I recently wrote about how government-owned Ally Financial was the only big bank that failed the Federal Reserve’s stress test and how that ties in to General Motors’ operations. The bailed-out bank formerly known as GMAC received about $17 billion of taxpayer money as part of the auto bailout (aka bankruptcy) process. It is now possible for GM, which relies on the auto lending unit of Ally Financial, to buy back the best segment of the bank on the cheap after taking advantage of the taxpayer largesse that saved the lender.
The Obama Administration has received criticism for its lack of vision for Ally as Treasury has given no indication that it would end the government’s intrusion into the private sector by selling its Ally stake. Since GM sold off most of its Ally / GMAC holdings (which was required for Ally to get a taxpayer handout) and the government took over, Ally has filed for bankruptcy for its ResCap unit and most recently failed the Fed’s stress test. It is apparent that the Obama Administration is not the savviest of stewards to oversee the struggling lender. The damaged reputation of Ally Financial may end up giving GM another taxpayer-funded benefit as pressure builds for the Obama team to get out of Ally once and for all.
GM had boosted its available line of credit to $11 billion late last year. Despite promises to stay debt-free, GM needed cash for its repurchase of part of Treasury’s GM shares as well as for dangerously underfunded UAW pensions. At the same time, GM continues to rely upon Ally Financial for financing of retail sales and dealership inventory making GM the only major auto manufacturer without a “captive” prime lender. The stars now seem to be aligned for GM to buy back Ally’s auto lending unit free of the mortgage and banking overhangs, and the price should be right as the stress test failing may lead to a fire sale of Ally’s assets.
GM has already repurchased the overseas lending division of Ally. The addition of Ally’s prime North American lending operations would put the final piece of the multi-billion dollar auto bailout puzzle in place. It is not out of the question that the stress-test failing for Ally turns out to be just one more manipulated event designed to give GM all the help possible to secure the perception of success, particularly if Ally goes full circle back to GM. In the absence of such a deal, GM needs to give thought to an alternative for its crucial financing needs. The risk of relying on a lender with a shaky financial foundation is just one of many for GM as it competes against many leaner auto manufacturers that operate at higher profit margins. It continues to appear that GM will need all the taxpayer-funded help it can get.
Mark Modica is an NLPC Associate Fellow.