Why GMAC Shouldn't Have a Government Ally

Al de Molina’s tenure as CEO of GMAC was short and rocky, punctuated by bailouts and controversy over the morally hazardous tactics of subsidiary Ally Bank.

His strategy hasn’t worked and Ally’s anti-competitive behavior is hurting other banks. The new chief executive, Michael Carpenter, needs to restructure GMAC so that it is no longer dependent on a government lifeline.

GMAC has already received $12.5 billion of TARP money and recently asked for as much as $5.6 billion more. In addition, the FDIC has guaranteed $7.4 billion of debt.

Ally has also received another $7 billion in federally subsidized loans in the form of advances from the Federal Home Loan Bank of Pittsburgh. As a government-sponsored enterprise, the FHLB has access to cheap capital. It passes the savings on to member banks like Ally.

At the same time, Ally is marketing deposit accounts with interest rates among the highest in the nation. Insulated from risk, depositors couldn’t care less about Ally’s health. They’ve poured money into the bank over the past year, raising GMAC’s total deposits 57 percent, to $28.8 billion.

This doesn’t sit well with other banks that don’t benefit from so much government largess and can’t afford to pay the same rates. Last May, the American Bankers Association complained to the FDIC, which put the screws to Ally. The bank reduced its rates, but only a little. According to the Wall Street Journal, Ally now pays 2.1 times the national average for a one-year CD, down from 2.3 in May.

Ally’s financial condition, meanwhile, continues to deteriorate. Chris Whalen of Institutional Risk Analytics gives Ally an “F” grade, pointing to charge-offs that doubled in the third quarter.

Whalen also notes the growth of Ally’s securities portfolio. It is becoming less of a conventional lender and more of a bond hedge fund, he says. So why is the government is supporting it?

Ally’s funding is also life-support for ResCap, the subprime mortgage unit that helped sink GMAC in the first place. The more cash GMAC/Ally pours down the drain at ResCap, the less taxpayers are likely to get back.

Carpenter should cut his losses by cutting off ResCap. That would be a good start to restructuring GMAC.

But if GMAC can’t fund itself without the magical elixir of bailouts, deposit insurance and nation-leading CD rates, then for the sake of taxpayers, depositors and banks struggling on their own, it should be put out of its misery.

Comments

[Kansas City Shuffle]

Why is this a bad thing? As a saver I get higher rates, which act as some form of retribution for all the TARP money invested in banks. Not to mention, this forces other banks to stop paying out absurdly low deposit rates. If a bank has to raise money, better to do it via deposits than more and more TARP money we will never see back. Furthermore, the argument that GMAC/Ally has some form of government backing that no other bank has is wrong. Citi is owned by the government and all banks are existing under a de facto guarantee by the government. For banks to whine that they are being forced to pay more to the American saver at a time of record profits is an embarrassingly bad pr stunt.

2009 Nov 17 01:40 PM

[H.J. Huneycutt]

KC Shuffle,

While I can understand your argument, I think it ignores the bigger picture here. This is the third time GMAC has gone to the well (i.e. the government). They are essentially offering unrealistically high rates at the expense of the taxpayers. This is a subsidy that is being abused more or less.

I'm all for higher rates if that's what the market produces, but this is a case where a financial services company is offering rates that they cannot profit off of on the basis that they can suck on the government teet to make up the difference. Sure, if you're a consumer and you're essentially getting free government money, you like this, but it's not good for the system and the end result is that we are all paying higher taxes in the future to pay for this.


On Nov 17 01:40 PM Kansas City Shuffle wrote:

> Why is this a bad thing? As a saver I get higher rates, which act
> as some form of retribution for all the TARP money invested in banks.
> Not to mention, this forces other banks to stop paying out absurdly
> low deposit rates. If a bank has to raise money, better to do it
> via deposits than more and more TARP money we will never see back.
> Furthermore, the argument that GMAC/Ally has some form of government
> backing that no other bank has is wrong. Citi is owned by the government
> and all banks are existing under a de facto guarantee by the government.
> For banks to whine that they are being forced to pay more to the
> American saver at a time of record profits is an embarrassingly bad
> pr stunt.

2009 Nov 17 01:49 PM

[THofler]

Why is the gov. supporting it? Obviously, it is yet another wealth transfer from taxpayers to the failed auto companies & indirectly, their labor unions. (Oh yeah, also a transfer to the Rescap mortgage holders.) Would it surprise anyone at this point, if the gov. knowingly wasted a billion of taxpayer money for each million increase in campaign funding?

The real question now is whether the UAW will intentionally wreck Ford Motor in order for those workers to partake in the goodies that flow from a GM style failure.

As a holder of a modest position in hybrid GMAC debt, I have been slowly selling into any unit price rallies. I fully expect the gov. to seize all debt holder assets at some point while denying them any access to a bankruptcy court. This is of course, exactly what a Hugo Chavez or Evo Morales would do. I don't believe that it is possible to be too cynical about what it going on here.

2009 Nov 17 01:51 PM

[Curious Bystander]

At the end of the day we are being sold off to the labor unions by the most corrupt of President's. History will be unkind to this oaf, and rightly so. If you look at the health-care bill who is it helping? Certainly not the 36 million who are supposedly uninsured as only 6 million more will be covered under this 1.4 trillion dollar pile of garbage. Who benefits? That's right, the unions do. The promises made by the unions to take care of their members is now going to be born on the backs of the tax payer at the behest of the federal government. This is just more of the same. It is time we start viewing this POTUS through the lens of the unions, community organizers, and every other leech in America. This is who he's interested in helping and paying back. NOT middle class America.

2009 Nov 18 03:29 PM