GMAC seeks $5.6 billion more from government

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gmacSeveral sources are saying that GMAC, the former lending arm of GM, is negotiating with the Treasury to get as much as $5.6 billion more in bailout money. The financial firm has already received $13.5 billion from the federal government.

The main reason for helping GMAC is obvious; GM relies on the company to provide auto loans to dealerships and individual consumers. If its ability to lend were compromised, GM could be badly hurt. A lack of leasing options is already being blamed for much of Cadillac's 44 percent drop in sales during the first nine months of this year. While GMAC might survive without the government funds, its ability to make new loans would be crippled.

The money that will probably go to GMAC raises another critical issue: what happens if financial institutions that have already received government funds need more money to continue operating or lending money to consumers and businesses? It is currently assumed that the largest banks like Citigroup ( C) and Bank of America (BAC) are now on the mend and will be able to pay the government back the money that they have taken under TARP.

Dozens of medium-sized banks and financial firms took money from the government as part of the TARP program, and recent data from the Treasury shows that 34 of these did not pay dividends on the money for the August fiscal quarter. That means there are probably a number of severely troubled financial firms still battling to fix their balance sheet problems.

GMAC may not be the last financial operation to request more federal government funding, so what will the Treasury do if more companies come knocking on the door asking for additional capital? It could cause a bit of a panic if the government starts turning them down.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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