$3.8 Billion More In TARP Aid Makes U.S. Majority Owner Of GMAC

USA Today

WASHINGTON — The government on Wednesday provided a fresh $3.8 billion cash infusion to stabilize GMAC Financial Services as the financing company struggles with hefty losses in its home mortgage unit.

The Treasury Department said the new aid, which comes from a taxpayer-financed bailout fund, is less than the roughly $6 billion the government had earlier thought GMAC would need to stabilize the company.

The fresh infusion is on top of $12.5 billion in taxpayer money Detroit-based GMAC has already received from the government. The new agreement will boost the federal government's ownership in GMAC to 56%, from 35%.

Even with the government upping its stake, Treasury officials said the government intends to stick to its policy of leaving day-to-day business decisions about financing to GMAC management. Still, with the additional stake, the government will have the right to appoint two additional directors to the company's board, Treasury officials said.

GMAC will continue to be subject to executive pay restrictions imposed by the government's pay czar.

Shoring up GMAC has been a major component of the Obama administration's massive effort to rescue ailing automakers General Motors and Chrysler. The lender provides critical wholesale financing to thousands of GM and Chrysler auto dealers, allowing them to stock their showroom floors with vehicles.

But GMAC also operates a large residential mortgage business, ResCap, which was battered by the recent housing collapse. GMAC was obligated by the Treasury Department to raise $11.5 billion in additional capital earlier this year after failing the government's stress test for banks, largely because of ResCap's big losses.

The stress tests were to see whether banks had enough capital even if the economy worsens next year. However, GMAC had difficulty raising money because of its financial woes, making an extra government infusion necessary.

Michael Carpenter, who succeeded Alvaro De Molina as the company's CEO in November, has said the company would need no more than $5.6 billion in aid. Lawmakers estimated the company would receive between $2 billion and $5 billion in additional aid.

Any additional government money would come from the $700 billion Troubled Asset Relief Program that has been used to bail out troubled financial institutions and automakers.

Even after the latest capital infusion, the government will likely take steps to help GMAC as it tries to ensure the recovery of GM and Chrysler, said Kirk Ludtke, senior vice president at CRT Capital Group. That includes helping GMAC refinance its debt as it comes due, he said.

"The government has come this far, it is not going to destabilize GMAC at this point," he said.

GMAC still remains on shaky financial ground. Last month, it reported a quarterly loss of $767 million, though the results were an improvement over a giant loss a year ago. ResCap lost $747 million during the third quarter as homeowners continued to default on their mortgages in large numbers.

GMAC, which also provides financing to car buyers, has also been hurt by the rapid decline of the U.S. auto industry after sales crumbled due to the recession and financial woes of the big automakers. Sales of cars and trucks were down 24% through November compared with the same part of last year. The industry is expected to sell around 10 million cars this year, one of the worst performances for autos sales in decades.

Despite the drop in auto sales, GMAC's auto lending business has shown some signs of revival. The auto financing division earned a profit of $395 million during the third quarter. The company's online consumer banking unit, Ally Bank, has also been a bright spot by bringing in billions of dollars in new deposits by offering relatively high interest rates. It now accounts for about 29% of GMAC's assets.

$12.1 Trillion In Debt Places U.S. In Fiscal Peril

USA Today

After $787 billion in stimulus spending and $700 billion in bank bailouts, 2010 is fast shaping up to be the year of the federal budget diet.

Bipartisan support is growing in Congress for action to stabilize the nation's bulging debt, which is now $12.1 trillion. Influential experts from former Federal Reserve Board chairman Alan Greenspan to former comptroller general David Walker have joined the cause.

The public debt is the amount owed to individual investors, including foreign countries, but excluding money the government owes to its own trust funds. It has soared from $5.8 trillion to $7.6 trillion this year alone — and is more than half the size of the nation's economy for the first time since 1956.

Without action to reduce that unprecedented rise in red ink, lawmakers and experts say, Washington risks a fiscal crisis. The Congressional Budget Office projects annual interest on the public debt would be about $800 billion by 2019, but the Heritage Foundation's Brian Riedl and other analysts estimate it could surpass $1 trillion by then. Foreign creditors could refuse to buy more Treasury securities.

The focus is on the White House as President Obama prepares his State of the Union address and 2011 budget. Lawmakers and lobbyists seeking to cut the record $1.4 trillion budget deficit and stabilize the debt want Obama to back the creation of a commission that would recommend spending cuts and tax increases and require a vote by Congress. It's a process that has worked since the 1980s on military base closings.

Task force proposed

"This is a defining moment for this chamber, for this Congress, for this administration," said Sen. Kent Conrad, D-N.D., who came to Washington in 1986 when the deficit and debt were one-sixth their current size. "It is imperative that we find a way to deal with this debt threat."

Thirty-four senators so far favor creating a task force whose recommendations Congress would have to approve or reject. House Majority Leader Steny Hoyer and other House Democrats want to guarantee that every tax cut or increase in government benefits doesn't add to the deficit. The Peterson-Pew Commission on Budget Reform, a non-partisan group led by former representatives Bill Frenzel, Charles Stenholm and Tim Penny— a Republican, Democrat and independent — want to set future debt targets and enforce them with automatic spending cuts and tax hikes.

What's unusual is the number of proposals, the clout of lawmakers supporting them and the admission by Obama and congressional leaders such as Speaker Nancy Pelosi that the rising debt should be a priority. Greenspan, who presided over a commission in 1983 that helped rescue Social Security from looming bankruptcy, added his authoritative voice to the cause last week.

"The challenge to contain this threat is more urgent than at any time in our history," Greenspan said. "Our nation has never before had to confront so formidable a fiscal crisis as is now visible just over the horizon."

The administration is examining options as it prepares its second budget, to be unveiled Feb. 1.

"We share the concerns that all these members have ... in trying to bring down deficits and put us on a fiscally sustainable path," said Kenneth Baer, spokesman for the White House budget office. "We're looking at a whole range of stuff."

Who's to blame for the soaring debt is a matter of debate. Much of it is on autopilot, fueled by ever-rising costs to sustain Medicare, Medicaid and Social Security, the nation's three most expensive entitlement programs.

The White House says it inherited the problem from the Bush administration, citing the cost of two major tax cuts, two wars, a recession that began two years ago and a bailout of financial institutions. House Republican leader John Boehner and others in his party blame the $787 billion economic stimulus package passed in February and increases in this year's spending bills.

"We've seen American families and small businesses struggling all year in a very difficult economy, and all they've gotten from Democrats here in Washington is more spending and more debt piled on the backs of their kids and grandkids," Boehner said.

The cumulative debt has surpassed annual deficits as the greatest concern. The public debt could be 61% of the economy next year, growing to 70% by 2013 and 85% by 2018 if current tax and spending policies are continued, according to the Peterson-Pew Commission.

Sen. Evan Bayh, D-Ind., and a dozen colleagues threatened in December to block a nearly $2 trillion increase in the nation's debt limit — the amount of money it's allowed to borrow. Congress eventually passed a much smaller increase of $290 billion that will last only until February.

"Democrats tend to want to spend more than we can afford, Republicans tend to want to cut taxes more than we can afford, and our kids pick up the bill," Bayh said.

'The problem is the problem'

When the debt limit must be raised again in February, a dozen senators led by Conrad and Sen. Judd Gregg, R-N.H., plan to block action unless they get a vote on their commission. Their threat is forcing opponents, such as Pelosi, to signal a compromise.

"We will come to terms on a commission," Pelosi predicted last week, though its power to force Congress to vote remains in doubt. Noting Congress passed deficit-reduction packages three times in the 1990s, she said, "We know how to do it. We will do it again. And, of course, we will have to make a judgment about the priorities."

Senate Finance Committee Chairman Max Baucus, D-Mont., belittles the need for a commission to take over Congress' responsibilities. "The process is not the problem," he said, quoting former Congressional Budget Office director Rudy Penner. "The problem is the problem."

$30 Billion Of TARP Money May Go To Small Businesses

New Mexico Business Weekly

Small businesses could receive $30 billion from federal bank bailout funds, the U.S. Treasury Department said Wednesday.

While large banks have been eager to exit the Troubled Asset Relief Program, the Treasury is worried that many community banks never entered the program, not wanting to be subject to the conditions that came with the funds. As community banks are a key source of lending to small businesses, federal officials believe community banks' rejection of TARP is one of the factors keeping credit from flowing more freely.

From President Barack Obama on down, government officials have been gently stepping up pressure on banks to increase lending, saying that higher lending is needed to sustain the economic recovery.

No final decision on TARP money for small businesses has been reached, how many and which businesses might qualify, or how small businesses might apply for funds.

In New Mexico, Trinity Capital Corp. of Los Alamos — the parent company of Los Alamos National Bank — received a $36 million TARP investment in March, and Santa Fe-based Century Financial Services Corp. received a $10 million TARP investment in June.

Banks Getting TARP Funds Not Paying It Forward
Story from the Wall Street Journal

The largest bank recipients of U.S. government aid are offering less credit to businesses and consumers, the Treasury Department said Wednesday, reflecting and exacerbating the tenuous state of the current economic environment.

In a monthly snapshot of lending by the 21 largest banks receiving Troubled Asset Relief Program funds, the Treasury said credit being offered fell 2.2% across all commercial-lending and consumer-lending categories in February, compared with the prior month.

Particularly problematic: continued deterioration in commercial real estate and general business lending, as well as the credit being made available for auto and alternative student loans.

The lone bright spot remained home loans, with consumers eager to take advantage of record-low interest rates to refinance their home, business, or church mortgages.

The Treasury said 16 of the 18 banks surveyed increased mortgage originations in February, resulting in a 35% increase in mortgage lending from January levels.

The February decline in lending adds to pressure on the Obama administration's efforts to restart the still-fragile credit markets.

The Treasury has committed $95 billion in TARP funds for new programs to boost consumer and business lending, though they are either just getting started or are still in the development phase.

The report suggests that jawboning by federal officials for banks to use TARP funds to boost lending is having a limited effect.

The Treasury blamed the decrease on the broader economic weakness, including low consumer confidence, high unemployment and a decrease in U.S. exports.

It also said lending would have been lower absent the nearly $200 billion in capital injections the government has provided to about 550 banks.

Banks' diminished appetites for lending are forcing businesses and consumers alike to curb their spending, which risks prolonging the U.S. economic recession.

Demanding New Collateral

Dan Carl, who owns a handful of businesses including several car dealerships in Michigan, said Fifth Third Bancorp, Cincinnati, refused to renew some of his company's credit lines when they came due earlier this month. On other loans, Fifth Third raised interest rates and demanded Mr. Carl's firm put up additional collateral.

The lack of affordable credit was one factor prompting Mr. Carl's company to recently lay off 20% of the work force and close at least one dealership.

Lenders such as Fifth Third are punishing "the good customers to make up for the banks' mistakes," he said.

Fifth Third received $3.45 billion through TARP.

It made $634 million of new commercial and industrial loans in February, down from $785 million in January and $1.3 billion in December, according to the bank's filing with the Treasury Department.

"Demand for Small Business credit is still relatively stable but showing signs of weakening as application volume is starting to slow," Fifth Third said in its filing.

Fifth Third's Response

Fifth Third spokeswoman Stephanie Honan said the bank won't comment on specific customers.

In reviewing loans, she said, Fifth Third considers overall economic conditions and "any changes to the customer's business environment."

Overall, she said, the bank tries "to balance our commitment to our customers with safe and responsible lending practices."

The banking industry's lending pullback was particularly severe with consumer credit.

In February, according to the Treasury report, originations of new U.S. credit-card accounts fell 2.7%.

That number likely understates the magnitude of the retrenchment. Many banks have been slashing borrowing limits on cards, especially for customers who rarely approach their limits.

By reducing the credit lines, the banks can free up space on their balance sheets. But the move risks infuriating consumers.

Bank of America Corp., which received $45 billion through TARP and has the industry's largest U.S. card portfolio, said in its submission to the Treasury that credit-card loan balances and new account originations declined in February "due to continued reduction of exposure on long term inactive customers and line reductions on high risk accounts."

Bank of America recently informed longtime customer James S. Jensen that the interest rate on his credit card would leap into the double-digits, even though he had never been late on a payment.

Canceling His Account

"I could borrow on the street for less than this," says Mr. Jensen, a 61-year-old vice president at Navistar Truck Group in Warrenville, Ill.

Mr. Jensen says he is canceling his Bank of America card as a result.

Bank of America spokeswoman Betty Riess said the Charlotte, N.C., bank is "taking a more aggressive look at accounts to control risk given the current environment."