In stress test results released this week, Ally Financial Inc fared by far the worst of 19 banks examined by the Federal Reserve, adding to questions about the ability of the former lending arm of General Motors to pay back some $12 billion in taxpayer money.
After being bailed out three times during the financial crisis, Ally revived its auto lending business, but it remains besieged by troubled mortgage loans and executives say an initial public offering is not realistic until that issue is resolved. Last year, the lender, formerly known as GMAC, shelved plans for an IPO aimed at repaying the government as problems mounted at its Residential Capital mortgage subsidiary and market conditions deteriorated in the wake of the European debt crisis.
Overshadowed by high-profile bailouts such as GM and American International Group IncBut ResCap creditors warn that a filing for its wholly-owned subsidiary will throw Ally into a costly legal battle over loss claims on risky mortgage-backed securities sold by the unit, further complicating IPO efforts.
Ally's woes come as the U.S. Treasury is making progress recouping investments it made in other firms under the Troubled Asset Relief Program, the bailout program launched during the financial crisis. In the past two weeks alone, the government announced plans to sell stock in six bailed-out community banks and also cut its stake in AIG.
Some sources close to the bailout process say Ally remains a thorn in the side of an otherwise successful restructuring of the U.S. auto industry. "It doesn't look great for Ally or the taxpayer going forward," said Neil Barofsky, the former TARP special inspector general. "It really calls into question Treasury's oversight and management."
No final decision has been made on a potential bankruptcy for ResCap and Ally has yet to engage ResCap bondholders to discuss a settlement, the sources said, indicating any filing is not imminent.
Where Are the Owners?
Treasury officials are increasingly concerned with the slow progress in Ally's efforts to repay U.S. taxpayers, not necessarily through an IPO, but also through the sale of Ally assets in a breakup, people familiar with the matter said.
At the same time Treasury, which owns nearly 74 percent of Ally, has done little to assert control because it does not want to be seen as heavy handed in managing bailed-out companies, the sources said
Ally's advisers, executives and other stakeholders in the company have had internal discussions about whether selling assets such as auto lending, online banking and insurance to different strategic buyers could deliver a better, and more timely, return for the taxpayers than an IPO, they said.
Some of these people believe the Treasury could get higher value from selling assets now because strategic buyers would likely pay a premium over book value, while an IPO for a high-yield finance company would require a heavy discount to entice investors, the sources said.
Ally Chief Executive Michael Carpenter and the board have been lukewarm about the breakup idea, betting that Ally would be more valuable in the future if they wait until the ResCap issues are resolved, they said.So far, Treasury has not sought to change that direction, despite internal concerns, the sources said. In addition, the Treasury has filled only four of the six Ally board seats it is entitled to as a condition of the bailout.
"That's Treasury. They complain a lot, but don't use the authorities they have," said a former senior government official, who did not want to be identified talking about a specific financial firm. "In fairness to them, they don't want the government running banks. Of course, if you don't want government running banks, you shouldn't be taking ownership in them."
Ally ran into trouble during the financial crisis as its mortgage loans soured, forcing the government to inject more than $17 billion in 2008-2009 to keep the company afloat. Ally said it has since repaid $5.4 billion. Treasury officials have been looking for candidates to join Ally's board, which has nine members currently, but has had trouble attracting what they consider to be the right candidates, people close to the matter said.
And while it recently proposed Harry Wilson - who was part of the White House's auto task force leading the sweeping 2009 restructuring of GM - for a board seat and to oversee Ally's restructuring, it backed down when Carpenter opposed the move, the sources said.
Part of the issue was that Wilson wanted broader responsibilities than just board representation, seeking to be named "chief restructuring officer," they added. That could have been a blow to the authority of Carpenter, who according to the sources has been micro-managing the ResCap restructuring.
Ally did not make Carpenter available for this article. He said on a conference call last month that the government is "behaving as a logical investor," interested in disposing of its investment, but not at any price. "We've already gotten back a third of our investment. We will work toward getting our investment repaid. I think the board and the management are very committed to doing that," said a senior Treasury official.
Ally spokeswoman Gina Proia said in a statement: "Every action the company has taken and contemplated has been with the objective to fulfill our mission to support the auto recovery and fully repay the taxpayer's investment, and this is what will guide our decisions going forward."
Cutting Ties to Rescap
In the stress tests results released on Tuesday, Ally was one of four banks that failed, meaning it would not have maintained a required capital ratio under a severe economic scenario. The next-worse bank performed nearly twice as well.
In a statement, Ally took issue with the Fed's analysis, saying it "dramatically overstates" potential mortgage risk, especially with newer loans. The test also does not reflect management's commitment to address its ResCap mortgage risks, Ally said. The company said it will resubmit a revised capital plan to the Federal Reserve in the near future.
Carpenter has stressed that ResCap does not have unlimited support from the parent company and is considered a separate legal entity with its own board, reinforcing talk a bankruptcy filing is possible.
But ResCap creditors will say they have claims against Ally as well, arguing Ally and ResCap are one and the same.
Bankruptcy or not, Ally and ResCap will have to deal with challenges from investors and monoline insurance companies related to the loans ResCap originated and sold before the housing market collapse. Ally also has to find a long-term solution for its core automotive lending business, which has recovered on rising car and truck sales in North America, but which is facing increasing competition from other banks, as well as moves by automakers to expand their own auto financing capabilities. "This has been the black sheep in the TARP family. And it's been passed around and never really focused on by anyone," said one source familiar with Ally's bailout.
A second source said: "The government was going to bail out GM and everyone was supposed to fall in line. There wasn't good analysis. The GMAC part wasn't thought out well."