The U.S. Treasury, under pressure to quickly wind down its crisis-era bailouts, believes it will take time to shed auto lender Ally Financial because the company's mortgage lending unit is in a messy bankruptcy, a person familiar with the matter told Reuters.
Ally is one of Treasury's largest remaining holdings, but the lender will be hard to exit as long as it is working through the bankruptcy of its Residential Capital unit and is also selling its international operations, the person said.
"There are particular challenges with Ally," the person familiar with Treasury's thinking said. "There is no specific timetable," for a sale or stock offering, he added. Treasury understands the company's difficulties and supports the company's chief executive, Michael Carpenter, the source added.
The source did not want to be named because the person was not authorized to speak publicly on the matter.
Not everyone wants Treasury to be so accommodating. In a report last month, an internal Treasury watchdog said the agency needed a more concrete plan for getting repaid the $17.2 billion it poured into Ally during the crisis.
Treasury has been exiting other high-profile investments made through its crisis-era bailout fund, the Troubled Asset Relief Program (TARP). Since December, it has sold remaining stock in insurer American International Group and announced plans to sell its last General Motors Co shares in the next year or so.
The government's difficulties in exiting Ally show how hard it will be for Treasury to completely close down TARP. Treasury has recovered 93 percent of the $418 billion it put in the program, but remaining companies could take a long time to shed.
Ally, the former GM lending arm, will be the largest remaining TARP recipient once the GM shares are sold. Treasury has said it plans to recoup its investment in the auto lender through a public or private sale of stock, or by selling assets. An initial public offering "is one of the options that Treasury has down the road," the person said.
As of February 15, the lender will have paid $5.9 billion to the government, including dividends. Treasury in 2011 sold off $2.7 billion in Ally securities, but it still owns $5.9 billion in preferred stock in the lender. The company hopes to repay those preferred shares soon.
Treasury also owns 74 percent of Ally's common equity. The auto lender filed for an IPO in March 2011 but shelved the offering amid turbulent financial markets and growing concern about ResCap's mortgage liabilities. In May 2012, ResCap, once a major subprime lender, filed for bankruptcy, and Ally announced a plan to sell international operations in a bid to speed up repayment.
SETTLEMENT IN DOUBT
It is unclear how much Ally will end up having to pay creditors in the ResCap bankruptcy. Ally agreed to make a $750 million payment to creditors in exchange for a release of any possible claims against the company. But in a letter sent to Ally's board in November, some creditors said the settlement is much less than Ally's actual liability and that the lender could face damages for stripping assets from ResCap.
In a fourth-quarter earnings conference call on Tuesday, CEO Carpenter said the lender was "extremely confident that such claims are completely without merit." Ally could withdraw its settlement offer and was willing to pursue litigation, he added.
The company's book value was about $20 billion at the end of December.
Treasury understands that a Chapter 11 proceeding can take time and doesn't plan to intervene, the person familiar with the department's thinking said. "Treasury is not going to lean on Ally to agree on bad terms on that just to get this done quickly," the person said.
ResCap auctioned off assets for $4.4 billion in bankruptcy last fall. A court-appointed examiner is expected to issue a report on the bankruptcy in April and a reorganization plan could be filed in May, according to a letter Treasury wrote in response to the internal watchdog's report.
Ally reached agreements last year to sell its international operations for $9.2 billion in proceeds, and the deals are expected to close this year.
(Reporting by Rick Rothacker in Charlotte, N.C.; Editing by Dan Wilchins, Gerald E. McCormick and Nick Zieminski)