Bailout of GMAC Could Boost GM Car Sales

The federal government is taking another step to help domestic carmakers.

The Treasury Department said Monday that it would invest up to $6 billion in GMAC, a company that finances auto loans. The funds are in addition to the $17 billion emergency loan GM and Chrysler got earlier this month. With this new money, GMAC says it can start making more loans to more people looking to buy cars.

For the past few months, GMAC's car-loan business had slowed to a crawl. But Tuesday — within hours of the Treasury Department's announcement — things started flowing again.

"It's already trickled down to us," says Barry Williams, a Chevrolet dealer in Elkton, Md.

Williams arrived at work to find notes from GMAC touting new financing deals and loosening its credit standard for car loans. It was the first such message he had seen from the company in months.

"GMAC went from my biggest player to nothing," he says. "I haven't sent a deal to GMAC in three months, just because they really didn't want the business because they didn't have the funds."

GMAC is the financing arm of General Motors, though its majority owner is private-equity firm Cerberus, which also owns Chrysler. GMAC helps finance dealers such as Williams to get cars to show in their stores. It also provides loans to consumers looking to buy cars.

GMAC ran into major trouble after it ventured into subprime home lending, which turned out to be toxic. GM, which owns nearly half the company, then ran out of cash, leaving GMAC hamstrung.

In order to help GM, the government also had to help GMAC, says University of Maryland professor Peter Morici.

"You can't make cars without engines; you can't make cars without credit," Morici says. "Giving money to GMAC provides General Motors with the credit to make cars."

Morici says, however, that giving GMAC the money won't mean cars will suddenly start flying off GM dealers' floors. It is just part of the government's attempt to help the car industry on multiple fronts.

"This will not make a huge difference in General Motors sales," Morici says. "This is one piece of the puzzle for solving the General Motors problem.

"General Motors needs financing for its dealers, financing for its customers. It needs a new labor contract; it needs to restructure its debt with its bondholders. And all these things are dependent on one another."

Car dealers say they are heartened by the immediate actions by GMAC — in particular, the looser credit requirements. GMAC's minimum credit score is now 621, down from 700.

"The consumer psyche has been, 'I don't know if I'm going to qualify.' And, really, what's been holding them back is the whole credit issue," says Marc Cannon, senior vice president at AutoNation, which runs the biggest chain of auto dealerships in the country.

Cannon says the previous credit restrictions blocked almost two-thirds of potential clients from buying.

"I think it's clearly going to help, but it's going to take time, by the way," he says. "It is not going to be the quick fix."

Williams, who runs the Chevy dealership in Maryland, says consumers still need to recover from a harsh downturn and feel more secure about GM's future and their own jobs.

"The real issue is just the general economy, and these are just little pieces of the whole issue," Williams says. "And consumer confidence is the biggest issue, in my opinion."

Williams says that during the 45 years he and his family have been working with GMAC, he has never seen anything slow down so quickly.

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