GMAC Cleared to Become Bank

WASHINGTON (AP) -- The Federal Reserve has granted a request by the financing arm of General Motors (GM Quote) 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.