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The Obama administration announced Thursday that it has invested $7.5 billion in GMAC, aiming to prop up the troubled lender and boost its ability to make loans to Chrysler dealers and customers.

GMAC is the main source of financing for General Motors customers and was recently tapped by the administration as the main lender for Chrysler.

The company, which is also a home mortgage lender, has been wracked by huge losses in recent quarters and hit hard by the decline in auto sales and turmoil in the housing market.

“Over the past several months, the contraction of credit in the auto finance markets has helped drive our auto industry into a historic crisis,” Treasury Secretary Tim Geithner said in a statement. “This new arrangement with GMAC will help provide a reliable source of financing to both auto dealers and customers seeking to buy cars.”

Government involvement: GMAC had already received about $6 billion from the government under the Troubled Asset Relief Program, or TARP.

The new $7.5 billion investment will be in the form of preferred equity. The Treasury Department said it will also soon exchange a previous $884 million loan to GM for common shares in GMAC. As a result, Treasury would hold 35.4% of the common equity of GMAC.

The new injection, however, also can be converted into common equity at a later date if GMAC’s financial health deteriorates further. The government’s ultimate ownership stake remains to be seen.

Some $4 billion of the new investment will go toward supporting financing for Chrysler dealers and customers. The remaining $3.5 billion will be used to boost GMAC’s capital levels, as required under Treasury’s recent stress tests of the nation’s largest banks and lenders.

GMAC must still raise $5.6 billion to meet regulators’ requirements about its financial health. The company has until June 8 to present a plan to obtain the remaining funds.

“This provides a downpayment on that, but doesn’t meet the entire need,” said a senior administration official.

GMAC also said Thursday that it had been approved to participate in a powerful program that lets companies issuing debt backed by the Federal Deposit Insurance Corp. GMAC will be able to borrow as much as $7.4 billion.

“These actions represent another major step in stabilizing and strengthening GMAC,” GMAC Chief Executive Officer Alvaro G. de Molina said in a statement.

GMAC and was once a major driver of General Motors’ earnings before GM sold a majority stake to private equity firm Cerberus Capital Management LP and other investors in 2006.

The company had approximately $180 billion in assets and serviced 15 million customers around the world, as of March 31.

GMAC’s auto finance business will get a boost this month as it becomes the preferred lender to Chrysler LLC customers as part of the Obama administration’s agreement with that bankrupt automaker. Chrysler Financial, also owned by Cerberus, will no longer provide loans to Chrysler dealers and customers.

Chrysler and GM are both facing critical deadlines in coming days. A federal bankruptcy judge who holds the fate of Chrysler’s restructuring plan is set to hold a key hearing next week. And GM is racing toward a June 1 deadline imposed by President Obama to devise a viable survival plan.

On Thursday, the United Auto Workers union said it has reached a deal with Treasury and GM to alter its labor contract – one of the key obstacles that needed to be cleared for GM to potentially avoid being forced into bankruptcy in the next two weeks.

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Citigroup Friday sold $2 billion in debt, its first U.S. corporate bond sale without a government guarantee in nine months in a sign of improved confidence in the bank as it recovers from a credit crisis.

Long viewed as one of the most troubled U.S. banks, Citigroup’s return to the corporate bond market came after government stress tests last week showed its capital position was better than many feared.

The stress tests, announced by U.S. Treasury Secretary Timothy Geithner in February, were meant to restore investor trust in major banks after massive losses raised fears about financial failures.

Citigroup’s self-led note sale attracted more than $5 billion in interest, according to a buyside trader looking at the deal. Citigroup was the latest of a number of large banks to sell debt without government backing since the stress test results were released a week ago.

“If I were Mr. Geithner, I would be pleased to see this news, because it is a vote of confidence in the results of the stress tests and the rest of the actions the government has been taking to restore market confidence,” said Kathleen Shanley, analyst at independent research service Gimme Credit.

Citigroup sold its 10-year notes with a yield of 8.765 percent, or 562.5 basis points more than U.S. Treasuries, according to IFR, a Thomson Reuters service.

Proceeds will be used for general corporate purposes, which may include funding operations, acquisitions, business expansion or debt refinancing, according to IFR.
“Just a few weeks ago, I don’t think anyone would have predicted Citigroup would be tapping the market so soon,” Shanley said. “For Citigroup, it is very important for them to show that they are not the only bank of the 19 in the stress test group that is unable to issue non-guaranteed debt.”

Stress tests showed that 10 of the 19 largest banks need to build capital by about $75 billion to be able to withstand a worst-case scenario set by the government.

Citigroup, which was told it needed to raise $5.5 billion, has said it would exchange that amount of preferred securities for common stock. Citigroup has suffered more than $90 billion of writedowns and credit losses since mid-2007.

Citigroup’s bonds and shares have rallied since March 10, when Chief Executive Vikram Pandit said the bank was profitable in the first two months of the year.

Yield spreads on Citigroup’s 6.125 percent notes due in 2018 have declined to 521 basis points over Treasuries from 646 basis points the day before Pandit’s remarks. Falling yield spreads over Treasuries indicate investors see less risk.

Other banks that have issued non-guaranteed debt in recent weeks include JP Morgan Chase, Bank of America, US Bancorp, Morgan Stanley, Bank of New York Mellon, Goldman Sachs, BB&T Corp and Northern Trust Corp.

Citigroup and other banks had been issuing debt with the backing of the Federal Deposit Insurance Corp since the credit crisis eroded investor confidence last year, sending banks’ borrowing costs soaring.

Banks have been attempting to wean themselves off government support to shake off tight restrictions, including caps on compensation. Regulators have said selling non-guaranteed debt was a key condition for being permitted to repay funds from the Treasury’s Troubled Asset Relief Program.

Still, selling non-guaranteed debt remains costly, with banks’ yield spreads much higher than before the credit crisis, an indicator of investor caution. – Reuters

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Some lenders refuse offer to reduce debt, leading to Chapter 11 bankruptcy filing. But Chrysler will remain in business and completes deal with Fiat.

Chrysler LLC filed for bankruptcy Thursday. But a deal has been reached to combine the company with Fiat in order to allow Chrysler to stay in business.

The bankruptcy filing, which was made in federal court in New York, comes after some of Chrysler’s smaller lenders refused a Treasury Department demand to reduce the amount of money the troubled automaker owed them.

In remarks at the White House, President Obama said that the bankruptcy filing is not a failure for the company but “one more step on the path to Chrysler’s revival.”

Obama vowed the bankruptcy process would be quick, efficient and controlled. A senior administration official predicted it would be completed within 30 to 60 days. The combination with Fiat is also due to close during that period of time.
According to government officials, a new company will be formed that will buy the assets of Chrysler – its plants, brands, land, equipment, as well as its contracts with the union, dealers and suppliers – from the bankruptcy court.

The company’s liabilities and an unspecified number of Chrysler’s 3,300 dealerships which now sell the Chrysler, Dodge and Jeep brands will be left behind in the bankruptcy court.

Administration officials said the Treasury Department will provide Chrysler with about $8 billion in loans on top of the $4 billion in loans it has already received to get it through bankruptcy.

Officials said $3.3 billion of the new loans will be used to fund operations during bankruptcy, while the remaining $4.7 billion will allow Chrysler to function normally once it exits bankruptcy. In addition, the Canadian government will loan the companies $2.7 billion to help support Chrysler’s Canadian operations.
While an administration official promised there will be no immediate job cuts for the company’s 39,000 employees or plant closings, Chrysler announced that most manufacturing operations will be temporarily shut down on Monday, May 4. Normal production is not due to resume until the transaction with Fiat is completed.

But some Chrysler plants, including truck assembly and stamping plants in Warren, Mich., shut down earlier than scheduled on Thursday. Following the bankruptcy filing, some suppliers worried about being paid stopped shipping parts to the plants.

“I was hoping we could get through this unscathed,” said Gene Behme, a production technician at the Warren stamping plant as he left work about an hour early. “I’m disappointed. I would like to keep working. Hopefully we’ll come through stronger.”

Chrysler President Tom LaSorda would not say how many plants would shut down early or how many suppliers had cut off shipments on the bankruptcy news.

“Hopefully most of the suppliers will continue to supply us,” he said.

Most of Chrysler’s hourly workers will receive about 80% of their normal pay during the shutdown under unemployment benefits and supplemental pay in the union contract.

The employees whose jobs may be most immediately in danger are the 3,400 workers of Chrysler Financial, which provides loans to Chrysler customers and its dealers.

That unit is essentially going out of business. As part of the reorganization, lending will now be provided by GMAC, the finance arm jointly owned by General Motors (GM, Fortune 500) and current Chrysler parent Cerberus Capital Management. (Cerberus will end up with no stake in Chrysler once the bankruptcy is complete and is in the process of cutting its stake in GMAC to less than 15%.)

Some of the 140,000 employees at Chrysler’s network of dealers could also be at risk. Chrysler CEO Robert Nardelli said that the reduction in the network of 3,300 dealers would not be a “catastrophic” but that it would be “noticeable.”

Nardelli, who joined Chrysler two years ago, will leave after Chrysler emerges from bankruptcy and completes the alliance with Fiat.

Fiat will be calling more of the shots after the combination as the deal calls for it to provide “management services” to Chrysler.

A successor for Nardelli will be named by the new Chrysler board of directors, which will have four members named by the Treasury Department, three named by Fiat, and one each by the UAW and the Canadian government.

Once the deal closes, Fiat will examine the cost structure of Chrysler to find additional savings. Fiat has promised to use Chrysler’s existing plants to build the small cars it now sells in Europe for the U.S. market.
Chrysler faced a midnight Thursday deadline from the Treasury Department to reach deals with creditors who had loaned the company about $7 billion.

But the troubled 85-year old automaker was able to avoid liquidation thanks to the deal with Fiat, concessions from the United Auto Workers union and agreements by major lenders to cut Chrysler’s debt.

The UAW announced late Wednesday night that its membership at Chrysler had overwhelmingly ratified the agreement reached between the company and union leadership on Sunday night.

As a result of that deal, the UAW will own 55% of Chrysler. Fiat will own a 20% stake with the option of increasing it to 35%. The U.S. government will own 8% and Canada will have a 2% stake.

Major banks such as Citigroup (C, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) agreed to reduce their portion of $7 billion in secured loans to a more manageable $2.25 billion, but talks with smaller lenders broke down Wednesday when they refused to meet a deadline set by the Treasury Department to accept pennies on the dollars for loans to Chrysler.

Nonetheless, the fact that Chrysler will not have a disorderly bankruptcy may prevent a rash of failures across the auto supplier industry that had the potential to disrupt production at other automakers.

Chrysler owes its suppliers about $7 billion, according to the latest figures available from the company. Some of those suppliers could still be hurt by the bankruptcy filing.

And the auto industry’s woes are far from over. Sales have plunged due to the global recession and tighter credit. Major automakers are expected to report dismal April sales on Friday.

Chrysler has been among the hardest hit. It has fallen behind Toyota Motor (TM) in sales, and is close to being overtaken by Honda (HMC) for the No. 4 spot for U.S. sales.

In addition, GM faces a government-imposed deadline to restructure by the end of May or it too could be forced into bankruptcy.

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