The Obama Administration has become quite the expert on bankruptcy filings. The Detroit Free Press reports that the third auto bailout partaker, Ally Financial, has filed bankruptcy for its mortgage subsidiary, ResCap. The government still owns 74% of Ally, and now has an 0 for 3 record on restructuring bailed out auto-related companies outside of bankruptcy.
Three years ago the Obama Administration, particularly the Auto Task Force, had a mission to restructure General Motors, Chrysler and GM’s lending arm, GMAC. The stated goal was to restructure the auto industry players outside of bankruptcy. This stated goal turned out to be a deception as plans were in place to orchestrate a bankruptcy procedure that would first see Chrysler go through a manipulated pilot process that went smoothly enough for GM to follow the same template.
GMAC, now Ally Financial, was the mostly-overlooked player in the game. GMAC made the poor decision of participating in the mortgage debacle that devastated the economy. GMAC also played an all-important role of serving as a captive finance source which provided funds for both purchasers and dealers of GM vehicles. Government support was necessary for the company to continue providing funding for GM, and later Chrysler vehicles, at the expense of taxpayers.
GM initially sold a 51% stake of its lending arm to Cerberus Capital Management (which later purchased Chrysler) in 2006. In 2009 the government provided GMAC with $17.2 billion of taxpayer money through TARP. It now appears that the underlying problems at the lender have gone mostly ignored as the auto bailout focus over the past three years has been on GM and Chrysler.
A congressional oversight panel criticized the use of TARP funds for GMAC, claiming that the company did not pose a risk to the broader financial markets. What was not recognized was the fact that GMAC was crucial to the survival of both GM and Chrysler. By owning the primary lender to the bailed-out auto manufacturers, Team Obama could now assure financing for purchasers and dealers. 0% loans, supported leases, shaky credit? No problem. What’s another $17 billion or so of taxpayer money when a presidential campaign would eventually be run on the “success” of the auto bailouts?
A few hoops had to be jumped through for GMAC to get its piece of the TARP pie. After all, this was an auto lender and wouldn’t normally qualify for TARP. So, GM had to sell all but less than 10% of its remaining stake in GMAC. The lender then submitted, and was approved for, Bank Holding Company status. At that point the taxpayers’ spigot could be opened again.
To further distance itself from GM, GMAC changed its name to Ally Financial. Maybe taxpayers wouldn’t notice that the auto bailouts cost them billions of dollars more and they would be comfortable opening accounts with their new “Ally.” Despite all the cute commercials, the company has proven to be only an ally of those capitalizing on access to taxpayer coffers. GM and Chrysler (as well as a president that campaigns on the “success” of both) have essentially benefited from a back-door bailout that siphoned funds through Ally Financial.
While the Obama Administration has proven to be very astute when it comes to bankruptcies, it remains to be seen how Ally Financial will be totally protected by a ResCap filing. According to a previous Detroit Free Press piece quoting University of Michigan bankruptcy law professor, John Pottow, “…a ResCap bankruptcy wouldn’t necessarily shelter Ally from such lawsuits. Some bankruptcy judges won’t allow corporate parents to escape legal challenges when a subsidiary files for bankruptcy. ‘What they could be trying to do is get a broader scope of relief than just ResCap’s debt,’ Pottow said.”
A NY Times article also notes that creditors were being negotiated with stating, “Ally and ResCap have also been working on securing the blessing of several major bondholders, a group that includes hedge funds like Appaloosa Management and Paulson & Company.” It is unknown whether or not Treasury officials were having back-room dealings with bondholder representatives, as they did in the GM process.
We should soon have answers as to what becomes of Ally’s auto lending unit. Some speculate that GM will repurchase the unit, free from ResCap obligations after a $17 billion influx from taxpayers and subsequent bankruptcy. That would be another windfall for GM at the expense of taxpayers and politically unimportant ResCap creditors. This move may also give a boost to GM share price as November elections approach. The fact that taxpayers and creditors funded the move would largely go ignored. And the bizarre notion regarding the auto bailouts that filing for bankruptcy and stiffing creditors represents the pinnacle of success will continue with Ally Financial joining the ranks of the “successful.”
Mark Modica is an NLPC Associate Fellow.