As Treasury Bails Out GMAC, Is It Overdrawing Federal Bailout Funds?

Maybe it’s not quite as bad as it looks.

Tonight, the Treasury said it would funnel $6 billion of the federal bailout funds to GMAC, the big auto-financing company. This is above and beyond the cash infusion for General Motors itself, and Chrysler, that President Bush announced on Dec. 19, and it isn’t explicitly tied to GMAC’s conversion to a bank holding company.

But wait — all $350 billion of the funds allocated so far by Congress are spoken for, promised to banks, AIG, Citigroup and the automakers themselves, among others. Congress hasn’t unleashed the second $350 billion; Treasury Secretary Henry Paulson hasn’t even asked for it yet.

So what gives — is the Treasury doing a little deficit spending of its own? Kiting checks? Something else?

It's the difference between cash-flow and a budget: The Treasury has said it would use $250 billion of the first installment on shoring up bank capital, by purchasing preferred shares and warrants from banks and thrifts; in a sense, it has budgeted for that much.

But much of that money hasn't yet gone out the door -- at last count, the agency has paid $172.4 billion to more than 130 banks. Other bank applications are still pending. So while the Treasury has said it would spend up to $250 billion on the program, it still has billions in cash available for new programs; in theory, if Congress doesn't hand over the second $350 billion, it would just mean that banks get a little less.

GMAC might not be the end of it for auto financiers and manufacturers: Within a couple days, a Treasury official says, the agency will post guidelines for loans to auto companies generally. No word yet on how broad eligibility might be.

In another curious twist, the GMAC bailout appears to include a loan to let General Motors increase its stake in GMAC -- even as Federal Reserve banking rules appear to require it to shed ownership.

Of the $6 billion announced tonight, $5 billion goes to purchase preferred shares in GMAC (with an 8% coupon for the government, a nice bump up from the 5% banks are paying).

But the remainder, of up to $1 billion, is a loan to General Motors -- a loan that allows GM to participate in a rights offering from GMAC. That rights offering, of course, is being presented as part of a make-or-break strategy by GMAC to refashion itself into a bank holding company and avoid bankruptcy. The Federal Reserve approved GMAC's application to become a bank holding company on Christmas Eve -- but GM, and co-owner Cerberus, has to give up control of of the lender to comply with bank ownership rules.

In other words, it appears that the Treasury is lending to GM so it can keep GMAC afloat by increasing its stake in it -- an investment GM apparently can't maintain for long.