Credit is key to the auto bailout

Flags fly outside of the General Motors Corp. in Detroit, Michigan.

In my new book Gimme My Money Back, I explain why the world runs on credit. The current financial mess depends on that fact: ever since the housing bubble popped, lenders have increasingly lost faith in businesses and individuals, no longer trusting that they will be able to repay loans. That means that potential buyers of homes and cars and dishwashers have not been able to go out and spend, which in turn choked those industries. And businesses that depend on loans to cover day-to-day costs were forced to delay expansion plans and cut corners, which is partly why we are seeing huge rounds of layoffs nowadays.

The government recognizes that freeing up credit is a must to restore our economy. That explains why late Monday the Treasury announced it will invest $6 billion in GMAC, the financing arm of General Motors. The hope is that this massive cash infusion will jumpstart the lending process, putting more money in the hands of consumers who want to buy cars.

Let’s take a closer look at the new $6 billion initiative.

1. The plan comes in two parts: firstly, the Treasury will directly buy $5 billion worth of preferred equity shares in GMAC; and secondly, the Treasury will lend $1 billion to General Motors, which will then direct the money to GMAC. The second move will allow General Motors to participate in a rights offering during GMAC’s reorganization and comes as a loan, so the government receives no shares in exchange.

2. The whole of the $6 billion will come out of the Troubled Asset Relief Program. This program was originally intended to help U.S. banks, but the Treasury is being forced to draw on it to prop up U.S. automakers as well due to the Senate’s rejection of the proposed auto bailout bill earlier this month.

3. As a result of this new cash injection, GMAC says it will ease its lending standards and resume financing for a broader range of car buyers. In the third quarter, GMAC issued 22% fewer loans compared to a year ago, and raised its credit criteria for customers.

That last point gets to the heart of the credit issue: if customers can’t borrow money, then everyone suffers: the customer, the producer, and the lender. This latest government initiative was key for General Motors, which depends on GMAC to help get customers shopping for cars again.

Now we have to wait and see if consumers, jittery about the current recession, are ready to get back out there.

Ali Velshi is CNN's chief business correspondent and author of the new book "Gimme My Money Back: Your Guide to Beating the Financial Crisis," published by Sterling & Ross. Read an excerpt from the book.