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Federal Watchdog Questions Treasury’s Actions to Preserve GMAC

The ""Congressional Oversight Panel"":http://cop.senate.gov/index.cfm (COP) recently released a ""report"":http://cop.senate.gov/documents/cop-031110-report.pdf finding that throughout the federal bailout of Detroit-based ""GMAC"":http://www.gmacfs.com/us/en/index.html, ""Treasury missed opportunities to increase accountability and better protect taxpayers' money.""

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GMAC began as General Motors Acceptance Corporation in 1919, the Detroit-based, in-house credit arm of General Motors Company (GM). The once-small credit arm began providing home mortgages in 1985, and in 2006, GM spun the arm off into its own independent company--GMAC Inc., which today ranks as the 14th largest bank holding company in the United States.

Soon after gaining this independence, though, the U.S. financial system plunged into crisis, and the existence of GMAC came under threat. By late 2008, GMAC's residential mortgage unit was suffering crippling losses due to the downturn in the housing market, and its automotive financing operations faced an uncertain future as GM headed toward bankruptcy.

In December 2008, the federal government provided GMAC with $5 billion in TARP funds under the auto industry financing program, and the company became

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further entwined in the government's financial rescue efforts after being subjected to a ""stress test"" to ensure that it could withstand a sharp economic downturn. The test revealed that GMAC needed to increase its capital buffers, so the government provided further investments of $7.5 billion in May 2009 and $3.8 billion in December 2009.

Despite the $17.2 billion TARP investment, there is still no clear business plan for GMAC.

In its report, the COP strongly questions the government's early decisions to rescue GMAC instead of pursuing other options as part of a broader bailout of the domestic automotive industry. For example, Treasury did not condition access to TARP money on the same sweeping changes that is required for GM and Chrysler, the report says. It did not wipe out GMAC's equity holders, it did not require GMAC to create a viable plan for returning to profitability, nor did it require a detailed, public explanation of how the company would use taxpayer funds to increase consumer lending.

The panel also remains unconvinced that bankruptcy was not a viable option. Treasury might have been able to orchestrate a strategic bankruptcy in 2008 in connection with the Chrysler and GM bankruptcies, and this could have preserved GMAC's automotive lending functions while winding down its other, less significant operations, putting the company on sounder economic footing. The COP also said Treasury has not given due consideration to the possibility of merging GMAC back into GM.

GMAC's rescue came at a great public expense, and the panel is deeply concerned that Treasury has not required GMAC to lay out a clear path to viability or a strategy for fully repaying taxpayers. The Office of Management and Budget currently estimates that $6.3 billion or more of the $17.2 billion in bailout funds may never be repaid. Moving forward, the COP said Treasury should clearly articulate its exit strategy from GMAC.

About Author: Brittany Dunn

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