Rebranded as Ally Financial, General Motors Acceptance Corp., is now the second largest existing Troubled Asset Relief Program investment, according to a new report from the Office of the Special Inspector General for the Troubled Asset Relief Program.
GMAC, which owes $14.6 billion in TARP bailout funds, is still 74% owned by taxpayers, SIGTARP claims in a recent report. The Treasury is confident it can recover on the "investment."
"GMAC, rebranded as Ally Financial, languishes in TARP four years later with taxpayers owning 74% of the company," said Christy Romero, special inspector general for TARP. "Treasury and Federal banking regulators must now develop a path to repay taxpayers while leaving Ally, as well as GM and the auto industry, in a position of strength going forward."
Treasury has since responded to Romero in a letter, stating that in May 2012, Ally Financial: "commenced two strategic initiatives that were necessary and critical for Treasury to continue recovering its investment."
Subprime loan liabilities stemming from GMAC's Residential Capital subsidiary, which eventually went through a bankruptcy restructuring, also were not fully addressed even as the Federal Reserve enforced some restructuring of GMAC, SIGTARP claims.
TARP was announced on Dec. 19, 2008, along with a statement from the White House that said, "Taxpayers will not be asked to provide financing for firms that do not become viable."
During the middle of the recession in which the auto industry was threatening to dissipate, the government offered assistance to GMAC to keep financing available to creditworthy General Motors Corp. dealers.
GMAC’s TARP assistance was markedly different than the other auto bailouts because GMAC was the sole company in the automotive portion of the bailout whose business reached beyond the auto industry, according to SIGTARP's report.
As one of the nation's largest subprime mortgage lenders, the demise of GMAC would not only affect the auto industry, but the housing market as well, Christy Romero alleges in the SIGTARP report.
Most taxpayers invested in GMAC specifically for the auto financing business; however, GMAC has also utilized TARP money to cover losses in its subprime business, the report noted.
A recent quarterly report from SIGTARP to Congress stated, "In response to a SIGTARP survey in 2009, Ally told SIGTARP that it used TARP money to ‘make auto loans, provide dealer financing, and modify home loans.’ According to Ally, $1.3 billion in TARP funds went to Ally Bank for its ‘higher risk’ mortgages."
GMAC was an exception when it came to TARP requirements as well. Treasury never forced GMAC to turn in its strategy to resolve substantial liabilities that led to historic losses. Other auto bailouts, such as GM and Chrysler, were forced to submit plans. However, the fact that there was no plan addressing the subprime mortgage component to begin the GMAC investment may be the leading factor as to why today, four years later, GMAC is still in the program, the inspector general report suggests.
"Because it financed GM cars, Treasury bailed out GMAC, one of the nation’s largest subprime mortgage lenders,” said Romero. “Treasury placed no requirements on GMAC to plan to resolve its subprime mortgage liabilities and losses, which have become a millstone around taxpayers’ necks.”
Treasury did not devote the necessary assets to fully restructure GMAC and ResCap, and ResCap filed bankruptcy in 2012, the report says.
The inspector general report goes on to say that now under the Ally name, the company has failed stress tests conducted by the Federal Reserve in order to gauge financial stability. Because of this, the Federal Reserve required Ally to raise additional capital, which the company did via three taxpayer-funded TARP injections, which totaled $17.2 billion. Of this amount, the Office of Management and Budget estimated that taxpayers will lose approximately $5.5 billion.
Had Treasury forced GMAC to develop a plan originally, they would have better protected the taxpayers’ investment and GMAC would likely have been more financially stable, SIGTARP contended in the report.
In order for Ally to abort the program at this point, they must now resolve issues related to the mortgage liabilities, which should have originally been addressed at the initial investment by Treasury, the inspector general's report asserts.
Ally recently lauded its decision to move away from mortgage servicing and the home loan side of the business in its recent third-quarter earnings report, which clearly shows the financial firm more profitable when compared to year ago levels. It also paid back $4.5 billion in remaining debt owed to the Federal Deposit Insurance Corp.
Treasury is now stating that it has several options to divest in the company, although it has yet to decide which path it will choose, according to SIGTARP. Whenever Treasury does choose to divest, it will be crucial that the fragility of Ally’s financial stability be of utmost importance, the report added.
In its recent letter to Romero, Treasury stated that it discussed its exit strategy with SIGTARP several times and has described its exit strategy publicly. To read the full Treasury response, click here.