Bailed-Out Ally Financial Only Bank to Fail Stress Test

GM Ally logosThe Federal Reserve’s latest round of stress tests for the banking industry showed only one bank remaining on a shaky financial foundation. That bank was government-owned Ally Financial (the bailed-out company formerly known as GMAC), which also happens to be General Motors’ prime source for financing.

GM divested itself of GMAC so that the struggling lender could be classified as a bank holding company and receive billions of taxpayer dollars. In a move to distance itself from GM, the company was renamed Ally Financial. The government maintains majority ownership of Ally Financial, which in turn has helped GM by financing retail sales and dealership inventories.

GM is the only major automaker without its own captive financing arm. Bailed-out Chrysler recently cut the umbilical cord which maintained the flow of taxpayer-funded financial assistance from government-owned Ally by reaching a deal with Spain’s Banco Santander so that it could have in-house lending of its own, which now makes Chrysler an Italian-owned company relying on a Spanish bank for financing. The fact that Ally Financial is now the only bank to fail the Fed’s stress test further shines light on another risky aspect of the auto bailout process which was not fully thought out.

Since the government took over Ally Financial, the bank has had to file bankruptcy for its mortgage lending arm, ResCap. If there is one thing that the Obama Administration has become an expert on, it’s the American bankruptcy system. Billions of dollars have been spent so that companies like Chrysler, GM and Ally Financial could capitalize on reneging on their financial obligations as they went through government-orchestrated bankruptcies. The ability to legally stiff creditors (such as GM bondholders) seems to have become the new definition of success in Obama’s America.

As has been seen time and time again, companies that go through bankruptcy processes do not always emerge as healthy, stable corporations that have a long-term plan for success. Many of the underlying problems at companies like GM or Ally Financial do not disappear simply because of a temporary improvement to balance sheets and Ally Financial’s continuing woes seem to indicate that government intrusion and control further hampers the prospects for success.

In the cases of GM and Ally Financial, the improvements to their balance sheets came at the expense of bondholders and taxpayers. That expense is measured in the tens of billions of dollars and is an expense that should be kept in mind when the “success” of bailed-out companies like GM is trumpeted.

Signs are emerging that the auto bailouts have not been the panacea for struggling companies in an unforgiving industry that they were made out to be. GM has had to rely on shady accounting procedures that utilize tax credits gifted to it by the Obama Administration to offset losses; losses which under GAAP (Generally Accepted Accounting Principles) would measure in the billions of dollars. Auto financing standards have been loosened at government-owned Ally Financial so that politically popular cars like the Chevy Volt can have demand manufactured through leases with low monthly payments. Meanwhile, GM loses market share in a still-competitive industry. The rosy and deceptive declarations of success for GM may have helped President Obama win reelection at the taxpayers’ expense, but just how financially healthy is the company?

The Fed’s stress test is designed to show how financial institutions can weather an economic downturn. It is logical to ask how GM, a bailed-out company in a super-competitive industry, would weather such a downturn any better than Ally Financial, which failed the test. An improving economy and the improved auto sales that come with it can hide a multitude of sins at companies that are not run in the most efficient manner. In a worse case scenario, in a major economic downturn, GM may lose its ability to finance retail sales and dealer inventories because of its reliance upon the weakest of big American banks. That is just one more risk factor for GM as it operates at razor thin profit margins in an environment that leaves little room for mistakes.

Mark Modica is an NLPC Associate Fellow.