Ally Financial seldom gets mentioned when the auto bailouts are discussed. The company was formerly known as GMAC and the 17 billion dollars that taxpayers sunk into the company was crucial for the perceived success at both General Motors and Chrysler . We now learn that Ally Financial has failed a government stress test and, according to Reuters, "fared by far the worst of 19 banks examined."
Years back, GMAC changed its name to Ally Financial to dissociate itself from GM. Just changing a name can not negate the fact that the $17,000,000,000 Ally Financial received from taxpayers went towards helping GM (as well as Chrysler) which had already received about $50,000,000,000 in bailout funds. According to the Reuter's report "Ally has now emerged as a black mark on the roster of companies that received taxpayer-funded rescues" and "Ally is currently in talks to sell ResCap to Fortress Investment Group LLC in a process that could involve a bankruptcy filing, people familiar with the matter have said."
The outlook is not good regarding the taxpayer "investment." According to Neil Barofsky, the former TARP Special Inspector General, "It doesn't look great for Ally or the taxpayer going forward. It really calls into question Treasury's oversight and management." Besides the risks to the perception of success for the auto bailouts, there are also risks to GM and Chrysler if Ally Financial has to tighten up on its lending.
GM is still highly dependent on Ally Financial, despite growing its own financial arm. Ally does most of the retail lending and, perhaps more importantly, much of the inventory financing or "floor plans" for both GM and Chrysler. Dealerships need the financing to purchase vehicles from the manufacturers. And when it comes to those special leases for cars that need a little extra help, like the Chevy Volt, guess who provides those supported leases? Yep, good old, government-owned Ally Financial.
The Obama Administration has made it clear that they will be campaigning on the perceived success at GM and Chrysler. Ally Financial may finally get attention and, given the high stakes, you can bet that Team Obama will keep a close eye on the Ally situation. Given a choice between putting its campaign strategy at risk and throwing more taxpayer funds at Ally Financial, I would say taxpayers would lose.
There has been no limit to how many billions of dollars are spent to support the auto bailout. GM has been the primary recipient ensuring that the company can show profits and keep giving bonuses to the valued UAW workers who are lining up to help with Obama's reelection bid. If you think about it, it really is ludicrous to brag about saving a company by giving them $50 billion cash along with billions more in tax credits and the $17 billion for their primary lender, Ally. How can the company not appear to "succeed?"
The problem with the whole auto bailout process was that it focused on politics and a manipulation of bankruptcy codes instead of on truly improving the operations at GM. I had long ago mentioned the risk of GM not having an established "captive" finance arm , but those in charge of orchestrating the bankruptcy process were bankruptcy experts and financial industry heavyweights, not auto industry people. Taxpayer money was no object as long as UAW benefits were protected and GM could come out of the process with enough billions of dollars to give the appearance that they are a healthy and profitable company, at least long enough to get through the 2012 elections. The political influence is further evidenced by GM's continuing quest to make the money-losing Chevy Volt its flagship as it falsely blames low sales on critics who they claim have a right wing agenda.
A worrisome portion of the Reuter's story addressed the government's attempt to once again embed itself in Ally Financial and gain control of a restructuring effort. From the article:
Treasury officials have been looking for candidates to join Ally's board, which has nine members currently, but has had trouble attracting what they consider to be the right candidates, people close to the matter said. And while it recently proposed Harry Wilson - who was part of the White House's auto task force leading the sweeping 2009 restructuring of GM - for a board seat and to oversee Ally's restructuring, it backed down when Carpenter opposed the move, the sources said. Part of the issue was that Wilson wanted broader responsibilities than just board representation, seeking to be named 'chief restructuring officer,' they added.
Harry Wilson was the Auto Task Force member that put an end to attempts by other creditors to get fair representation in the GM bankruptcy proceeding. What is truly ironic is that Wilson threatened the bankruptcy court that Treasury would pull out of the deal and force GM to be liquidated if the court did not allow the process to play out just as the Obama Administration sought. Obama now accuses others of having wanted to liquidate GM when it was his team that actually made the threat. And, worse yet, the precedents of the GM case now sets the stage for our government to repeat the intrusion in to what should be the private market, as demonstrated by the Obama Administration trying to plant a "chief restructuring officer" at Ally Financial.
A source from the Reuter's piece says it best, "The government was going to bail out GM and everyone was supposed to fall in line. There wasn't good analysis. The GMAC part wasn't thought out well." It does not take a politically extreme viewpoint to realize that the auto bailout process was not quite the success that voters are expected to believe it was.
Mark Modica is an NLPC Associate Fellow.