WASHINGTON (Reuters) - A top U.S. bank regulator voted Friday to expand its federal guarantee program to include banks' mandatory convertible debt.

The Federal Deposit Insurance Corp Friday voted to make a "very narrow targeted improvement" to its Temporary Liquidity Guarantee Program (TLGP) and separately voted to increase the fees it charges banks to insure deposits.

The FDIC established the voluntary guarantee program in October. It provides a government guarantee on certain senior unsecured debt and on banks' transaction deposit accounts. (Reporting by Karey Wutkowski and John Poirier, editing by Gerald E. McCormick)

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GMAC stays mum on debt swap

The financing arm of General Motors Corp. remained silent Monday on whether it had raised enough capital to become a bank-holding company and eligible for access to billions in federal bailout money.

Analysts have speculated that if GMAC (nyse: GJM - news - people ) Financial Services LLC doesn't obtain financial help it would have to file for bankruptcy protection or shut down, which would be a serious blow to parent GM's own chances for survival.

GMAC had received the Federal Reserve's approval to become a bank holding company last week, but the approval was contingent on the auto and home loan provider raising at least $30 billion in regulatory capital. The company had been attempting to raise the needed funds through a complicated debt-for-equity exchange that expired at 11:59 p.m. EST Friday.

In an e-mail Monday, GMAC spokeswoman Gina Proia said GMAC still had no news to announce regarding the debt swap. That came after Saturday e-mails that did not provide any specifics but said that GMAC planned to announce the results of the debt swap soon.

"The offer did expire yesterday at 11:59 p.m. as planned. We have not yet issued final results but intend to in the near term. I have no further comment on the exchange until then," Proia wrote Saturday.

Becoming a bank-holding company would both qualify GMAC to access the government's bank rescue funds and support GMAC loans to car buyers and GM dealerships. GM owns 49 percent of GMAC.

The Federal Reserve apparently needed to see that bondholders were willing to inject more capital into GMAC. The bondholders needed reassurance that the Fed would approve GMAC's application to qualify for federal aid.

If the financing company fails to become a bank holding company, it could mean severe consequences for automaker GM.

General Motors (nyse: GM - news - people )' ownership of GMAC has kept the finance arm lending to dealers and car buyers, even as credit from traditional banks has dried up. If GMAC goes under, other institutions aren't likely to step in to replace the credit lost by GM's dealers and customers.

The Fed's action Wednesday came as GMAC was struggling to get bondholders to convert 75 percent of their debt into equity of the company. It's been nearly two weeks since GMAC has released any information about the amount of participation so far.

As of Dec. 17, only about 16.9 billion, or 58 percent, of its GMAC notes had been tendered, along with about $3.5 billion, or 38 percent, of the notes issued by its Residential Capital LLC mortgage business.

GMAC's goal is to reach $30 billion in capital, the majority of which would come from the exchange of debt. Another part of the equity requirement included a demand from the Fed that $2 billion of the total come from new equity. So far, GMAC has received a commitment of $750 million from GM and private-equity firm Cerberus Capital Management, which owns the majority stake in GMAC.

It's unclear whether that funding would come from the $17.4 billion in bridge loans the U.S. Treasury granted GM and Chrysler LLC - which is owned by Cerberus_ earlier this month.

Some of the rescue money will be available this month and next - $9.4 billion for GM and $4 billion for Chrysler, which have said they could be facing bankruptcy soon without government help. GM is set to receive the remaining $4 billion in loans after more money is released from the financial rescue account.

It was unclear Monday exactly when the Treasury Department planned to release the first set of loans.

"We're making good progress finalizing the automaker loans and are committed to closing them on a timeline that will meet their individual near term funding needs," Treasury spokeswoman Brookly McLaughlin said in a statement.

GMAC has not said publicly how much it was requesting from the $700 billion bank bailout fund. CreditSights analyst Richard Hoffman estimated in a research note Friday that GMAC "could have applied for up to about $6.3 billion."

The Fed order says GM will reduce its stake to less than 10 percent of the voting and total equity interest of GMAC. GM's remaining equity interest in GMAC will be transferred to an independent government-accepted trustee who must dispose of the equity held in the trust within three years of the trust's creation.

Cerberus, which led an investment group that bought a 51 percent stake in GMAC from the automaker for $14 billion in 2006, will reduce its stake in GMAC to no more than 33 percent of total equity.

In afternoon trading, GM shares fell 27 cents, or 7.4 percent, to $3.39.

Associated Press Economics Writer Christopher S. Rugaber in Washington contributed to this report.

Fitch Ratings said Thursday it has placed Charter Communications Inc.'s "CCC" issuer default rating on negative rating watch, after the cable operator said it will begin discussions with its bondholders about financial options to improve its balance sheet.

Fitch said the rating watch reflects its concern that the start of those discussions increases the likelihood that the company will engage in a broad-based distressed debt exchange or file for bankruptcy.

About $21.1 billion of the company's outstanding debt as of Sept. 30 is affected.

A "CCC" rating is non-investment grade, also known as "junk."

Charter, a St. Louis-based cable TV operator controlled by Microsoft Corp. (nasdaq: MSFT - news - people ) co-founder Paul Allen, reported interest costs of $478 million for the third quarter compared with operating income of $208 million. Allen no longer works for Microsoft.

Charter's shares were trading at 13 cents apiece Thursday afternoon.

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Fitch puts Charter on rating watch over debt woes

Fitch Ratings said Thursday it has placed Charter Communications Inc.'s "CCC" issuer default rating on negative rating watch, after the cable operator said it will begin discussions with its bondholders about financial options to improve its balance sheet.

Fitch said the rating watch reflects its concern that the start of those discussions increases the likelihood that the company will engage in a broad-based distressed debt exchange or file for bankruptcy.

About $21.1 billion of the company's outstanding debt as of Sept. 30 is affected.

A "CCC" rating is non-investment grade, also known as "junk."

Charter, a St. Louis-based cable TV operator controlled by Microsoft Corp. (nasdaq: MSFT - news - people ) co-founder Paul Allen, reported interest costs of $478 million for the third quarter compared with operating income of $208 million. Allen no longer works for Microsoft.

Charter's shares were trading at 13 cents apiece Thursday afternoon.

Copyright 2008 Associated Press. All rights reserved. This material may not be published broadcast, rewritten, or redistributed

U.S. households, hit by declining home values and stock market losses, have cut back on their debt levels for the first time on record as loans remain scarce amid what appears to be a deepening recession.

The Federal Reserve on Thursday released it latest quarterly look at consumer and business finances showing that households reduced their debt levels by 0.8 percent at an annual rate in the July-September period, the first drop on records that go back more than 50 years.

The decline in household debt levels is evidence of the severe credit squeeze that is occurring as banks, saddled by billions of dollars of losses in mortgage debt, have tightened lending standards and made it harder for people to get loans.

Mortgage debt fell at an annual rate of 2.4 percent in the third quarter, the largest decline on record. Mortgage debt had fallen at an annual rate of 0.1 percent in the second quarter. Those two quarterly declines are the first such drops in the Fed survey that dates back to 1952.

In past periods of tight credit, mortgage and total household debt have never declined, although the debt growth usually slowed.

The Fed report also showed that households' net worth fell by 4.7 percent in the third quarter to $56.5 trillion, reflecting the hit Americans are taking as the value of their homes and investments decline.

The drop in household net worth - total assets such as homes and checking accounts minus liabilities like mortgages and credit-card debt - marked the fourth straight quarterly decline since total family net worth hit an all-time high of $63.6 trillion in the July-September quarter of 2007.

When Detroit's Big Three CEOs return to Washington on Dec. 2 with a plan tailored to sell Congress on a $25 billion bridge loan, they will try to convince lawmakers that they are in the throes of big restructuring moves that will bring profits back as soon as the economy picks up.

Sources at the companies and in Congress say that General Motors (GM), Ford Motor (F), and Chrysler are mulling symbolic moves like executive pay cuts and scaling back use of corporate planes.

But given the huge debt load they may be taking on, they might have to show more substantial ways to save money. Congress will be allocating billions in taxpayer dollars to invest in the Big Three carmakers, so the lawmakers should know what the prospects are for these companies to compete should the bridge loan see them through the downturn.

Close to the Brink

It's not pretty. All three companies are already carrying massive debt and interest payments that will sap their ability to develop and market new models once the economy turns around. GM has $43 billion in debt and Ford has $24.9 billion in borrowings. "Their debt burden has been escalating for some time," says Mark Oline, managing director for debt-rating agency Fitch & Co. "These companies will be smaller so their earnings capacity will be smaller. The interest will be a big burden."

Let's look first at GM, which is closer to the brink of collapse than Ford. GM already pays more than $3 billion a year in interest. JPMorgan (JPM) analyst Himanshu Patel estimates that GM needs $17 billion in government loans to make it through 2009. That would add another $900 million in interest. That means GM would have close to $60 billion in debt and more than $4 billion a year in interest payments.

Plus, GM has to pay back $2.3 billion next year, $200 million in 2010, and $1.7 billion in 2011, according to company financial statements. All of that will require cash that could go into new cars, marketing, or disposing of brands.

Health-Care Trust Could Help

Ford pays $2.4 billion a year in interest. While the company is in a better cash position, since it borrowed $23 billion while credit markets were liquid, its interest costs also would rise.

The carmakers racked up huge debt over the past few years largely to fund pension plans, buy out workers, close plants, and set up a union-led health-care trust that will hand management of medical benefits to the UAW.

GM President and COO Frederick A. Henderson said in a Nov. 18 interview that the debt is only a big burden if GM can't improve profits. A union health-care trust, called a voluntary employee benefits association, or VEBA, would save $4.8 billion a year in cash outlays. That deal and other union concessions will make the company more profitable once the market turns around (BusinessWeek.com, 9/26/08).

Bond markets are seeing Ecuador as increasingly risky now that the government plans to delay a $30.6 million interest payment on its foreign debt. The money is due Saturday.

Finance minister Maria Elsa Viteri says Ecuador will opt for a 30 day grace period on the debt while it reviews the results of a presidential commission that found signs of lawbreaking in the contracts.

The minister says Ecuador can easily pay the debt. But the bond markets are reacting sharply, increasing bond yields and lowering prices on more than half a billion dollars in Ecuadorean bonds.

Ecuador President Rafael Correa given bond markets reason for concern, warning that he could forego debt payments if oil prices keep dropping. Oil is Ecuador's top income source.

Add the Terminator to the long list of people seeking a handout from Henry Paulson. Late on Oct. 2, California Governor Arnold Schwarzenegger sent a letter to the U.S. Treasury Secretary saying he may need a $7 billion short-term loan from the federal government to help the state make its payroll at the end of the month.

The governor's outstretched hand is just the latest sign of the severity of the financial vice squeezing the nation (BusinessWeek.com, 9/29/08). Everyone from small business people to homeowners to the largest state in the nation is finding it difficult to get a loan. "Right now this credit crunch impacts just about everyone who wants to borrow," says Doug Charchenko, head of the fixed-income department at broker Wedbush Morgan Securities. "New issues have not been able to get into the market. Institutions aren't buying bonds, they're hoarding cash."

Such a federal loan to a state would substantially broaden the federal government's efforts to stem the credit crisis—and could well lead to similar requests from other strapped states. Jennifer Zuccarelli, director of public affairs at the Treasury, confirmed that California’s request had been received but would not comment further on whether it is under consideration or when a decision might be reached.

Municipal Issues Seize Up

The $700 billion question is whether the bailout bill passed by Congress (BusinessWeek.com, 10/3/08) this week will restore confidence in financial markets and get investors buying again. "Hopefully this recovery plan will end the paralysis in credit markets and allow the state to conduct its short-term borrowing," says Thomas Dresslar, a spokesman for California Treasurer Bill Lockyer.

"There's a lot of disruption in the market," adds David Hitchcock, the head of municipal finance at credit rating agency Standard & Poor's. "That could change any day."

Municipal bond insiders say that while there is some interest from small investors looking to purchase municipal bonds that are already trading, the market for new issues has almost totally dried up. That's because there is no sign that banks, insurance companies, or other institutional investors are jumping back into the market yet. Matt Favian, managing director of Municipal Market Advisors, a research firm, figures some $15 billion in bonds from more than 150 municipal issuers are waiting to be sold. "To the extent people are more confident with banks, to the extent it helps confidence, [passage of the bailout bill] should begin to open up the markets so issuers can issue bonds," he says.

Where Are the Underwriters?

The frozen state of the municipal bond markets (BusinessWeek.com, 10/1/08) is a function not just of the lack of investors but also of the difficulties faced by many of the key players in the underwriting industry. Major investment banks that issued municipal bonds, including Bear Stearns and Lehman Brothers, are out of business. Municipal bond insurers, such as MBIA (MBI) and Ambac, saw their own credit collapse earlier this year when some of the riskier new investments they had been covering began to implode.

California's cash crunch is a symptom of its poor financial management in recent years, analysts say. The state has had multibillion-dollar shortfalls between its revenues and expenses dating back to the last recession in 2001.