The Treasury Department gave Ally Financial an initial approval to put troubled mortgage subsidiary Residential Capital into bankruptcy, according to Bloomberg.

Ally CEO Michael Carpenter said last month that ResCap’s liabilities “are dragging the whole company down,” but left open a number of possibilities in the resolution of the subsidiary. A ResCap bankruptcy could cost Ally up to $1.25 billion, according to the bank.

The Treasury owns 74% stake in Ally, and the bank still owes roughly $12 billion through the Troubled Asset Relief Program.

Bloomberg cited an anonymous Obama administration official in its report. Click here to read more.