Ally Financial Inc., the largest U.S. auto lender, enlisted Cerberus Capital Management LP’s Lenard Tessler to help oversee turnaround efforts and salvage the government’s $17.2 billion investment, four people with knowledge of the matter said.
Tessler, 59, is a former director of Detroit-based Ally and remains an adviser to the bank’s board. His assignment follows a U.S. suggestion this month that the bailed-out lender name someone to help restructure the money-losing Residential Capital mortgage unit and get Ally’s public stock offering back on course, according to the people, who asked for anonymity because the discussions were private.
“This guy is the latest in a long line of advisers,” said Adam Steer, an analyst at Brookfield Investment Management Inc., whose parent Brookfield Asset Management Inc. oversees about $150 billion in assets. “It’s the same story again and again,” Steer said. “No matter who’s looking at it, the overwhelming issue is that ResCap is effectively insolvent.”
Chief Executive Officer Michael Carpenter is searching for ways to repay the U.S. after President Barack Obama vowed in 2009 to recover “every last dime” of taxpayer bailout money. Carpenter, who once predicted that a pending IPO could value Ally at $30 billion, said this month the sale won’t happen until there’s progress on mortgages, and people with knowledge of the matter have said a ResCap bankruptcy is being considered.
While the U.S. Treasury Department had asked Ally to consider putting a full-time executive in charge of restructuring, Ally envisions Tessler in a part-time role with no formal title, two of the people said.
Tessler is a managing director and co-head of private equity at Cerberus, the New York-based investment firm that controls 8.7 percent of Ally. He serves on the Cerberus investment committee along with co-founder and CEO Stephen Feinberg, 51, who sits on Ally’s board.
Cerberus had been the majority holder before the U.S. took control in 2008 to stave off collapse at Ally, then known as GMAC. Tessler was a GMAC director from November 2006 to March 2009. GMAC was the financing arm of General Motors Corp. until 2006, when Cerberus engineered a buyout. Cerberus then lost control of the lender during the financial crisis as losses on subprime home loans mounted.
The U.S. determined that GMAC was crucial to the survival of the auto industry because of its role in financing purchases and provided multiple bailouts in return for a 74 percent stake. Ally said this month it 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. After returning to profit in 2010, the company posted losses in the final two quarters of 2011.
Carpenter, 64, who took over as CEO in November 2009, filed plans for an IPO last March to help repay the bailout. The sale has since stalled, and Carpenter told analysts on Feb. 2 that “realistically, until we’ve made some progress on the mortgage issue, we’re not going to go out into the marketplace.”
Once ranked among the largest originators of so-called subprime and Alt-A mortgages, ResCap reported more than $14.5 billion in losses from the start of 2007 to the end of 2009. The auto business, while profitable, hasn’t generated enough gains to offset losses in the mortgage business.
Treasury officials discussed whether someone other than Carpenter was needed to focus on a turnaround, and Assistant Treasury Secretary Tim Massad floated the idea this month of hiring Harry Wilson, a former adviser to Obama’s Auto Task Force, three people said. Wilson helped revive Detroit-based GM and founded his own restructuring firm.
Deferring to Ally
Carpenter disagreed with Treasury’s suggestion, the people said. The CEO was concerned that Wilson and his ties to the Treasury might encroach on Carpenter’s authority, according to two of the people. Carpenter was supported at a February board meeting by Cerberus CEO Feinberg, the people said.
Ally instead chose Tessler, who won’t be paid, and Massad deferred to the bank’s decision, according to two of the people. The Treasury and Massad typically try to avoid active roles at companies in which the U.S. holds a stake, two people said.
“Ally has a very constructive relationship with the U.S. Treasury and has ongoing communication on a number of matters, as would be expected between management and its largest shareholder,” said Gina Proia, a spokeswoman for the bank. “Ally has not appointed a restructuring executive and the Ally board has not considered doing so.”
Buyers and Bankruptcy
Tim Price, a Cerberus spokesman, and Treasury’s Matt Anderson declined to comment. The agency said in an October report that officials would focus on exiting auto-industry investments, including Ally, “in the months ahead.” At the time of the report, Treasury had received a total of $5.1 billion from dividend payments and the sale of Ally securities.
“It’s all good that they are doing this,” Christopher Whalen, a senior managing director at Tangent Capital Partners LLC, said of Tessler’s role. “We need finality on ResCap.”
ResCap talked with private-equity firms including Cerberus about buying the unit in a pre-packaged bankruptcy, people with knowledge of the matter said this month. Tessler may have to negotiate with a ResCap bondholder group that includes John Paulson’s Paulson & Co., David Tepper’s Appaloosa Management LP and Boston-based Loomis Sayles & Co. The group has expressed opposition to any plan placing ResCap in bankruptcy.
Tessler also may help ensure that Ally doesn’t lose business from Chrysler Group LLC, which has a preferred-lender arrangement with Ally that expires next year. The Chrysler tie generates $50 billion annually in originations and Ally would be less valuable without it, one person said.
Chrysler is in talks with lenders, Ally included, about forming a captive finance arm as a joint venture, similar to one Fiat SpA has in Europe with Credit Agricole SA, two people familiar with the matter said this month.
Tessler’s role and Feinberg’s place on Ally’s board may present a conflict of interest if Cerberus bids for ResCap. A group of investors led by the buyout firm holds 8.7 percent of Ally after U.S. bailouts diluted the 51 percent stake acquired from GM for $7.4 billion in 2006. Tessler’s role also may bump up against federal limits on the private-equity firm’s control.
“Neither Cerberus nor any affiliated entity will have any advisory relationships with GMAC or any investor regarding the vote or sale of shares or the management or policies of GMAC,” according to a Dec. 24, 2008 order from the Federal Reserve that made GMAC a bank holding company.
In addition to Cerberus, ResCap and its financial advisers have contacted Fortress Investment Group LLC, Centerbridge Capital Partners LLC and Leucadia National Corp. to gauge their interest in purchasing the Minneapolis-based unit, people familiar with the matter said this month.
ResCap contacted advisers for the bondholders group this week and asked them to sign confidentiality agreements in return for material, non-public information about ResCap’s plans, according to another person briefed on the discussions. The bondholders have hired Houlihan Lokey as their financial adviser, the person said.
Earlier this month, ResCap’s lawyers at Morrison & Foerster LLP asked the bondholder group to consider providing debtor-in-possession financing during the bankruptcy, and nondisclosure agreements were exchanged, the person said.
Dennis Moore, a spokesman for Houlihan, said he couldn’t comment. A call for comment to Morrison & Foerster’s Eileen King wasn’t returned.
The Treasury and Ally are becoming concerned about the status of the public offering and delay in bolstering the company’s liquidity and capital position, said one person. While multiple parties have approached the agency about acquiring pieces of Ally and effectively breaking it up, Treasury has turned away the inquiries so far, the person said.
“The government is behaving as a logical investor,” Carpenter told analysts on Feb. 2. “They would like to get liquidity, and we would like to have them have liquidity, but they are also interested in getting value.”
In 2011, when Ally was close to a public offering, the company considered a joint bid from GM and Toronto-Dominion Bank, Canada’s second-largest lender, but the discussions didn’t lead to a sale, said another person with direct knowledge of the matter. Stephen Knight, a spokesman for the Toronto-based bank, and Renee Rashid-Merem, a GM spokeswoman, didn’t comment on whether their firms made an offer.
Wells Fargo & Co. may be a buyer for Ally’s North American auto-finance business, and the online banking unit could be sold for about $1 billion, according to a Feb. 20 report from KBW Inc. analysts including Fred Cannon.
“Ally Financial is still keeping all options on the table,” the analysts wrote, citing the government’s desire to recover bailout funds disbursed by the Troubled Asset Relief Program. “We do know the Treasury is looking to wind down its TARP program in the near future, which could mean recouping investment in Ally.”