General Motors (GM) has gained access to billions of extra dollars in US Government assistance when the Federal Reserve approved an application for the struggling car maker's finance arm to become a bank.

The approval came a week after the Government said that it would provide $17.4 billion in emergency loans to GM and rival Chrysler to help them cope with plunging car sales.

As a bank holding company, GMAC, which gives loans to about 80 per cent of GM car dealers so that they can stock their showrooms, will have access to the $700 billion banks bailout agreed by the US Government in October, plus the ability to take out emergency loans with the Fed and to issue Government-guaranteed debt.

In return, GM and Cerberus Capital Management, the private equity firm with a major stake in GMAC, will be forced to reduce their holdings in the finance company. In 2006 Cerberus headed a consortium that paid GM $7.4 billion for a 51 percent stake in GMAC.

GM must reduce its ownership interest in GMAC from 49 per cent to less than 10 per cent of voting shares and total equity. Cerberus will cut its stake to a maximum of 14.9 per cent of voting shares and 33 per cent of total equity by distributing its holdings in GMAC to Cerberus investors

Also, a Utah-based industrial loan company controlled by GMAC will become a commercial bank.

GMAC said that the change to a bank holding company would give it "expanded opportunities for funding and access to capital, which will provide increased flexibility and stability".

The business is also trying to raise $1.2 billion from private investors and restructure $38 billion of debt. The deadline for bondholders to agree to the debt restructuring is this Friday. Pimco, the giant fund manager, has so far refused to agree to the restructuring.

GMAC applied for permission to become a bank holding company last month.

There was disagreement amongst the Fed's board members over allowing the change.

In a statement on Tuesday announcing that approval had been granted to GMAC, the Fed said that Elizabeth Duke, a banker that joined its board in August, had voted against the change but did not explain Ms Duke's objections. The Fed also denied a request from another un-named board member for a public hearing on the decision.

"The board has determined that emergency conditions exist that justify expeditious action on this proposal," the Fed statement said.

Cerberus, which also owns a majority share of Chrysler, has separately been pursuing a merger between the two car companies in an attempt to recoup some of its bet on the struggling automotive sector. Chrysler Financial, the financing arm of Chrysler, is expected to apply for bank holding company status.

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