Among the companies that were bailed out by the federal government during the financial crisis, perhaps the most intractable is proving to be the company formerly known as the General Motors Acceptance Corporation. It's a case study in how bailouts can linger and profits, when they do come, flow not to the government but to the Warren E. Buffetts of the world.
G.M.A.C. was the financial arm of General Motors. In the years leading up to the financial crisis, it was also G.M.'s most profitable unit, which tells you something about the auto industry at the time. The company earned more profit from lending money to customers than in selling cars.
In 2005, desperate to raise cash, General Motors sold a 51 percent stake in G.M.A.C. to the private equity firm Cerberus Capital Management. Cerberus beat out a rival, Kohlberg Kravis Roberts, for the privilege, spurring BusinessWeek to write that Henry R. Kravis's loss “has to sting.â€
During the financial crisis , however, the sting was felt on the other side, as G.M.A.C. staved off collapse thanks only to a government infusion of $17.2 billion. The company was renamed Ally Financial - you have probably seen its catchy commercials on television. The Treasury Department owns 73.8 percent of Ally, with Cerberus retaining an 8.7 percent stake.
Almost since that time, the Treasury Department has wanted to rid itself of its Ally stake. Ally filed for an initial public offering in March 2011, but it has so far languished in the face of a weak market and concerns over Ally itself. The Treasury Department has been paid back about $5.7 billion and still controls the company through its stock ownership and appointment of a majority of Ally's directors.
Despite lingering concerns about Ally, the automobile sales market is recovering and Ally's auto finance operations turned a profit last year. But Ally is still suffering from legacy debts, primarily concentrated in its ResCap unit. While you might think that with a name like G.M.A.C., the company financed only automobiles, but the company was also one of the largest subprime housing lenders through its ResCap subsidiary.
ResCap, a wholly separate entity owned by Ally, is the fifth-largest mortgaging servicer and origination unit in the nation, serving 2.4 million mortgages with a principal of $374 billion. The business has lost billions since the financial crisis, and the never-ending stream of losses has made investors fearful. They should be. Ally has lent ResCap $1.2 billion and has provided an infusion of $10.3 billion since Jan. 1, 2007.
Ally's chief executive, Michael A. Carpenter, has stated that his priority is to repay the American taxpayer rather than support ResCap. In 2011, ResCap disclosed a loss of $845.1 million and its financing has been drying up as the market realized that Ally would no longer be ResCap's sugar daddy.
It's still unclear why Ally didn't put ResCap in to bankruptcy instead of providing billions in support. One explanation may be that Ally wasn't stable enough at the time to risk the market reaction to a bankruptcy and the possibility that Ally's own financing might dry up as a result. In addition, ResCap turned a profit in 2010, but has since been overwhelmed by litigation and bad subprime loans.
Whatever the reason, Ally finally bit the bullet and put ResCap into bankruptcy in May this year, presumably hoping that this would make Ally more attractive itself for an I.P.O. or sale.
ResCap filed for bankruptcy with a huge $1.25 billion loan from Barclays and up to an additional $220 million available from Ally. The initial bankruptcy plan was for ResCap to split up, with the mortgage servicing business being sold to Fortress Investment Group for about $2.3 billion. A legacy portfolio of $5.2 billion in mortgage loan principal would be sold separately. At the time of the bankruptcy, Ally announced its intention t o serve as a stalking horse bid for the legacy portfolio, bidding from $1.4 billion to $1.6 billion.
Enter the greatest investor of our time.
One of Ally's biggest creditors at that time was Mr. Buffett's Berkshire Hathaway, which held more than $500 million of ResCap's unsecured bonds and $900 million in ResCap's junior secured bonds. Berkshire has since sold the unsecured bonds but has also joined the fray. It announced in June that it would bid for the mortgage servicer, and offer $1.45 billion for the legacy loan portfolio. The investment firm Lone Star Funds has also stated its interest in buying one or both.
Ally has now bowed out and Berkshire has replaced it as the stalking bidder for the loan portfolio. This fall, a bankruptcy court will hold an open auction for both businesses. We don't know who will buy these businesses, but it won't be Ally, which has left the scene after losing billions.
When asked for comment on why it was no longer bidd ing, an Ally spokesman expressed the intention for Ally to focus on its core businesses where Ally has a “leading position and competitive strengths, and that includes the auto finance and direct banking franchises.â€
Ally's initial gambit as a stalking horse bid has succeeded in bringing bidders to the table and maximizing the value of ResCap. But it's hard not to think that if Ally were not a ward of the government, this might have turned out differently. Having come so far and invested more than $10 billion, Ally might want to bid for those assets, using its prior ownership to gain an advantage. After all, now there appears the potential to profit.
But the costs and uncertainties of continuing in the mortgage business are significant, and Ally does not appear to want to take that risk. At the time of the bankruptcy, the Treasury Department stated that its “objective today is to exit in a manner that balances speed of recovery with maximizing returns for t axpayers†and that it believes that the ResCap bankruptcy will “put taxpayers in a stronger position to maximize the value of their remaining investment in Ally.â€
That's the problem with companies being bailed out. They're no longer as entrepreneurial or risk-taking as they might be, and instead have to balance gains against a need to pay back the government. Now that housing is in a fitful recovery, smart financiers are returning to this market. Ordinarily, this would be a good situation for Ally to buy back the assets in bankruptcy. But it will be private investors - and potentially Mr. Buffett - who will profit from ResCap's carcass.
And with the Treasury Department still in the hole for more than $11.5 billion with Ally, it is already facing a significant period before the government is paid back in full. The Treasury Department expects that it will be repaid a substantial portion of the government's investment in Ally, if not the full amount.
Tho ugh Ally operates independently, the Treasury Department, as Ally's owner, is not likely to have the patience to wait longer for ResCap. When the government is your lender, paying back the money is your first goal.
Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.
