Treasury plans to give GMAC $7.5 billion for new auto loans

WASHINGTON — The Treasury Department said Thursday it is providing auto lender GMAC with $7.5 billion in fresh aid to enable it to make new loans for General Motors Corp. and Chrysler LLC vehicles.

The department said the investment will help provide a reliable source of financing to auto dealers and people looking to buy. Treasury said it won't immediately expand its equity interest in GMAC, but soon will exercise its right under an earlier pact to trade an $884 million loan to GM for an equity share in GMAC.

"This new arrangement with GMAC will help provide a reliable source of financing to both auto dealers and customers seeking to buy cars," said Treasury Secretary Timothy Geithner.

Strengthening GMAC will help stabilize the country's auto-financing market, which should help the economy, he said.

The government has a vested interest in seeing GMAC succeed and the U.S. auto industry revive. General Motors has received $15.4 billion in federal loans and Chrysler has received $5.8 billion.

The move to provide fresh aid to GMAC comes after it failed a bank "stress test" earlier this month. The Treasury Department mandated the company raise $11.5 billion within six months.

GMAC Financial Services received $5 billion from the government's $700 billion financial bailout program in December. In return, the government received 5 million shares of GMAC, and told the company it must extend financing services to Chrysler, which filed for bankruptcy protection April 30.

The dose of new aid marks the government's latest attempt to break through credit clogs and spur more lending, a necessary ingredient to lifting the country out of recession.

Analysts suggest that fresh government aid, along with the merger of Chrysler's financial arm, will make GMAC a lending powerhouse that would give GM and Chrysler a huge advantage over their competitors. A government-controlled GMAC would have the power to offer better loan terms to buyers of GM and Chrysler cars and trucks as a way of steering business to the troubled automakers.

GMAC, which reported a first-quarter loss of $675 million, said earlier this week it has seen rising defaults in its auto finance division. That, combined with soured assets in its Residential Capital LLC mortgage unit, makes it more difficult for the company to raise the additional capital from private investors.

The banking arm of GMAC changed its name to Ally Bank last week in an effort to repair its tarnished image and attract customers.


AP Auto Writer Kimberly S. Johnson in New York contributed to this report.

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