Government Assistance for GMAC/Ally Financial: Unwinding the Government Stake

Ally Financial, formerly known as General Motors Acceptance Corporation or GMAC, provides auto financing, insurance, online banking, and mortgage and commercial financing. For most of its history, it was a subsidiary of General Motors Corporation. Like some of the automakers, it faced serious financial difficulties due to a downturn in the market for automobiles during the 2008-2009 financial crisis and recession, while also suffering from large losses in the mortgage markets. With more than 90% of all U.S. passenger vehicles financed or leased, GMAC’s inability to lend was particularly threatening to GM’s retail sales and dealer-financing capabilities. The Bush and Obama Administrations used the Troubled Asset Relief Program (TARP) to provide assistance for the U.S. auto industry, concluding that the failure of one or two large U.S. automakers would cause additional layoffs at a time of already high unemployment, prompt difficulties and failures in other parts of the economy, and disrupt other markets. The decision to aid the auto industry was not without controversy, with questions raised as to the legal basis for the assistance and the manner in which it was carried out. The nearly $80 billion in TARP assistance for the auto industry included approximately $17.2 billion for GMAC, which changed its name to Ally Financial in 2010. The government’s aid for GMAC was accomplished primarily through U.S. Treasury purchases of the company’s preferred shares. Many of these preferred shares were later converted into common equity, resulting in the federal government acquiring a 73.8% ownership stake. This conversion from preferred to common equity significantly changed the outlook for the future government recoupment of the TARP assistance. After such a conversion, if the government’s common equity were to end up being worth less than the assistance provided, the company would have no responsibility to compensate the government for the difference. Conversely, if the common equity were to be worth more than the assistance, the gain from this difference would accrue to the U.S. Treasury (and be used to pay down the national debt, as specified in the TARP statute). Beginning in November 2013, the government’s stake in Ally Financial began dropping due to share dilution and the sale of the government’s stock through both private placements and open market sales. The final sale of the government’s Ally stock was completed in December 2014. With the completion of the sale, the government received a total of $14.7 billion in repayment for its assistance, leading the Treasury to recognize a loss of $2.5 billion. However, the government also received $4.9 billion in dividends and other income due to the TARP assistance to GMAC/Ally Financial. In addition to TARP assistance, during the financial crisis in 2008, GMAC converted from an industrial loan company into a bank holding company, an expedited conversion that was permitted by the Federal Reserve (Fed) due to prevailing emergency conditions in the financial markets. This change increased access to government assistance, including Fed lending facilities and Federal Deposit Insurance Corporation (FDIC) guarantees, and also increased regulatory oversight of the company.