THE Federal Reserve bank is to allow General Motors' finance arm to qualify for cash from the government's US$700-billion rescue fund.

The Fed said it had approved GMAC Financial Services' request to become a bank holding company. That makes it eligible to receive a portion of the bailout fund and get emergency loans from the Fed. The plan also significantly reduces the ownership stakes of GM and Cerberus Capital Management in GMAC.

Analysts had speculated that without financial help, GMAC would have had to file for bankruptcy protection or shut down, dealing a serious blow to GM's own chances of survival. The Fed cited 'emergency conditions' in justifying its decision.

GMAC was facing a crucial deadline today to complete a deal with its bondholders that would allow it to exchange debt for equity. It was struggling to convince investors to provide the capital it desperately needed to win approval to become a bank holding company. The United States central bank acted before the debt deal deadline, which GMAC says still stands and will expire today.

The Fed's move to provide government aid to one of America's biggest suppliers of auto loans was just the latest extension of the federal bailout program, initially designed to shore up ailing banks. As the credit crisis kept ballooning, the program expanded to include insurers, credit card companies and the auto makers themselves.

Just last week, President George W. Bush ordered an emergency bailout of the industry, offering US$17.4 billion in rescue loans, and citing imminent danger to the US economy.

'This is a very significant positive step for the company, and it marks a key turning point in our 89-year history,' said GMAC spokeswoman Gina Proia. 'GMAC believes becoming a bank holding company is the best long-term solution to providing automotive and mortgage financing to consumers and business, including auto dealers.'

GMAC provides financing for both GM dealers and customers as well as home mortgage loans through its Residential Capital division. If forced to file for bankruptcy, funding would have been cut off to roughly 85 percent of GM's North American dealers.

The company is 51 percent owned by Cerberus. General Motors owns the remaining 49 percent. But because those companies' businesses are mainly outside banking, they must cut their ownership so GMAC qualifies as a bank holding company.

The Fed said the plan would 'benefit the public by strengthening GMAC's ability to fund the purchases of vehicles manufactured by GM and other companies and by helping to normalize the credit markets for such purchases.'

Meanwhile, the future of Chrysler Financial, Chrysler's financing arm, is also uncertain. Earlier this month, the company that provides financing for 75 percent of Chrysler dealers said it could be forced to temporarily suspend funding for showroom inventories if dealers kept pulling large amounts of their money out of an account used to fund those loans.

Ford Motor Credit Co, which expects to report its first year of losses this year, has applied for an asset-backed securities loan facility administered by the Federal Reserve. It has already drawn on 25 percent, or US$4 billion, under the commercial paper funding facility.

Ford Motor Credit spokeswoman Brenda Hines said the company had no intention of going through the process to become a bank holding company.

The decision to change the status of GMAC to a bank holding company follows the Fed's action on Monday granting the request of CIT Group to become a bank holding company so that it could qualify for rescue funds.

The Fed has also granted bank holding status to Goldman Sachs, Morgan Stanley and American Express, all of which changed their status to gain access to more support after the financial crisis erupted.

Congress approved the bailout program on October 3 with the original intention of buying up troubled mortgage assets.