GMAC to get $7.5 billion in new federal aid

updated 6:35 p.m. ET May 21, 2009

WASHINGTON - The government 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 Treasury Department announced the investment on Thursday, saying it would help provide a reliable source of financing to auto dealers and customers looking to buy vehicles.

The cash infusion is intended to help the company make loans for General Motors Corp. and Chrysler LLC vehicles. The people spoke on condition of anonymity Thursday because they were not authorized to speak before a formal announcement by the Treasury Department.

The move came after GMAC failed a bank "stress test" earlier this month, with the Treasury mandating 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 would mark the government's latest attempt to break through credit clogs and spur more lending, a necessary ingredient to lifting the country out of recession. It also would increase the government's role in bailing out the auto industry and give Treasury more control over GMAC.

Analysts suggest fresh government aid, along with the merger of Chrysler's financial arm, would make GMAC a lending powerhouse that would give GM and Chrysler a huge advantage over their competitors. A U.S.-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.

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