WASHINGTON (Reuters) - U.S. Treasury Secretary Timothy Geithner said on Friday the Obama administration will provide substantial support to troubled lender GMAC, a vital provider of financing for buyers of U.S.-made cars.
“It’s likely, again, that GMAC will need to take additional capital from the government and we’ll be prepared to provide that,” Geithner said in an interview with Reuters Television.
The Treasury and U.S. banking regulators said on Thursday that GMAC needs to raise $11.5 billion to fill a capital hole it could face if the economy were to deteriorate further.
After “stress tests” were performed on the 19 largest U.S. banks, the Treasury and the Federal Reserve concluded that 10 of them need to raise a combined $74.6 billion to build a capital buffer to ensure they could keep lending even if faced with unexpectedly high losses.
Banks can seek private infusions of capital to try to avoid having to seek government help, but those unable to do so have a taxpayer-funded rescue as a last resort.
‘LONG WAY TO GO’
Geithner said there were some signs that credit conditions were easing and fears of a catastrophic financial meltdown were waning. However, there was still “a long way to go” before the shaken financial system returns to full health.
GMAC, the former financing arm of General Motors Corp, has taken $5 billion from the government already. In addition, the Treasury has lent GM $884 million to support GMAC’s lending activities. Under the restructuring of Chrysler Corp, GMAC is assuming the business of Chrysler Financial.
Chrysler has entered bankruptcy proceedings and GM has until June 1 to show it can come up with a workable restructuring plan, underlining the importance of GMAC to the struggling U.S. auto industry.
Many analysts think GM is likely to enter bankruptcy as well. Geithner said that just because Chrysler filed for bankruptcy protection, did not mean that GM necessarily would.
When the Obama administration announced on April 30 that Chrysler would file for bankruptcy protection, it said it would offer support to GMAC, including necessary capital, to allow it to finance Chrysler’s sales.
GMAC spokeswoman Toni Simonetti said the company was expecting the government to provide new capital soon to allow it to take on the Chrysler business, and said this was separate from any capital-raising it would need to do to raise the $11.5 billion in capital regulators have told it to raise.
Geithner made clear the government was willing to put a large amount of capital on the line.
“Financing is critical to this (restructuring) process, and that requires that GMAC have the ability to provide loans that Americans need to buy cars,” Geithner said.
An implosion of the U.S. housing market and plummeting consumer demand for autos and other products have plunged the economy into a deep recession that has cost 5.7 million jobs.
The Labor Department said on Friday that 539,000 Americans lost their jobs last month, with the unemployment rate jumping to a 25-1/2 year high of 8.9 percent.
While steep job losses continued in April, analysts took heart that the number of jobs lost was the fewest since October, and Geithner also said the data offered some hope.
“They’re encouraging in some sense because the rate of decline in the economy as a whole is slowing,” he said.
Still, Geithner said the jobless rate would likely rise for a while, even though the economy appeared poised to begin pulling out of recession in the second half of the year.
The Treasury has injected hundreds of billions of dollars of taxpayer funds into banks to stabilize the financial sector and help pull the economy out of recession.
But the rescue has stoked public anger. Many taxpayers blame bankers for the crisis and think their pay packages are out-sized and inappropriate.
Geithner was unsparing in his criticism of Wall Street compensation and said the government will demand a closer link between pay and performance in the future.
“This crisis was caused in part by the fact that compensation practices just got way divorced from reality,” he said. “They played an important role in laying the foundation for this crisis and we can’t let that happen again.”
Congress approved a $700 billion financial-bailout fund last fall that the government has used to inject capital into banks. Geithner repeated that he still thinks the fund, which has dwindled to about $100 billion, can still handle any additional cash injections that may be needed, but he didn’t close the door entirely to asking for more taxpayer money.
“If we have to go back to Congress, we’ll make the best case we can,” he said. “We’re not at that point yet.”
The credit crisis that struck 19 months ago has led policy-makers worldwide to revisit how they oversee financial firms. The Obama administration has laid out principles for how it would like to revamp regulations, and Geithner said a detailed plan would be given to Congress in a couple weeks.
“We’re trying ... to put in place stronger rules of the road over the financial system,” he said. “We hope to move forward quickly with legislation.”
Additional reporting by Karey Wutkowski; writing by Glenn Somerville; Editing by Dan Grebler