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Ally Financial Drops After IPO Prices at Low End of Range

Ally Financial CEO Michael Carpenter
Ally Financial Inc. Chief Executive Officer Michael Carpenter has refocused the company on its auto-lending roots after the mortgage business went bankrupt. Source: GMAC Inc. via Bloomberg

Ally Financial Inc., the auto lender rescued by the U.S. government during the 2008 financial crisis, dropped in its trading debut after pricing its initial public offering at the low end of an expected range.

Ally fell 4.1 percent to $23.98 at 4:15 p.m. in New York under the ticker symbol ALLY. The U.S. Treasury Department, which had been the Detroit-based firm’s majority shareholder, raised $2.38 billion by selling the shares for $25 each.

The IPO marks the end of a three-year process for Ally, which filed to go public in March 2011 as it sought to pay back the remainder of its $17.2 billion U.S. bailout. Chief Executive Officer Michael Carpenter, 67, has refocused the company on its auto-lending roots after the mortgage business went bankrupt and said he’s seeking to increase return on equity to “double-digits” by the fourth quarter of next year.

“We’re currently a low single-digit ROE company and we find that completely unacceptable,” Carpenter said today in a phone interview. “It does not at all equate to the strength of our two major franchises. We have a leading, if not pre-eminent position in auto finance, we have a leading online bank.”

Ally’s ROE was 1.92 percent last year, according to the prospectus. Carpenter said he plans to improve profitability by expanding commercial-banking operations, paring high-cost debt and cutting an additional $400 million in expenses. As Ally exits its bailout, additional “regulatory constraints will be removed,” which also will help boost ROE, he said.

Unwinding TARP

Treasury trimmed its stake in Ally to about 17 percent through the IPO from about 37 percent, according to the prospectus. The government owned as much as 74 percent after the bailout through the department’s Troubled Asset Relief Program.

The U.S. is evaluating ways to exit its remaining Ally stake and to wind down TARP “as soon as practicable,” Treasury said in a statement.

“With this offering, taxpayers have now recovered more than they invested in Ally,” Mary Miller, the Treasury’s undersecretary for domestic finance, said in the statement. Carpenter said in February that he expects the government to sell the rest of its stake by year-end.

The offering and repayment to taxpayers will lift some of the regulatory restrictions that came with the bailout and allow Ally to take on more risk that could help boost profitability.

While the auto lender is going public following the best year for U.S. initial public offerings since the financial crisis, recent stock-market volatility may affect the shares. The Standard & Poor’s 500 Financials Index slipped 2.6 percent through April 8 after reaching a five-year high on April 2.

‘Don’t Care’

“I personally don’t care one way or another how the stock trades, a few pennies one way or another today,” Carpenter said in the phone interview. “Over an 18- to 24-month period, look to us to substantially improve profitability and return on equity of the company.”

Lending at Ally, a former General Motors Co. subsidiary, also could face hurdles as carmakers including GM and Toyota Motor Corp. deal with setbacks from product recalls.

Third Point LLC, the hedge-fund firm led by billionaire Daniel Loeb, said in January that it amassed a 9.5 percent stake, making it one of Ally’s largest shareholders. Affiliates of Cerberus Capital Management LP -- which led the buyout of GMAC, as it was known when it was GM’s finance arm -- owns 8.6 percent, according to a March 27 filing.

Ally won Federal Reserve approval to become a bank holding company in December 2008, enabling it to tap the U.S. rescue.

Treasury had offered 95 million shares for $25 to $28, according to a regulatory filing last month. Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley and Barclays Plc led the IPO.

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