* Options range from 'staying the course' to bankruptcy -
* Ally is 73.8 pct owned by Treasury after bailouts
* Net income $310 mln vs $146 mln year-ago
By Rick Rothacker and David Henry
April 26 Ally Financial Inc, the U.S.
government-owned lender, said its mortgage unit could file for
bankruptcy, in the company's most direct statement so far about
its plans for the struggling business.
Ally Chief Executive Michael Carpenter said its Residential
Capital LLC unit has been examining options that range from
"staying the course" to bankruptcy.
"We think that the single most important thing that we can
do to preserve and enhance shareholder value is to distance Ally
from the mortgage business," Carpenter said on a conference call
with investors after the company posted quarterly earnings.
Sources have told Reuters that bankruptcy was an option for
ResCap, possibly as early as mid-May, but the company had
previously only hinted at the possibility. An executive said
Ally failed a recent test from regulators for soundness in
distressed economic situations, known as the Federal Reserve's
"stress test," in large part because of liabilities linked to
the mortgage business.
Ally, which was originally the lending arm of General Motors
, said it learned on Wednesday that Chrysler Group LLC was
not renewing a preferred lending agreement that will now expire
next year, but executives downplayed the importance of that loss
on the call.
Ally is 73.8 percent owned by the U.S. Treasury after a
series of bailouts spurred by its ballooning mortgage losses.
The lender hoped to repay taxpayers through an initial public
stock offering, but last year it shelved those plans as problems
mounted at ResCap and market conditions deteriorated during the
European debt crisis.
As in the past, Carpenter emphasized that Ally and ResCap
are separate entities and that a ResCap bankruptcy decision
would be made by the mortgage unit's board, not Ally's.
Sources familiar with the matter said Ally is preparing for
a possible bankruptcy filing for ResCap, and that there is
pressure to get the filing completed before mid-May, when
unsecured notes come due for the unit.
On the conference call, Jeff Brown, Ally's finance and
corporate planning executive, said the bank would offer a new
capital plan to the Federal Reserve in the next 90 days, after
failing the stress test.
Ally has two secured lending facilities with ResCap that had
$1.2 billion outstanding at the end of 2011, but the parent
company feels confident about getting repaid, Brown said. This
month, Ally did not renew a $500 million unsecured credit line
with ResCap as part of its efforts to reduce mortgage risk, he
HIGHER FIRST-QUARTER PROFIT
Even as executives faced ResCap bankruptcy questions, Ally
said on Thursday gains linked to the company's ability to
collect mortgage payments from borrowers helped boost
Ally reported net income of $310 million for the first
quarter, compared with $146 million a year earlier.
Operating earnings from its mortgage business were $191
million, up from $43 million. The improvement resulted from
higher values for mortgage servicing rights, as well as
additional lending tied to government refinancing programs, the
Accounting charges related to those rights to collect
mortgage payments can fluctuate wildly. Ally remains committed
to diminishing the importance of the mortgage business to the
overall company, Brown said.
Profits from auto finance, which the company said is key to
its future, declined 15 percent to $442 million. The company
said lease profit margins in North America were down.
Ally said Chrysler's decision to allow a lending
relationship to lapse had been expected and did not preclude the
two companies from doing business together in the
The pact covered retail auto lending made with manufacturer
incentives. That accounted for 5 percent of Ally's $9.7 billion
of U.S. consumer loans made in the first quarter, compared to 11
percent for other business done with Chrysler dealers, Ally
The agreement with Chrysler, which is majority-owned by
Italian automaker Fiat SpA, runs through April 2013.
Without Chrysler's notice, it would have been automatically
extended through April 2014.
"We continue to have constructive discussions about the
future relationship," Brown said. "We expect to continue to play
a significant role with Chrysler dealers in the future, as the
dealer is our direct customer for the majority of business that
In Chrysler's earnings conference call on Thursday, Chief
Executive Sergio Marchionne said the automaker plans to talk to
a number of financial institutions, including Ally, about future
According to debt analyst Kathleen Shanley of Gimme Credit,
the end of the Chrysler agreement will not be material to Ally
financially but underscores the intense competition the company
faces in auto lending.
The government injected more than $17 billion into Ally,
then known as GMAC, in 2008 and 2009. Ally said it has since
repaid $5.4 billion.
Ally has made progress in shrinking its portfolio of
troubled mortgage loans, reducing total assets to $10.5 billion
at the end of March from about $19 billion at the end of 2009.
But it still faces a slew of lawsuits and other claims related
to mortgage-backed securities sold to investors during the
housing boom, making it difficult to quantify potential losses.
Ally in the first quarter moved to resolve one of its
mortgage-related problems by joining four other lenders in a $25
billion settlement over foreclosure abuses. As part of the pact,
Ally paid $110 million in penalties and agreed to provide $200
million in loan modifications to struggling borrowers. Ally took
a $270 million charge for the settlement in the fourth quarter.