May 22 (Bloomberg) -- GMAC LLC, the auto and home lender bailed out in December, received $7.5 billion from the U.S. Treasury to expand auto lending at Chrysler LLC and was cleared to sell government-backed debt for the first time.

The investment includes $4 billion for GMAC to originate loans to Chrysler buyers and sellers, the Treasury said yesterday in a statement. The remaining $3.5 billion will help Detroit-based GMAC meet capital needs that resulted from the government stress tests. The Treasury said it expects to hold a 35.4 percent common equity interest in the company.

The second capital infusion brings the government’s investment in GMAC to $13.5 billion. It signals the Obama administration’s commitment to secure financing for customers and dealers of General Motors Corp. and Chrysler, two of the country’s three biggest automakers. Chrysler filed for bankruptcy on April 30, and GM is likely to follow on June 1, as the U.S. auto industry suffers from 18 straight months of declining sales.

“To stabilize GM and Chrysler they have to stabilize GMAC and the suppliers,” said Kirk Ludtke, an auto analyst at CRT Capital Group Inc. in Stamford, Connecticut. “They don’t have any choice and they may have to go beyond this.”

The contract with the government, announced three weeks ago, includes a four-year agreement for GMAC to be the preferred provider of incentivized retail financing for Chrysler, and originate loans to customers that had relied on Chrysler Financial.

Government-Backed Debt

Separately, GMAC can now sell $7.4 billion in debt backed by the Federal Deposit Insurance Corp., the company said in a statement. GMAC also said it received an exemption from the Federal Reserve to allow its bank to originate a limited amount of GM-related retail and wholesale assets.

Previously unable to sell debt because of a junk rating, GMAC was permitted to convert into a bank holding company in December to tap the Treasury’s rescue fund and attract more retail deposits. GMAC has lost money in six of the past seven quarters and faced near collapse last year from tumbling auto sales and surging home foreclosures.

Government stress tests this month determined GMAC needs to raise $11.5 billion to withstand a deepening recession. Of that, $9.1 billion must be new Tier 1 capital, which is reduced to $5.6 billion after yesterday’s announcement. GMAC said it intends to submit a plan for raising new capital to the Federal Reserve Bank of Chicago by June 8.

Bond Prices

GMAC’s bonds have jumped 83 percent since the Chrysler deal was signed on optimism the government won’t let the company fail. The 8 percent bonds due in 2031 rose 4.9 cents, or 7 percent, to 75.9 cents on the dollar yesterday, to yield 10.9 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Gimme Credit LLC analyst Kathleen Shanley recommended investors sell their stakes after the rally because of the deteriorating auto market. In the first quarter, GMAC’s loan originations for new vehicles tumbled 74 percent from a year earlier to $3.4 billion as unemployment reached the highest in a quarter century.

“GMAC’s core auto-finance business is being buffeted by the sharp downturn in auto sales and the worldwide credit crunch,” Shanley, based in Chicago, wrote in a May 14 report. Even with government support, “bondholders may not be out of the woods yet, especially if operating results continue to deteriorate,” she wrote.

No ‘End in Sight’

Senator Richard Shelby, an Alabama Republican, said that continuously pumping money into the automakers and finance companies is delaying recovery in the industry and has been a bad investment for U.S. taxpayers.

“I don’t see any end in sight,” Shelby said in an interview with Bloomberg Television. “You’ve got to ask the question -- will this money be paid back, how is it going to be paid back, when is it going to be paid back? That’s the big question. I have my doubts.”

GMAC’s status as a bank holding company forced majority- owner Cerberus Capital Management LP and minority-owner GM to relinquish most of their stakes. GMAC is also altering its board to consist of Chief Executive Officer Al de Molina, Stephen Feinberg from Cerberus, and Robert Blakely and Kim Fennebresque from Treasury. The other five board members include two current and three independent directors.

To contact the reporters on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; Rebecca Christie in Washington at rchristie4@bloomberg.net;

Last Updated: May 22, 2009 00:00 EDT