The parent company of mortgage financier Residential Capital LLC (ResCap), GMAC Financial Services, received approval from the Federal Reserve last week to become a bank holding company, making the struggling organization eligible for government assistance through the Troubled Asset Relief Program (TARP). Just days after its bank conversion plans were sanctioned, GMAC announced on Monday that it had completed the sale of $5 billion of GMAC’s preferred membership interests and warrants to the U.S. Department of the Treasury as a TARP participant.
As a bank holding company, GMAC now has “expanded opportunities for funding and access to capital, which will provide increased flexibility and stability,” the company said in a press release.
“[The approval for conversion to a bank holding company] marks a key turning point in GMAC’s history,” said GMAC CEO Alvaro de Molina. “As a bank holding company, GMAC will be competitively positioned for the long-term to provide financing to auto and mortgage consumers and businesses…”

New York-based GMAC also announced on Monday that former majority owner General Motors Corp. (GM) and an affiliate of its new majority owner Cerberus Capital Management contributed $750 million in subordinated participations to the $3.5 billion senior secured credit facility between GMAC and ResCap in exchange for new common equity of GMAC. In addition, GMAC announced that the two contributing firms entered into agreements to purchase $1.25 billion of new common equity, of which the U.S. Treasury will help fund GM’s share, GMAC said.
GMAC also said that the conditions to its previously announced separate private exchange offers and cash tender offers have been satisfied and that GMAC has accepted all of the validly tendered GMAC old notes and ResCap old notes. The GMAC and ResCap offers are expected to settle promptly, the company said.
GMAC’s mortgage financing arm ResCap, which is based out of Bloomington, Minnesota, has been flirting with bankruptcy for some time now. In the third quarter of this year, ResCap lost $1.91 billion. And in November, GMAC warned that the ResCap division might have to close its doors unless it received direct economic support from its parent company, who itself has been facing financial hurdles with the added troubles in the automobile industry and dissent from investors when it came to raising the necessary capital for GMAC to become a federally-chartered bank holding company. Last quarter, ResCap closed all GMAC Mortgage retail offices and terminated all new wholesale lending. The company also sold off the GMAC Home Services business to Brookfield Residential Property Services in Canada.
Analysts at Moody’s Investors Services still contend however, that ResCap will likely not be able to stand on its own, regardless of GMAC’s new stream of TARP funding. “Each month requires additional support from GMAC to prevent ResCap from violating its debt covenants and defaulting on its debt service,” Moody’s concluded in November.