GMAC shouldn’t have a government ally

November 17, 2009

Al de Molina’s tenure as CEO of GMAC was short and rocky, punctuated by bailouts and controversy over the morally hazardous tactics of subsidiary Ally Bank.

His strategy hasn’t worked and Ally’s anti-competitive behavior is hurting other banks. The new chief executive, Michael Carpenter, needs to restructure GMAC so that it is no longer dependent on a government lifeline.

GMAC has already received $12.5 billion of TARP money and recently asked for as much as $5.6 billion more. In addition, the FDIC has guaranteed $7.4 billion of debt.

Ally has also received another $7 billion in federally subsidized loans in the form of advances from the Federal Home Loan Bank of Pittsburgh. As a government-sponsored enterprise, the FHLB has access to cheap capital. It passes the savings on to member banks like Ally.

At the same time, Ally is marketing deposit accounts with interest rates among the highest in the nation. Insulated from risk, depositors couldn’t care less about Ally’s health. They’ve poured money into the bank over the past year, raising GMAC’s total deposits 57 percent, to $28.8 billion.

This doesn’t sit well with other banks that don’t benefit from so much government largess and can’t afford to pay the same rates. Last May, the American Bankers Association complained to the FDIC, which put the screws to Ally. The bank reduced its rates, but only a little. According to the Wall Street Journal, Ally now pays 2.1 times the national average for a one-year CD, down from 2.3 in May.

Ally’s financial condition, meanwhile, continues to deteriorate. Chris Whalen of Institutional Risk Analytics gives Ally an “F” grade, pointing to charge-offs that doubled in the third quarter.

Whalen also notes the growth of Ally’s securities portfolio. It is becoming less of a conventional lender and more of a bond hedge fund, he says. So why is the government is supporting it?

Ally’s funding is also life-support for ResCap, the subprime mortgage unit that helped sink GMAC in the first place. The more cash GMAC/Ally pours down the drain at ResCap, the less taxpayers are likely to get back.

Carpenter should cut his losses by cutting off ResCap. That would be a good start to restructuring GMAC.

But if GMAC can’t fund itself without the magical elixir of bailouts, deposit insurance and nation-leading CD rates, then for the sake of taxpayers, depositors and banks struggling on their own, it should be put out of its misery.

Comments

There are two sides to every story, and the other side deserves airing here.

Yes, you are right that there are risks in GMAC’s deposit grab — but there are also rewards. If I recall, Ally’s deposit rates were something like 50 to 100 basis points above the market before the federal government spanked the company last June. That premium was a small price to pay for capital and liquidity, both of which GMAC desperately needed then, and continues to need today. But the federal government effectively prevented GMAC from financially righting itself through deposit funding. Is that good for you and me, who as taxpayers own much of GMAC? Is it better that GMAC remains fiscally crippled or would you prefer that GMAC pays a relatively small premium to revive its financial health? I’m not so sure the answer is as clear cut as you presented it. At some point, GMAC’s risk profile would have transformed as a result of its deposit funding strategy, no matter how soiled is the company’s mortgage portfolio.

This same sort of opposing argument holds for GMAC’s mortgage portfolio, by the way. There are two variables: a) the mortgage market overall; and b) the state of GMAC’s Rescap portfolio. Should Mr. Carpenter just cut off Rescap, as you suggested, if the mortgage market is going to come back and be an engine for financial improvement at GMAC or should he simply jump ship at the bottom of the Great Recession? Further, just how bad is Rescap’s portfolio? And while I haven’t done the research on this, I wonder whether asset values in the Rescap portfolio might return in the relative near term? Again, do you just cut those assets loose if you think they will return? We’re shareholder-taxpayers; and speaking as a shareholder, the answers to these questions are anything but clear cut. That Michael Carpenter has quite the job ahead of him.

 

Yes JJH, I too wish to benefit from higher CD rates made possible by taxpayer bailouts to a giant bank with an imprudent business model at the cost to my solvent, well run community bank or credit union of deposits that would have gone them otherwise.

As long as I keep no more than $250k at Ally, no worries. It’s good to be on the payout side of a huge moral hazard.

Posted by StevenKs | Report as abusive
 

By Walden Siew

NEW YORK, Nov 17 (Reuters) – Standard & Poor’s on Tuesday lowered ratings on more than $17 billion worth of loan portfolios, signaling that credit deterioration continues despite a broader market recovery.

Defaults and rating downgrades of underlying collateral supporting Collateralized Loan Obligation bonds were the main factors in the CLO downgrades, including some rating cuts to the CCC level, which is deep into junk territory and suggests “substantial risk” of default, S&P said.

The rating actions affect 48 U.S. CLOs and show that the ripple effects of a global credit crisis continue to reverberate.

Posted by joey | Report as abusive
 

Above market deposit rates sure worked for WAMU and Wachovia didn’t they?

Posted by sangellone | Report as abusive
 

The government is not going to stop propping up GMAC. GMAC is the primary source of auto loans to customers of GM and Chrysler, which the government has poured $80 billion into on behalf of the taxpayers. Take away GMAC financing and sales at GM and Chrysler collapse from already depressed levels, which leads to more plant closings and job losses for GM and Chrysler and their suppliers. It would also lead to more bankruptcies and job losses at GM and Chrysler dealers.

Posted by DP | Report as abusive
 

First of all, Al De Molina was only there for just 18 months – long after the damage inflicted by those before him – and was attempting to turn that place around. Any bailouts GAMC took were because they needed that money to stay afloat. Al’s whole strategy was to have that company come clean, change their business model and earn more liquidity so it could be saved. When he was at B of A he was known for pushing back against unfair banking practices and that’s why he has so many people were loyal and followed him.

What’s ‘morally hazardous’ about Ally bank? It was ‘morally hazardous’ to offer better rates and not screw people over? Even with TARP money, it was wrong to offer higher rates to create more liquidity fast in order to be able to raise capital to pay back TARP faster?

Al is out because he rocked the boat and tried to truly change an industry deeply entwined with government. The status quo is back in charge.

Posted by Mick | Report as abusive
 

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