Ally Gets Nod for ResCap Filing as U.S. Seeks Repayment
Ally Financial Inc. (ALLY), the auto lender majority-owned by taxpayers, received U.S. Treasury Department approval to put its Residential Capital unit into bankruptcy as the government seeks to recover bailout funds.
The Treasury will support directors at Ally and ResCap if they decide that filing for court protection from creditors is the best course for the mortgage unit, said an Obama administration official, who asked for anonymity because the arrangements haven’t been made public. The approval is conditioned on a review of terms, the person said yesterday.
“Treasury wants its money back,” Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. “This sign-off is an indication that Ally has a good-enough plan to prove they can eventually pay back the government. The only feasible opportunity for them to get their money back is to split up or sell Ally.”
Chief Executive Officer Michael Carpenter is working to repay bailouts exceeding $17 billion that left the U.S. with a 74 percent stake. Officials concluded that addressing ResCap’s mortgage losses will put taxpayers in a better position, the person said yesterday. President Barack Obama vowed in 2009 to recover “every last dime” of bailout money.
Carpenter, who once predicted that a pending initial public offering could value Ally at $30 billion, later said the sale won’t happen until there’s progress on resolving the mortgage unit. Detroit-based Ally, formerly known as GMAC, confirmed last month that ResCap is considering bankruptcy and said Ally’s loss tied to the action could be $400 million to $1.25 billion.
The lender has since repaid $5.5 billion through dividends and the sale of Ally securities, Gina Proia, a company spokeswoman, said in an e-mailed statement. Matt Anderson, a Treasury spokesman, declined to comment.
“Addressing the risks in the mortgage business is key to successfully pursuing strategies that would best position the company to maximize value for its shareholders, including the U.S. Treasury,” Proia said. “That is our highest priority.”
Fortress Investment Group Inc., the private-equity and hedge fund manager, will probably buy assets from Ally for $3 billion, the New York Post reported, citing unidentified people with knowledge of the matter. New York-based Fortress may pay $2 billion for ResCap and $1 billion for a portfolio of mortgage- servicing rights Ally holds, the newspaper said.
A ResCap bankruptcy may accelerate so-called putback claims, where holders of mortgage-backed securities issued by the unit try to force the company to buy back soured loans backing the bonds, said Joshua Rosner, an analyst at Graham Fisher & Co. Those claims may saddle Ally with years of lawsuits that prevent the planned IPO and delay repayment of the bailout. Ally faced $1.2 billion in outstanding claims at the end of the first quarter.
“If Treasury waited 12 to 18 months, ResCap would be clean,” Rosner said. “By filing it they are going to force an acceleration of claims. The only way they can justify the filing is if they have a plan that they assume would resolve it faster than 12 to 18 months.”
Ally’s first-quarter profit more than doubled from a year earlier as mortgage results improved. Net income climbed to $310 million and profit in mortgage operations, run by Thomas Marano and which include ResCap, almost quadrupled to $191 million. ResCap’s deficits had helped drive the unit’s loss to about $792 million in the three previous quarters combined.
Treasury officials told Ally earlier this year that an IPO is unlikely, and they were pushing the firm to split into at least two pieces, people familiar with the matter have said. One part would be Ally’s auto-finance subsidiary, which is among the largest in the U.S., and the other would be its online bank, which had almost $28 billion in retail deposits at year-end.
All options, including the IPO or sale of business units remain open, the official said.
“Treasury doesn’t want to be viewed as actively managing the business,” said Kirk Ludtke, an analyst at CRT Capital Group LLC, the Stamford, Connecticut-based broker-dealer. Still, he said, “you need to have Treasury on board.”
Ally ranked No. 1 in financing U.S. consumer auto sales for 2011 with more than $40 billion in contracts for new or used cars and trucks, or about 1.5 million vehicles. ResCap was one of the largest originators during the housing bubble of subprime and Alt-A mortgages until record defaults led to billions of dollars in losses.
Ally’s $932.5 million of 8 percent bonds maturing in November 2031 climbed 0.5 cent to 115.75 cents on the dollar in New York trading yesterday. The firm had about $101.6 billion in debt outstanding at the end of 2011, its annual filing showed. Ally said it employed 14,800 workers at the end of December.
There are no publicly traded shares in Ally. Minority stakes include 9.9 percent held by a trust for General Motors Co. (GM) and 8.7 percent owned by Cerberus Capital Management LP, the New York-based investment firm. GM was GMAC’s parent until 2006, when Cerberus engineered a buyout. Cerberus then lost control and its stake was diluted in the bailout that began in 2008.
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