The FRB approved GMAC’s application to become a bank holding company (“BHC”) by converting its industrial loan company to a “bank” for purposes of the Bank Holding Company Act (the “BHC Act”). In evaluating the proposal, the FRB had to consider “a number of unique issues,” including the historical relation of GMAC to General Motors Corporation (“GM”), and the current majority ownership of GMAC by entities controlled by or affiliated with Cerberus Capital Management L.P. (“Cerberus”). Neither GM nor Cerberus is able to comply (or presumably wanted to make the changes necessary to comply) with the nonbanking activity restrictions of the BHC Act.
Control Issues. To address concerns it could control GMAC for purposes of the BHC Act (and thus itself be deemed a BHC), GM committed that before consummation of the proposal it would reduce its ownership in GMAC to less than 10 percent of GMAC’s voting and total equity interests. The remainder currently held by GM would be transferred to a trust with a trustee acceptable to the FRB and the Treasury. The trustee would be independent of GM and would dispose of the GMAC equity interests within three years. Until full divestiture by the trust occurs, GM will be considered an affiliate of GMAC for purposes of Sections 23A and 23B of the Federal Reserve Act, and GMAC would revise its agreements to remove limits on its ability to provide financing to parties other than GM.
As to Cerberus, to avoid BHC concerns the Cerberus funds would distribute a significant portion of their stakes in GMAC to their investors, which are sophisticated and independent of Cerberus. Cerberus and its related parties would not own more than 14.9% of the total voting interests or 33% of the total equity of GMAC (consistent with the FRB guidance on minority investment described in the Alert dated September 23, 2008). Moreover, Cerberus employees and consultants would no longer provide services to or act as dual employees of GMAC, and neither Cerberus nor any affiliated entity would have any advisory relationship with GMAC or any investor regarding the vote or sale of shares, or the management policies, of GMAC.Capital Issues. The FRB approval also addressed the capital position of GMAC. In approving the proposal, the FRB noted GMAC’s successful efforts to raise additional capital, and commitments it made to maintain significant capital in the future. The FRB also considered that GM, which would continue to be a major business partner of GMAC, had received credit from the Treasury to improve its viability. After the FRB approval, the federal government announced that it would make available a total of $6 billion to GMAC, in the form of a $5 billion investment in GMAC and a loan of $1 billion to GM which GM will then invest in GMAC.