GMAC wants to become a bank
Like AmEx, financial services company GMAC has applied for status as a bank, which would make it eligible to receive bailout funds. Tess Vigeland asks banking law professor Lissa Broome to explain the trend.
More on The Economy, America's Financial Crisis
TEXT OF INTERVIEW
Tess Vigeland: Today GMAC announced that it wants to follow in the footsteps of American Express and become a bank. The largest lender to General Motors dealerships says it's hoping to become eligible for that $700 billion that Treasury Secretary Henry Paulson is doling out. University of North Carolina Professor Lissa Broome has been following these developments, and we've asked her to help us understand why anyone in their right mind would want to be a bank right now. Professor Broome, welcome to the program.
Lissa Broome: Thank you.
Vigeland: So, why are all these non-banks trying to become banks?
Broome: Well, I think there are probably three major reasons, the first of which is to have access to the bailout money through the TARP program. Reason No. 2, is to have access to the Fed's discount window for short-term loans at the bargain rate right now of 1.25 percent -- that's access to pretty cheap money. And No. 3 is, now given the state of our economy and consumer uncertainty and investor concern, being regulated by the Federal Reserve Board, which bank holding companies are, may boost investor confidence and consumer confidence in the company.
Vigeland: You know, you mentioned regulation. And, you know, if you become a bank, you're certainly subjected to more regulation and in some cases restrictions than you are if you're not a bank. So, what's the downside here for them?
Broome: Well, there's a substantial downside in terms of the nature of the other activities that your corporation and your corporation's parent may engage in. A bank holding company may only be engaged in activities that are closely related to banking. So if you are engaging in activities, like selling cars for instance, then those would be forbidden activities. As you become a bank holding company, you get a minimum of two years, which could extend up to five years, to rid yourself of the non-conforming activities. So, perhaps one thought is the short-run need is for this additional infusion of capital from the bailout fund. And two years down the road, we'll decide whether we want to stay as a bank holding company, and then we'll have to get rid of our non-conforming businesses. Or whether we want to revert back to our prior status, and we'll shed our bank at that point.
Vigeland: So, then in practical terms, what does that look like for say, GMAC? What do they get rid of, what do they gain?
Broome: Well, General Motors owns 49 percent of GMAC. And so, right now, that would make General Motors also a bank holding company. And that would mean, you know, they can't make cars or sell cars anymore, or at least after this temporary period of two to five years expires.
Vigeland: So General Motors really just has to get rid of a lot of its stake in GMAC or a car company becomes a bank.
Broome: Or they could play this waiting game and say, we have become a bank holding company by our affiliation now with this thing that just became a bank, and therefore we're entitled to two-year window period where we get to divest ourselves of our non-conforming assets.
Vigeland: Well, Professor Broome thanks so much for the explanation today.
Broome: My pleasure.
Vigeland: Lissa Broome directs the Center for Banking and Finance at the University of North Carolina School of Law.
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