Ally Financial Inc agreed on Thursday to pay $2.1 billion to settle legal claims tied to its bankrupt Residential Capital LLC unit, nearly triple the amount it initially offered to creditors of the subprime mortgage business.
Ally hopes the deal will finally end allegations that ResCap was stripped of choice assets such as its online bank, Ally Bank, before being put into bankruptcy, leaving the mortgage unit's creditors empty-handed.
Putting the issue behind it will help Ally focus on its core business of auto lending and on repaying the U.S. government for a $17 billion bailout during the financial crisis.
The government is still owed more than $10 billion and owns about three-quarters of Ally, formerly a General Motors (GM.N) unit known as General Motors Acceptance Corp. Mortgages made by ResCap led to huge losses for Ally during the crisis.
Hurdles still remain to a final deal. Thursday's agreement with creditors, detailed in a court filing, requires court approval, which the pact said had to be obtained by July 3.
The settlement has the support of some major ResCap creditors, including bond insurer MBIA Corp (MBI.N) and the hedge fund Paulson & Co, but it remains to be seen whether other creditors will go along. One big creditor, Warren Buffett's Berkshire Hathaway Inc (BRKa.N) (BRKb.N), has already moved to upset one aspect of the deal.
Last year, Ally Chief Executive Michael Carpenter offered to settle the same legal claims with a $750 million payment to ResCap, but creditors rejected the offer as too low. Earlier this month Carpenter called that offer a "hostage payment."
Ally has raised billions of dollars by selling its international business to repay the government, but the cash pile has proven tempting to ResCap's creditors.
Under Thursday's deal, Ally will pay $1.95 billion in cash and expects $150 million more to come from its insurers. Ally said it expects to record a charge of $1.55 billion in the current quarter related to the settlement.
"Reaching this comprehensive agreement enables Ally to turn the page on a tumultuous chapter in its history that was severely impacted by the issues in the mortgage industry," Carpenter said.
The litigants and the U.S. Bankruptcy Court in Manhattan had agreed that if a settlement could be finalized by Thursday, a report from an independent court-appointed examiner would remain under seal. Former bankruptcy judge Arthur Gonzalez investigated ResCap creditors' claims of asset-stripping by Ally.
But on Wednesday, Berkshire asked Judge Martin Glenn to unseal that report so creditors could determine the fairness of Thursday's settlement.
That could unravel the deal, which requires the report to remain under seal until the settlement receives court approval.
Negotiations for a settlement were complicated by residential mortgage-backed securities, or RMBS, issued by ResCap before its bankruptcy in May 2012. Creditors who objected to the original deal included MBIA and rival bond insurer Assured Guaranty Corp (AGO.N).
Under Thursday's agreement, MBIA will have $3.6 billion in unsecured claims against various ResCap entities. ResCap estimated MBIA will recover about $796 million on its claims, but the figure could change materially, according to the settlement.
Shares of MBIA rose 3 percent in morning trading; the broader stock market was lower.
The settlement also trimmed to $7.3 billion the size of a claim that RMBS investors will have against various ResCap entities. Last year's deal allowed an $8.7 billion claim, which some creditors said was too high and would eat into their own potential recoveries.
(Reporting By Tom Hals in Wilmington, Delaware; Editing by Gerald E. McCormick and John Wallace)