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.