Will GM and Chrysler Steer Away From Ally Financial?

In the fall of 2009, the board of GMAC, one of the largest U.S. auto and home-loan companies, gathered in New York to discuss whether to put its troubled mortgage unit into bankruptcy. GMAC, now called Ally Financial, was just about to receive the last of $17 billion in taxpayer bailouts. The board, including directors named by the U.S. government, discussed whether to use bankruptcy to get rid of toxic mortgage assets that were pulling down the rest of the company, according to people who attended the meeting.

Alvaro de Molina, GMAC's CEO at the time, disagreed. The move, he said, would lead to years of fights with creditors and tough treatment from regulators that would hurt the company. De Molina prevailed, but the board lost confidence in the CEO and replaced him soon after with Michael Carpenter, an Ally director and former Citigroup Inc executive, these sources said. As of May 7, Residential Capital (ResCap) - Ally's mortgage servicing and lending unit that turned from a profit engine to a lemon - is again on the verge of being put into bankruptcy, possibly within a week, according to sources with direct knowledge of the situation.

At the same time, Ally may find that General Motors Co and Chrysler, two key sources of customers, are increasingly reluctant to steer business to it. Many GM and Chrysler dealers depend on Ally to finance their inventories, and refer customers looking for car loans to Ally. If Ally gets fewer referrals in the future, and dealers find other sources of inventory financing, the value of the government's seventy-four percent Ally stake could fall.

Ally still owes the U.S. Treasury Department about $12 billion, and people close to the company and the government acknowledge there is no clarity as to how to pay that back. The company says it remains committed to protecting its auto lending and direct banking franchises. Putting its mortgage problems behind it, Ally spokeswoman Gina Proia said, "will be key to repaying the U.S. taxpayer its remaining investment." The Treasury declined to comment.

GM, which once owned Ally, tried to buy back the company's auto finance business in 2010, but the two firms could not reach a deal, sources said. So GM bought Americredit, a subprime lender, for $3.5 billion and started building up its own financing arm. Recently, it has also started offering floorplan financing.

At the same time, at the end of 2013 Ally faces the expiration of a key lending agreement with GM. The automaker currently subsidizes car loans made by Ally to offer cheaper financing to consumers to help sell cars, known in the industry as "subvented lending."

GM spokesman Jim Cain said, "Ally remains an important financing partner for GM customers and dealers."

Meanwhile, Chrysler has given notice that it will not automatically renew a preferred lending agreement that will now expire in April next year. The automaker said it is in talks with a number of banks, including Ally, for better financing options.

"We are currently pursuing various ways to optimize the financial products and services available to meet the needs of our dealers and customers in the U.S. and Canada," Chrysler spokesman Ralph Kisiel said.

Ally executives dismiss concerns about the company's relationship with major Detroit carmakers. They have said the Chrysler move was expected and doesn't preclude the two companies from doing business together in the future. The lender can also still do business directly with Chrysler dealers.

Carpenter has reduced the company's dependence on GM and Chrysler. When Ally was the financing arm of GM, a huge portion of its business depended on subvented loans. These loans totaled eighteen percent of Ally's U.S. consumer business in the first quarter, down from nearly three-quarters in the same period three years ago.

During the financial crisis, Ally was one of the few lenders willing to provide financing to GM and Chrysler dealers, which it believes has given it strong relationships with car sellers, a source close to the company said.

But some auto dealers say those loyalties only go so far. They are happy to see more competition among lenders now, with more banks and GM stepping up for floorplan financing.

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