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Wednesday, September 26, 2012

TARP Assistance for the U.S. Motor Vehicle Industry: Unwinding the Government Stake in GMAC

Baird Webel
Specialist in Financial Economics

Bill Canis
Specialist in Industrial Organization and Business

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 and it still provides significant financing both for GM vehicles and for GM dealers. 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 over 90% of all U.S. passenger vehicles financed or leased, GMAC’s ability to lend, or inability to lend, was particularly important to GM’s retail sales and dealer-financing capabilities.

The Bush and Obama Administrations used the Troubled Asset Relief Program (TARP) to fund 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.

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 TARP assistance. Whether the government will recoup all or most of these funds now depends largely on the future market value of the government’s ownership stake. If the government’s common equity ends up being worth less than the assistance provided, the company has no responsibility going forward to compensate the government for the difference. Conversely, if the common equity ends up being worth more than the assistance, the gain from this difference accrues to the U.S. Treasury (and is used to pay down the national debt as specified in the TARP statute). 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, while also increasing regulatory oversight of the company.

In March 2011, Ally Financial (GMAC having changed its name in 2010) filed with the Securities and Exchange Commission (SEC) for an initial public offering (IPO) of shares, which it expected to launch in the second quarter of 2011. The IPO, however, was postponed because of stock market volatility and poor performance of Ally Financial’s residential mortgage unit. It is unclear whether an IPO will eventually occur or whether the government will dispose of its share of Ally Financial in some other way.

Date of Report: September 13, 2012
Number of Pages: 16
Order Number: R41846
Price: $29.95

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