isn’t shocking. GMAC and the Treasury Department were reported to be in advanced talks regarding additional funding in late October. The Washington Post notes that the big surprise here was the decision for the federal government to increase its ownership share in the firm:
The Treasury Department has said for months that GMAC would need more federal money, but the decision to increase the government’s ownership stake came as a surprise, cutting against the grain of the Obama administration’s recent efforts to wind down its bailout of large banks.
Never fear, though. “Treasury officials said the government intends to stick to its policy of leaving day-to-day business decisions about financing to GMAC management,” The Washington Times reports.
But then, there is the fact that the government will appoint four directors to GMAC’s nine-member board. And the Obama Administration’s pay czar will dictate the level of GMAC executives’ pay.
Old habits die hard.