Oct. 28 (Bloomberg) -- GMAC Inc., the lender that received two government bailouts totaling $13.5 billion, is negotiating with the Treasury Department for a possible third lifeline next month, people familiar with the matter said.

The U.S. is studying a capital injection of $2.8 billion to $5.6 billion, according to the people, who declined to be identified because the transaction hasn’t been agreed upon. GMAC may require less than the full amount because an improving market has made conditions less dire than envisioned, said one of the people. The Detroit-based lender also sold $2.9 billion of federally backed debt today.

GMAC may get more government money because the Obama administration regards the lender as crucial to the survival of the U.S. auto industry. General Motors Co., its former parent, and Chrysler Group LLC rely on the firm to finance their vehicle buyers. GMAC will report third-period results on Nov. 4, after losses in seven of the past eight quarters.

“It’s outrageous that the taxpayers are being asked yet again to support a troubled enterprise,” said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. “When will it end?”

GMAC is raising funds by selling almost $3 billion of three-year notes guaranteed by the Federal Deposit Insurance Corp. The sale exhausts GMAC’s ability to sell government- backed debt after issuing the full $7.4 billion approved under the agency’s program. FDIC spokesman Andrew Gray declined to comment.

Preferred Stock

The new capital will involve issuing preferred stock, boosting the government’s 35.4 percent stake if existing shares are converted into common equity, according to one of the people.

The U.S. conducted “stress tests” of the biggest lenders in May. The government then injected $3.5 billion into GMAC and said the company needed to raise as much as $5.6 billion in capital, the maximum being discussed by regulators and the company. The stress tests included worst-case scenarios in which the recession was assumed to be deep and prolonged.

GMAC is the only lender to have gone through the government’s stress tests and still require another public rescue, said Andrew Williams, a Treasury spokesman. Williams declined to comment on the bailout.

Stress-Tested

“We’re continuing to work with the Federal Reserve concerning the remaining capital requirement,” GMAC spokeswoman Gina Proia said in an interview. “We fully intend to comply with their final assessment for additional capital.”

In May, the government gave GMAC $4 billion to originate loans to Chrysler buyers and sellers.

“We are the preferred provider of automotive financing for two of the major automakers, being GM and Chrysler,” Proia said. “We’re focused on ensuring the appropriate level of available credit to consumers and small businesses.”

GMAC’s support has helped the auto industry as car sales slump, said Mirko Mikelic, who helps manage $19 billion at Fifth Third Asset Management. Light-vehicle sales at Chrysler declined 42 percent in September from the prior month and sales at GM, the largest U.S. automaker, slid 45 percent.

The government likely won’t seek to oust top executives in exchange for the third bailout, according to the Wall Street Journal, citing people close to GMAC. The Journal reported the new bailout plan yesterday.

GMAC posted a $3.9 billion second-quarter loss tied to rising loan defaults, including a $727 million deficit in the auto-finance unit. The firm also offers home loans through its Residential Capital unit, which once ranked among the biggest subprime mortgage lenders.

Ally Bank

“GMAC’s insolvent, it has been, and I don’t know that we can inject enough money into it to fix it,” said Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, California, firm that evaluates banks for investors. “The company, frankly, needs to be restructured and liquidated.”

The company should consider selling the Residential Capital unit amid a lackluster housing market unlikely to improve, said David Lykken, managing director of Mortgage Banking Solutions, an Austin, Texas-based consulting firm.

“What I don’t think anyone appreciates is the downside potential of the economy,” Lykken said. “You have to get out and whatever the consequences are you have to grin and bear it.”

The company also operates Ally Bank, which solicits deposits online by offering rates that had ranked among the nation’s highest, according to Bankrate.com. The unit, whose accounts are insured by the FDIC, held $25.4 billion in deposits at midyear. Rival banks have complained Ally competes while enjoying U.S. backing and funding.

Government support is “making life more difficult for the firms that have to compete with GMAC, the local banks that have to compete for funding, the other finance companies, the other automobile manufacturers,” Egan said.

To contact the reporters on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net; Rebecca Christie in Washington at rchristie4@bloomberg.net

Last Updated: October 28, 2009 16:28 EDT