Who Is Your Ally?

Rodney Johnson | Tuesday, September 10, 2013 >>

There’s a long-running TV commercial that features a spokesman who treats children differently. He gives better gifts to kids he just met – more ice cream, a pony – than he gives to children he already knows. The point is to make fun of companies that treat their clients differently and to highlight that the company sponsoring the ad, Ally Bank, is a friend of the people.

Hmmm.

That marketing doesn’t quite tell the real story of Ally Bank.

While this company might have relatively high interest on its CDs, and might actually treat all clients the same, it’s hard to reconcile the entirety of Ally Bank with that of being a friend.

Why?

Because Ally Bank is the remaining entity of General Motors Acceptance Corp (GMAC), the financing arm of GM.

GMAC has been around since the early 1900s, providing financing for GM cars and trucks. Over the course of the 1900s the company became involved in insurance, mortgages and other financial products.

As time went on, the company became more involved in mortgages and eventually bought Ditech, a company that specialized in sub-prime loans.

In 2005, GM’s mortgage business organized itself into a group called Residential Capital (ResCap). This made GMAC a combination of a finance company for a faltering auto manufacturer and a finance company for lower quality loans on residential housing during the property boom.

Both of these business lines imploded during the financial crisis.

So GMAC did what any – and seemingly every – failing financial institution would do. It applied to the U.S. Treasury to become a bank holding company in late 2008. The Treasury approved the application on Christmas Eve of that same year. Then a mere five days later, the U.S. Treasury “invested” $5 billion of taxpayers’ money in the company to keep it afloat.

It didn’t work. GMAC sank like a rock.

In May 2009 the U.S. invested another $7.5 billion in GMAC, which was followed by another $3.5 billion investment at the end of 2009.

For those keeping score, that amounts to $16.3 billion that we, as taxpayers, have provided to the company since 2008.

In 2010, GMAC rebranded itself as Ally Financial… after all, why stick with the loser name when your old parent company, GM, is officially bust?

The name change didn’t matter. The company still posted huge losses.

The U.S. Treasury, in an effort to allow the company to conserve cash, converted $5.5 billion of preferred shares that pay a dividend to common equity.

Apparently, U.S. taxpayers were the only ones that saw value in the company when investors didn’t. In 2011, the company failed to place an initial public offering (IPO) because no one wanted to buy the stock.

Meanwhile, losses from the old ResCap kept piling up. So Ally did what any company under government control — but no one else — could do. It sent its subsidiary through bankruptcy and limited its own exposure.

ResCap wrote off $22 billion worth of mortgages and wiped out billions of dollars in equity from investors. Then, using its clout as a member of the Treasury-Bailed-Us-Out Club, Ally successfully cut the ties to ResCap.

That leads me to today, when Ally is hoping to finally go public so it can pay off those pesky U.S. taxpayers who keep demanding interest payments on their remaining preferred shares.

The CEO of Ally is feeling pretty good. Being cut loose of any responsibility for the previous actions of the company gets rid of all the baggage holding back profits.

I’m certain that many people will swoop in to buy the shares when they’re eventually offered, as people did with GM, and it makes sense. Auto sales are flying high, and so is the business of financing those sales. It would appear that the company is developing a solid, profitable business.

Yet somehow I just can’t bring myself to join this party. To paraphrase an old saying: “With allies like these, who needs enemies?

Rodney

 

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Categories: Purchasing Power

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.