Bailed-Out Ally Financial Unit Comes Full Circle Back to GM
The final pieces are coming together in the General Motors' restructuring puzzle as the company has, not surprisingly, won its bid to repurchase government-owned Ally Financial's European and Latin American lending operations. GM was forced to spin off all but 10% of Ally Financial back when it was known as GMAC.
Back in late 2008, the spigots of taxpayer money were open and GM had its cup out. In order for GM's lending arm (GMAC) to receive TARP funds, GM had to divest all but less than 10% of the company so that GMAC could be granted status as a bank holding company. Under President Bush's watch, the Federal Reserve approved the move and the company that is now known as Ally Financial eventually received about $17 billion of taxpayer money. GM itself would eventually end up with about $50 billion of taxpayer money, mostly distributed during Obama's term.
In return for the taxpayers' $17 billion, the government got a majority ownership stake in Ally Financial, which changed its name from GMAC back in May of 2010 to distance itself from its former parent, GM. Taxpayers are expected to lose money on the "investment" adding to the tens of billions of dollars of losses on the auto bailouts. GM, however, is still able to benefit from having a relationship with a lender that is owned by the government. This can be seen in the sweet lease deals that Ally Financial offers on Chevy Volts which have been the driving force behind sales of the vehicles.
Government-owned Ally Financial is still the primary lender for GM's prime loans and dealership inventories in America. GM remains without a captive finance arm for its prime loans in the US; GM Financial handles the majority of sub-prime loans and has been pretty lenient with lending standards to those with shaky credit.
The Ally Financial end of the auto bailouts has often been overlooked. When you look at a recap of how things played out, it is hard not to feel that the dealings left taxpayers in a less than optimal position.
- GM sells most of its GMAC holdings in late 2008 with the primary reason being to get billions of dollars of TARP funds for GMAC.
- US Government gets majority ownership of GMAC, changes name to Ally Financial in 2010.
- Ally Financial files bankruptcy for its ResCap mortgage lending arm. Obama-friendly Warren Buffett's Berkshire Hathaway group wins bid for $1.5 billion ResCap loan portfolio.
- Ally Financial offers foreign auto lending arm for sale, GM wins the bid giving it back what it once owned, but after billions of taxpayer dollars were pumped into the company formerly known as GMAC.
- Government-owned Ally Financial continues to provide financing for GM's US auto operations.
We will eventually see how successful GM's bankruptcy restructuring is if the government completely removes itself from the industry. This means getting taxpayers out of their ownership stakes in both GM and Ally Financial. It may be a few years before we know just how great a thing President Obama's orchestrated bankruptcy process for America's auto industry really was.
If GM's management is not up to the task or if UAW labor costs can not be kept in check, the company may end up going the way of Hostess, which recently filed for its second bankruptcy. Hostess will be liquidating this time around with blame being placed on both unions who would not agree to concessions and a management team that was not able to transform the company. Of course, a baker's union does not have the political clout of the UAW, but it is not hard to envision a future where Twinkie-eating Chevy Volt drivers do not exist if the government ends its intrusion into the auto industry and GM's management and labor do not focus on long-term sustainability.
Mark Modica is an NLPC Associate Fellow.