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Is IPO for Ally Financial Really Seen as "Unlikely" by Treasury?
Over the past several weeks I have been hearing a variety of comments about the littlest of the zombie dance queens, namely Ally Financial. As the readers of The Institutional Risk Analyst know very well, we have been calling for a bankruptcy for Ally in order to 1) facilitate the sale of the auto business back to General Motors and 2) facilitate the sale of the ResCap mortgage servicing business to anybody who cares, to be followed by an orderly settlement of the unliquidated claims against ResCap overseen by some lucky bankruptcy trustee.
But I still hear some optimistic souls talking about an IPO for Ally, a truly amazing way of thinking given the financial condition of this issuer. Since the US Treasury has stated in several trial balloons that it sees a break-up of Ally and sale of the old GMAC auto business back to GM as an optimal outcome, one can only marvel at the optimism of those who continue to think of an IPO for Ally as a viable exit strategy.
Indeed Ally Financial looks to some observers like the pin-up girl for moral hazard in America. With the former mortgage backed securities team from Bear Stearns driving the bus in terms of enterprise risk management, Ally even makes our good friends from Wells Fargo seem positively reticent when it comes to creating new risk.
And if we take a look at those capital commitments by Ally on new loans in 2012, the risk management picture looks remarkably consistent with the high quality production we used to see coming out of Bear, Stearns years ago. Indeed, the quality of Bear RMBS production was such that it may just end up to be material to investors in JPMorgan Chase after all. Consider one view of Ally from a veteran banker:
“I encountered a car dealer from Dover, Delaware who I banked many years ago. He advised me that his quality auto paper was going thru Wells Fargo, but over the past month he has seen an explosion of paper going to Ally Bank. His term was: ‘they are really diving deep and we can place brain dead paper with them instantly’”.
According to the banker, Ally Bank offers 72 month paper at 150% of invoice (to cover deficiencies in the trade) at 3% to credit scores as low as 520. The auto dealer reportedly thinks Ally is “insane” for underwriting such poor quality auto paper, but he is pleased his volume has increased by 20% as a result of the new Ally program. No doubt the Obama Administration is pleased too.
The Ally business model is to provide the “captive” financing for GM dealers, the credits that the bankers at Wells Fargo and US Bank won’t take. So no surprise that Ally is banking the lower quality borrowers, but this does beg the question as to why GM does not simply repurchase the auto finance business. If banks like WFC and USB don’t want the loans Ally underwrites, then why is the FDIC good with this business model?
Could this type of loan underwriting be evidence of moral hazard? Maybe even unsafe and unsound banking practices? Maybe. Or maybe not. The tough thing for most analysts looking at Ally is that the public disclosure looks OK. In fact, the Ally Bank unit was rated “A+” by IRA at the end of 2011. So what’s not to like? Plenty IMHO.
The trouble with the public disclosure is that Ally does not even begin to tell the story about what is going on with the RMBS litigation. The Ally ResCap unit is involved in more than two dozen separate RMBS litigations, not to mention several lawsuits with MBIA and other private label RMBS litigations. ResCap has its own bond holders, adding complexity to the corporate governance and legal picture.
Ally takes the position that “[t]he range of any potential losses related to these matters is not currently determinable,” but I think that reasonable people can use simple arithmetic to figure out that Ally is facing billions of dollars in unliquidated claims that cannot be paid. Indeed, I think that the Ally exposure is several times larger than the $1 billion total in Ally’s latest 10-K. And this is why getting the auto finance business away from Ally ASAP makes a great deal of sense for Treasury and GM.
Every other global automaker captures the full spread of the leverage on sales, but GM currently gives away dealer inventory and captive sales to Ally. A couple years back, Mike Ward of Soleil Securities told Elizabeth Warren’s Oversight panel the same thing I’ve been saying, namely that to have a separate Ally auto finance business makes no sense if the objective is a profitable GM. And leaving the auto business under the same corporate owner as ResCap seems like a very bad idea for GM, so there is clearly a motive for the Treasury to propose a transaction.
Here’s a question for Ally, Secretary Tim Geithner and the other folks at the US Treasury who are supposedly responsible for this company: Who are you kidding when it comes to Ally? An IPO? In Ally we have a government controlled bank that failed its Fed stress test, uses anti-competitive marketing and credit strategies to run subprime auto paper through an FDIC-insured bank, and seemingly operates under the philosophy of “who cares it’s not our nickel.”
So tell us again, Secretary Geithner and President Obama, how do we get an IPO done for this bleeding zombie? Why is Treasury not actively seeking to liquidate Ally now, before this ersatz bank holding company is forced to file bankruptcy?
Of note, the Treasury just forced executives from three companies it bailed out during the financial crisis to take pay cuts, according to news reports. “The US treasury said the salary and benefit package for around 70 key managers was slashed by 10%. It said the bosses were employed by the American International Group (AIG) and Ally Financial, and General Motors (GM) - owner of Britain's Vauxhall marque,” reports BBC.
Cutting salaries makes for good election year media fodder, but what about possible irrational risk taking by Ally Financial? Is Treasury Secretary Geithner aware that the old crowd from Bear Stearns may be digging the proverbial risk hole at Ally deeper in a desperate attempt to keep ResCap and the rest of Ally out of bankruptcy court? Does rolling the dice in terms of new auto loan originations qualify as moral hazard?
It is interesting to note that in the most recent Ally 10-K filed with the SEC, one of the options outlined for the future is Ally “providing or declining to provide additional liquidity and capital support for ResCap.” In that event, the only next stop will be the US Bankruptcy Court, where the creditors of ResCap and the Ally parent will eventually need to cooperate.
My guess is that you can probably forget the Ally IPO for now. A sale of the Ally auto business and the bank to GM, and the Ally loan servicing book to a special servicer, looks like the best way to maximize the value of these assets to the creditors of Ally and ResCap. And eventually the folks at Treasury will have to do the right thing by Ally and the US taxpayer.
In a perfect world, the two creditor groups at Ally would sit down in a conference room and work all this out. And they would do so with the advice and blessing of the Secretary of the Treasury or his designated minion.
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Maybe everyone should buy some physical silver.
Isn't this another version of Jon Corzine. You're the new team brought into a losing operation, so you roll the dice and ramp up risk.
more cronyism instead of equal opportunity.
http://expose2.wordpress.com
This was an interesting read.
In a perfect world, Tim Geithner would be asking me if I want fries with that, not making obviously corrupt decisions about large banks.
Offloading the paper on Ally makes perfect sense for GM. Do you really think extend and pretend is going to keep operating as long as the life of those loans? We'll be lucky if it lasts as long as the election.
And GM will be paying off their loans to Obama's Treasury. Think of it as another way for the government to sell Tbills.
ALLY = Gluteus Maximus violation is Always Compulsory............ Buying corporate bonds? Remenber Great alaMo.
Every one knows that none of this matters to more than about 20 people in the whole country. As a fact, the bad paper they write would never be seen as a detriment by americans; only as an example of how Obama is helping the "little guy."
Yes, Ally can wait until after the election, but it really doesn't matter. Just like the foreclosure fraud problems are now long gone from anyone's memory, when the bad paper unravels, there will be a bailout, rich lawyers and even richer bankers.
There is a common theme in all of this. Nobody in any numbers cares at all. I mean at all. There is only one risk to the powers that be and that is a steady flow of entertainment, housing subsidies and food stamps. That's it. Keep Comcast, Cox and the NFL up and running, print SNAP and Section 8 vouchers into perpituity and the elected members of the executive and legislative branches could cook babies on the mall every day and no one, literally no one would try to do anything about it.
One day, all the currency in the world won't keep the plates spinning. But until then, articles like this are good to take to the bathroom and absorb for entertainment, because they don't mean a damn thing in the real world.
you forgot I-sucks. they are ruling the stock market. don't pay your mortgage - but please buy apple products.
otherwise 100%
I love the ALLY bank commercials, handing people on the street $100k to watch for a minute. Boy, I'd really feel safe having ALLY watch my deposits!
.
Anyone else getting Ally Financial banner ads today?
No but I've been getting a lot of SEC job openings and midget tranny bridal registry ads.
Let me get this straight, you want a company that operates a racket to get a nice quick resolve and you don't say one thing about the people that they have screwed over being compensated for the institutional fraud for decades. Is that about it?
Since a perfect world would not include those like yourself, your idea of what it might look like is skewed. You really aren't human are you?
This article is absolute garbage.
Ally does NOT offer 3% loans at 150% advance for anyone with a 520 score or better.
PURE BULLSHIT.
First of all, the maximum advance for Ally is 140% LTV for 60 months or less. At 72 months, it's 135%. Now, these advances are inclusive of extended warranties and various insurance products which you can add to loans. Nearly every bank advances for these "back-end" products, so to have an LTV of 140% or 135% is PERFECTLY within the norm of all underwriting guidelines for nearly ALL banks. In fact, Ally advances from invoice, not MSRP, which, comparatively, makes their advances rather conservative.
Secondly, on Ally's prime side, they have 4 different tiers, depending on credit scores. The first tier, S Tier, is for applicants with 740 Experian or better. The absolute best rate Ally offers (as of 4-4-12) is 3.24%. On the prime side, the worst rate is 11.59%.
On the subprime side, the rates start at 5.65% and go all the way to 17.99%. At the 17.99% tier, the advance is 115% LTV - again, perfectly within the norm of all banks.
520 - as mentioned in the article - is the minimum credit score that Ally will even consider. Unless there is some exceptionally weird circumstance, a 520 score will automatically be diverted to the subprime arm. The only way a customer would get a interest rate which seems abnormally low given their score would be if that customer has a HUGE amount of equity (down payment) or a long history with Ally where they always made perfect payments despite a credit bureau full of deliquencies.
This article is pure propaganda, attempting to smear Ally bank and make it look as if they have no underwriting standards whatsoever.
Fail.
Max Fischer, Civis Mundi
I wouldn't waste facts on the average ZH reader these days; not to mention a lot of the posters. They are, on average, too stupid, lazy and unaccomplished; digging out of a deep hole so to speak. But at least ZH has them digging...
You tell em Reese Bobby. Bet you just got that raise at the local dealership and feeling real good. Keep riding that high horse until you arent.
BTW Jackass Max F was not responding to a commentor. He was responding to Chris Whalen. You are something else.
I have chunks of pussies like you in my stool.
Ally does NOT offer 3% loans at 150% advance for anyone with a 520 score or better.
And greece bonds aren't yielding 10%.
Interest rate is somewhat irrelevant if they are completing more subprime loans. Do you have any evidence to say they are not processing more subprime? Or are you building another aquarium at the school?
GM already has a captive sub-prime lender dopey. And stop insulting me with crap comments like this. Read a little...
Thanks for the feedback. Enjoyed your response. Unfortunately it suffers from a lack of intelligence.
I read the entire article and I was responding to Max F's post that ally takes 520 credit score
If they are taking 520 ratings THEN they are taking subprime and if all the 700+ are going to US Bank and WF then they are going to be in a world of hurt.
Have a nice evening.
You're a complete idiot. I never said "all the 700+ are going to US Bank..."
Ally takes mostly prime loans, and their subprime loans yield huge interest to compensate for the risk. You're implying that their entire loan portfolio is entirely subprime, which is bullshit.
Max Fischer, Civis Mundi
I can translate your douche-bag response for the other readers:
"Fuck you. I don't understand what you are talking about but I am deeply offended and defensive.
I read the entire article, darn it, and thought I would take an uninformed swipe at someone much smarter than myself, not knowing I would be called out on it.
If ALLY is making loans to borrowers with FICO scores less than 520 THEN they are "taking subprime." (Sorry for making up terms but my vagina is misting with excitement/anger).
I didn't know, so I won't respond to the fact that GM bough Americredit, a sub-prime auto loan specialist.
Now go fuck yourself while I head to the wine bar to look for 'Mr. Right'."'
Again I have enjoyed your responses. I do wish I was a tough as you and as smart but the chips just didn't fall that way.
A simple question for you genius. Does Ally as MX F and Chris whalen state write loans to people with 520 credit scores? Or as you state does all this go to Americredit?
Thanks for your reply I anxiously await your response and I hope I have afforded you another opportunity to feel good about your miserable life.
Ally’s most recent securitization included zero loans with FICO scores less than 650.
And the odds are lotto-like that I give away more money in a year than you earn. Think about that son.
Is the question "Does anybody in Treasury have a fucking clue?" rhetorical?
William K Black: "Our banking system is a ponzi scheme"
http://t.co/7Vk6Pmha
Ally and General Motors can merge with another US government enterprise, the CIA's Facebook.
General Face Ally?