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GMAC Cleared to Become Bank

The Associated Press

WASHINGTON (AP) -- The Federal Reserve has granted a request by the financing arm of General Motors (GM) to tap the government's $700 billion rescue fund, bolstering GM's ability to survive.

The Fed announced Wednesday that it had approved GMAC Financial Services' request to become a bank holding company. That designation makes GMAC eligible to receive a portion of the bailout fund and get emergency loans directly from the Fed.

Analysts had speculated that without financial help, GMAC would have had to file for bankruptcy protection or shut down, dealing a serious blow to GM's own chances for survival. The Fed cited "emergency conditions" in justifying its decision.

The move to rescue an auto financing company was just the latest extension of the federal bailout program, which was designed to shore up ailing banks but has grown to include insurers and credit card companies.

GMAC provides financing for both GM dealers and customers, as well as home mortgage loans through its Residential Capital LLC division. The company is 51%-owned by Cerberus Capital Management LP, the investment fund that also owns Chrysler. GM owns the remaining 49% of the company.

Under the Fed's order, Cerberus and GM, whose businesses are mainly outside banking, would both have to significantly reduce their ownership stakes in GMAC. GM has committed to reducing its ownership in GMAC to less than 10%. Cerberus was ordered to reduce its stake to 33% of total equity in the company.

A GMAC bankruptcy filing would have cut off financing to the roughly 85% of GM's North American dealers it does business with.

The future of Chrysler Financial, Chrysler's financing arm, is also uncertain. Earlier this month, Chrysler Financial, which provides financing for 75% of Chrysler dealers, said it could be forced to temporarily suspend funding for dealer vehicle inventories if dealers keep pulling large amounts of their money out of an account used to fund those loans.

The Fed's decision was announced after the close of a shortened trading day on Wall Street. GM shares closed up more than 8% earlier Wednesday.

The Fed said the plan will "benefit the public by strengthening GMAC's ability to fund the purchases of vehicles manufactured by GM and other companies and by helping to normalize the credit markets for such purchases."

In a statement, GMAC praised the Fed's action.

"This is a very significant positive step for the company, and it marks a key turning point in our 89-year history," said spokeswoman Gina Proia. "GMAC believes becoming a bank holding company is the best long-term solution to provide automotive and mortgage financing to consumers and business, including auto dealers."

She said the change in status would provide the company with "improved access to funding."