The Rescue of the US Auto Industry, Module D: Emergency Assistance to Ally Financial (formerly GMAC)

The Global Financial Crisis that began in the summer of 2007 with a decline in the United States subprime mortgage markets entered a critical stage in early 2008 (FRBSL n.d.). As the crisis unfolded, credit markets tightened and a broader economic downturn developed; the auto industry was hit particularly hard (BLS n.d.). The crisis intensified a decade-long decline of the largest US auto manufacturers (Klier and Rubenstein 2012, 36, figure). Because of their size and importance to the economy, the government determined, beginning in December 2008, to provide assistance to General Motors (GM) and Chrysler Holdings (Chrysler) while the automakers developed plans to restructure. GM and Chrysler eventually required substantial government financial assistance and underwent US Treasury–assisted restructurings and bankruptcies. The Treasury’s assistance quickly expanded beyond the manufacturers to include their auto financing companies (Treasury 2014b).

The primary source of financing for GM’s dealers and consumers was the automobile finance unit of GMAC Financial Services. While GMAC had begun as a captive subsidiary of GM, by 2006, its $200-plus billion business^FNGMAC was renamed Ally Financial in 2010. However, GMAC/GMAC Inc./GMAC LLC/GMAC Financial Services/Ally will be referred to as GMAC throughout this case for the purpose of consistency. had expanded beyond auto financing to include real estate and insurance.^FNIn a press release of December 24, 2008, the company described itself as follows, “GMAC Financial Services is a global finance company operating in and servicing North America, South America, Europe and Asia-Pacific. GMAC specializes in automotive finance, real estate finance, insurance, commercial finance and online banking. As of Dec. 31, 2007, the organization had $248 billion in assets and serviced 15 million customers” (GMAC Financial 2008d). That year, GMAC was spun off as an independent company. However, GM retained a significant ownership interest, and certain “captive” aspects were retained with respect to the automobile financing business (Treasury 2014b)

In 2008, GMAC’s share of GM retail sales and sales to dealers were 32% and 81%, respectively. Thus, GMAC’s ability to continue to provide financing for GM dealers and customers was critical to the manufacturer’s ability to restructure its business and avoid failure (GMAC LLC 2009a). However, GMAC’s funding strategy and liquidity position were also being negatively impacted by volatility in the capital markets and diminished access to liquidity, which resulted in increased borrowing costs (GMAC 2008b). Moreover, GMAC’s mortgage origination and servicing subsidiary, Residential Capital, LLC (Massad 2012) was significantly adversely affected through its exposure to mortgage markets and had to be propped up by GMAC (Massad 2012). Over the course of 2007 and 2008, ResCap posted losses of $10 billion, while GMAC’s auto finance operation lost about $0.6 billion (GMAC 2008 10-K, 27). The losses. This negatively affected GMAC’s credit rating, which further increased borrowing costs and access to debt capital markets (Nygaard n.d.). In the third quarter of 2008, GMAC reported a net loss of $2.5 billion; since mid-2007, it had reported cumulative losses of $7.9 billion (COP 2011).

The US Treasury determined that GM could not survive without GMAC’s crucial dual role in providing financing to GM consumers and auto dealers (Treasury 2014b). An estimated 80 to 90% of consumers finance or lease their vehicles (COP 2010), and GMAC facilitated more than 30% of GM retail sales. GMAC also facilitated over 80% of the financing that the GM dealers network received to buy new vehicles for inventory, known as floor plan financing (GMAC 2008b). Moreover, in November 2006, in connection with the spin-off of GMAC from GM, GMAC and GM agreed that, subject to certain conditions and limitations, whenever GM offered vehicle financing and leasing incentives to customers, it would do so exclusively through GMAC (Ally Financial 2012). Consequently, due to the interdependence between GM and GMAC, GMAC’s ability to continue funding the manufacturer-dealer-consumer credit channel was critical to GM’s survival.

To restore liquidity to GMAC’s auto finance business, the government intervened with assistance in a variety of forms, including liquidity and capital assistance, originating from a number of agencies. GMAC accessed programs and worked with policy makers at the Federal Reserve (through efforts and programs including: bank holding company conversion, the discount window, the Term Auction Facility, the Commercial Paper Funding Facility, and the Term Asset-Backed Securities Loan Facility), the FDIC (the Temporary Liquidity Guarantee Program), and the Treasury (multiple capital injections). Each of these programs and interactions are outlined in the following sections and summarized in Figure 1.

Federal Reserve Liquidity Facilities

Discount Window and Term Auction Facility

One of GMAC’s subsidiaries was an industrial loan company (ILC),^FN“ILCs are state-chartered banks that have direct access to the federal safety net—deposit insurance and the Federal Reserve’s discount window and payments system—and have virtually all of the deposit-taking, lending, and other powers of a full-service commercial bank. Despite their access to the federal safety net and broad powers, these banks operate under a special exception to the federal Bank Holding Company Act (BHC Act). This special exception allows any type of firm, including a commercial firm or foreign bank, to acquire and operate an ILC chartered in one of a handful of states outside the framework of federal supervision of the parent holding company and without the restrictions on the scope of activities conducted by the ILC’s affiliates that govern the ownership of insured banks by bank holding companies” (Alvarez 2006). GMAC Bank (BdofGov 2008e), and as such it was eligible to access the Fed’s discount window, the Fed’s main vehicle for providing overnight lending to eligible depository institutions at favorable rates, fulfilling its lender-of-last-resort role for the banking system. However, it appears that GMAC had not applied to access the discount window until September 2008, which requires making an application, establishing an account, and posting collateral with the Fed to secure any loans. GMAC was granted access to the discount window on September 11, 2008^FNAn application and completion of certain administrative forms and steps are required before an entity can access Discount Window lending. (GMAC LLC 2008).

Earlier in the crisis, the Fed had established the Term Auction Facility (TAF), a liquidity program designed to counter any stigma related to borrowing through the discount window that made banks reluctant to borrow there. The TAF provided liquidity through the auction of a pre-announced quantity of collateralized credit for a term of 28 or 84 days (GMAC LLC 2009a). All banks eligible for primary credit under the discount window were eligible to borrow under the TAF.

By the end of September 2008, GMAC had pledged $5.2 billion of automotive loans and leasing financings as collateral to the two facilities, which provided to it a borrowing capacity of $4.1 billion (GMAC LLC 2008). GMAC’s capacity and quarter-end outstanding borrowings can be seen in the Figure 2, with a maximum outstanding amount of $5 billion (Nygaard n.d.).

Commercial Paper Funding Facility

On October 27, 2008, the Federal Reserve’s Commercial Paper Funding Facility (CPFF), which provided funding for third parties to purchase highly rated unsecured and asset-backed commercial paper from eligible primary dealers, began operations (BdofGov n.d.). GMAC Bank, via a subsidiary,^FNThe subsidiary was called the New Center Asset Trust (NCAT). was eligible to participate in this facility, and by the end of 2008, GMAC had $7.6 billion of outstanding commercial paper through the CPFF (GMAC LLC 2009a). By March of 2009, the total outstanding had decreased slightly, to $6.1 billion. By April 2009, most of the issued commercial paper had matured and was not renewed (GMAC LLC 2009b).

GMAC Bank’s use of the CPFF was cut short due to ratings downgrades. On November 25, 2008, GMAC’s commercial paper was downgraded below the CPFF’s eligibility requirement, and GMAC was granted two months to improve the credit rating (GMAC 2009a). GMAC was unable to do so and began an orderly wind-down of its commercial paper trust in January 2009 (GMAC LLC 2009b).

Term Asset-Backed Securities Loan Facility (TALF)

GMAC also participated in a Fed program that supported issuance of asset-backed securities, the Term Asset-Backed Securities Loan Facility (TALF). TALF allowed eligible institutions^FNSee FRBNY 2010 for the Federal Reserve Bank of New York’s description of eligible borrowers. to borrow from the Federal Reserve Bank of New York (FRBNY) using, among other types, auto loan asset-backed securities as collateral (BdofGov 2008c). Between September 2009 and March 2010, GMAC executed three TALF-eligible transactions worth a total of $2.7 billion (Nygaard n.d.). All institutions buying the securities from GMAC were eligible for the TALF; however, of the total $2.7 billion issued, investors that accessed the TALF accounted for $533 million (BdofGov 2011).

GMAC Becomes a Bank Holding Company (BHC)

On November 20, 2008, GMAC Bank requested approval from the Utah Department of Financial Institutions to convert from an industrial loan company to a state-chartered commercial bank (COP 2010; GMAC Financial 2008a). Simultaneously, GMAC, the parent company, applied to the Federal Reserve to convert to a bank holding company. The Federal Reserve approved GMAC’s application, subject to certain conditions, under an expedited process, for the conversion of both the subsidiary bank and the bank holding company on December 24, 2008 (BdofGov 2008e). Not only did this change in status provide the companies access to additional government funding facilities, it also affected outstanding private debt exchange offers and cash tender offers that had been contingent on these conversions. Reporting on the BHC conversion approval, the Wall Street Journal said, “In a rare sign of discord within the Fed over the emergency move, Governor Elizabeth Duke, a Virginia banker who joined the board in August, voted against the move. The Fed didn't explain her objections in its approval statement. The Fed also denied a request from an unnamed commenter for a public hearing on the decision” (Hilsenrath and Saha-Bubna 2008).

After the spinoff in 2006, the ownership structure of GMAC was such that GM held a 49% stake and an investment consortium led by Cerberus Capital Management, L.P. (Cerberus) held the majority 51% stake (GMAC LLC 2008). The BHC conversion was contingent on a number of ownership and management changes in order to be consistent with the Fed policy on non-controlling investments in bank holding companies and banks (BdofGov 2008e).

To avoid becoming a bank holding company itself, GM was required to reduce its ownership in GMAC to less than 10%. The remaining equity interest was transferred to an independent trust run by a trustee approved by the Fed and the US Treasury with the mandate to dispose of the equity interests within three years. GM also agreed to amend its agreements with GMAC to remove restrictions on GMAC’s ability to engage in transactions with unrelated parties and to ensure that GMAC controlled its own financing arrangements (BdofGov 2008e). The transfer to the independent trust was executed in May 2009 (COP 2010).

Each Cerberus fund within the consortium was also required to distribute its GMAC interests to its respective investors, who agreed to reduce their individual equity holdings in GMAC to less than 7.5%, or less than 33% collectively (BdofGov 2008e).

As part of the BHC conversion, GMAC was also required to restructure its board of directors. The new board of directors included: the GMAC CEO, a director appointed by Cerberus, two appointed by the independent trust, and three additional independent directors appointed by the first four (SIGTARP 2009).

A congressional report stated, based on interviews with GMAC staff, that the reasons that GMAC sought to convert to a BHC were to access certain government programs established to address the financial crisis. As a BHC, GMAC could access the FDIC’s Temporary Liquidity Guarantee Program (TLGP) and the TARP’s Capital Purchase Program (CPP). The TLGP provided an FDIC guarantee for new debt that GMAC issued (with certain restrictions) and a guarantee of its transaction account deposits. The CPP, administered by Treasury, made government capital injections of preferred stock into financial companies if they could not raise such funds in the markets. Although GMAC Bank, as an ILC, would have been eligible to receive CPP funds, its parent would not have been prior to conversion into a BHC (COP 2010).

The FDIC’s Temporary Liquidity Guarantee Program

In an extraordinary measure, the Treasury, the Fed, and the FDIC each issued individual statements^FNThe Federal Reserve announced the Commercial Paper Funding Facility and the Treasury announced the Capital Purchase Program. The announcements also indicated that nine large financial institutions had already committed to participating in both programs (Treasury 2008c). and together issued a joint statement on the morning of October 14, 2009. The FDIC announced the creation of the Temporary Liquidity Guarantee Program (TLGP). The joint statement indicated that the program was being created under the systemic risk exception^FNThis was only the second time that the FDIC board had approved a systemic risk exception, which required a finding by the Secretary of the Treasury; the first had been just two weeks earlier to assist Wachovia. See Davison 2019 for a detailed discussion of the TLGP. The TLGP had two components. “It provided a limited-term guarantee for certain newly issued debt not only of banks and thrifts but also of bank, thrift, and financial holding companies and eligible bank affiliates (the Debt Guarantee Program, or DGP). Additionally, the TLGP fully guaranteed certain non-interest-bearing transaction deposit accounts (the Transaction Account Guarantee Program, or TAGP). (FDIC 2008). of the FDIC Act as signed by the Secretary of the Treasury (Treasury 2008c). The TLGP was a voluntary program that allowed banks, thrifts, and their holding companies to issue senior unsecured debt with a full guarantee from the FDIC (Bair 2008).

The TLGP had two components. Under the first FDIC Chair Sheila Bair was reluctant to extend the TLGP’s guarantee to GMAC’s debt, given the ongoing losses at ResCap and lingering risks in its auto finance business. On March 19, 2009, the Fed Chairman and Treasury Secretary sent the FDIC a “comfort letter” promising to use their best efforts to protect the FDIC from losses on debt guarantees. Bair finally agreed to guarantee GMAC’s debt after the Treasury increased the FDIC’s credit line and supported legislation to allow the FDIC to impose an assessment on the biggest banks in the country (Bair 2013, p. 176).GMAC was ultimately authorized by the FDIC to issue up to $7.4 billion of senior unsecured debt under the TLGP for a fee. GMAC issued a total of $4.5 billion in the second quarter of 2009, $1 billion of which had a floating rate and $3.5 billion had a fixed rate. Both had terms ending in December of 2012. On October 30, 2009, GMAC issued an additional $2.9 billion in fixed-rate debt, borrowing up to the limit of the FDIC’s approved usage of the TLGP (GMAC 2009b). The $2.9 billion and $4.5 billion were repaid in full in October and December 2009, respectively (Ally Financial 2012).

, the Debt Guarantee Program (DGP), the FDIC, for a fee, provided a limited-term guarantee for senior unsecured debt issued on or between April 1, 2009, and October 31, 2009, by eligible participating entities (banks and thrifts but also bank, thrift, and financial holding companies and eligible bank affiliates). Eligible securities would be guaranteed through the earlier of their maturity or December 31, 2012. Under the second component, the Transaction Account Guarantee Program (TAGP), the FDIC would fully guarantee certain non-interest-bearing transaction deposit accounts (Bair 2008).

Treasury Capital Investments

Between December 2008 and December 2009, the US Treasury invested more than $17.2 billion into GMAC (Treasury 2014a). The investment was spread out over a series of three installments: (1) $5.3 billion as part of the funding round required by the Federal Reserve in GMAC’s BHC conversion; (2) $7.9 billion to assist GMAC in meeting the capital level required by the Supervisory Capital Assessment Program (SCAP) stress test; and (3) $4 billion in additional capital when the initial $7.9 billion failed to fully satisfy the SCAP requirement on its own (Nygaard n.d.).

BHC Conversion

One of the Federal Reserve’s stipulations for GMAC during its conversion to a BHC was that it raise its capital levels by approximately $7 billion, from $23 billion to $30 billion (SIGTARP 2014; GMAC Financial 2008b). The Fed required GMAC to convince 75% of bondholders to accept equity in exchange for debt and existing shareholders to invest new capital.

On December 29, 2009, when GMAC was unable to meet the threshold on their own, the Treasury stepped in with a $5.25 billion investment package (Nygaard n.d.). Of that total, $5 billion was used for an outright purchase of GMAC preferred shares (Treasury 2008a). The remaining $250 million came in the form of a warrant to purchase additional preferred shares.^FNThe shares purchased outright paid an 8% dividend, and the shares purchased via the warrant paid a 9% dividend (COP 2011). The warrant was exercised immediately (COP 2010).

On December 31, GMAC said that bondholders had agreed to exchange $17.5 billion of bonds for cash, new bonds, and new preferred stock; the exchange represented 59% of outstanding bonds, short of the Fed’s 75% target (GMAC Financial 2008e). Still, bondholders sustained substantial losses. GMAC reported a pretax gain on the debt exchange of $11.5 billion, including a $3.8 billion principal discount, a $5.4 billion discount representing the difference between the face value and the estimated fair value of the new notes, and a $2.3 billion discount representing the difference between the face value and estimated fair value of the new preferred stock (GMAC LLC 2009a, p. 145).

GMAC also raised $1.25 billion in a rights issue and $0.75 billion in subordinated debt from GM and Cerberus, announced on January 16, 2009 (GMAC LLC 2009a, p. 70). However, the Treasury provided an $884 million loan to GM, which GM used to subscribe to its portion of the rights issue for shares in GMAC. In addition to the shares purchased directly, on January 16, 2009, the Treasury also provided an $884 million loan to GM, which GM used to buy shares in GMAC (Treasury 2009b). GMAC was also required to “convince 75% of bondholders to exchange their notes for discounted preferred stock that would count as capital (SIGTARP 2013).

First Round of SCAP Assistance

In February of 2009, the Treasury announced that they would be conducting “forward-looking assessments to evaluate the capital needs of the major U.S. banking institutions under a more challenging economic environment” (Treasury 2009d). GMAC was one of the 19 institutions required to participate. The results of the test, released in May 2009, indicated that GMAC needed to raise its capital level by an additional $11.5 billion^FNOf the total $11.5 billion required, $9.1 billion had to be new Tier 1 capital (BdofGov 2009a). (BdofGov 2009a).

On May 21, 2009, when GMAC was unable to raise the required capital, the Treasury purchased $7.9 billion of GMAC shares. In a similar format as the December 2008 investment, the Treasury purchased $7.5 billion outright and immediately exercised a warrant for an additional $375 million. In the same announcement, Treasury indicated that the $884 million loan to GM made in January 2009 was being converted into GM shares (Ally Financial 2012). After the day’s actions, the Treasury’s stake in GMAC represented 35% of the company (Treasury 2009c).

Within this $7.87 billion capital injection round, $4 billion was used to assist GMAC in its acquisition of Chrysler Financial’s floor plan financing work with Chrysler (COP 2010). See Nye 2021 for more details.

Second Round of SCAP Assistance

Despite the large Treasury investment in May, by early November 2009 GMAC had still not met the $11.5 billion capital threshold required. The Federal Reserve announced that, of the 10 institutions required to raise additional capital following the SCAP, GMAC was the only one to fail to do so (BdofGov 2009b).

On December 30, 2009, Treasury made a capital investment of $3.9 billion in GMAC. The injection included $1.3 billion in preferred equity and $2.7 billion in trust preferred securities^FNAs in the previous investments, a small portion of these total figures were warrants that were exercised immediately (Ally Financial 2012; Treasury 2009c). (Ally Financial 2012). Following this third series of investments, which included the conversion of some conversions of preferred shares into common equity^FNSee Treasury 2009c for more details. (Treasury 2009c).

In December 2010, the Treasury converted $5.5 billion of preferred shares to common equity. This final conversion brought Treasury’s ownership of GMAC to what would be its peak ownership of 74% (Treasury 2010b).

Government Guidelines for Voting Shares

Under the terms of Treasury’s $884 million loan to GM, GMAC and its shareholders agreed that the governance of GMAC would change in the event that Treasury’s stake in the company grew. The shares that GM purchased with the Treasury’s loan were placed in an independent trust, the trustees of which temporarily had the right to select directors of GMAC’s board.

On May 21, 2009, Treasury exercised its option to convert its loan to GM into a 35% stake in GMAC, and the parties revised the governance agreement to increase the size of the board to nine members (GMAC LLC 2009c, p5). The temporary independent trust was abolished. Under the new agreement, Treasury would have the right to designate more directors as its equity stake grew (see Figure 4).^FNCOP reported that Treasury staff considered an ongoing trust structure as a possibility for Treasury shares but concluded that a trust ‘‘does not enhance our position.’’ Transcript of COP Hearing on GMAC, (COP 2010a).   

GMAC LLC 2009c, p.5.

In a June 2009 speech, President Barack Obama described the government’s position as one of “a reluctant shareholder” (Obama 2009b). Most of TARP’s investments were in the form of non-voting preferred stock; however, the interventions in the auto industry did involve voting ownership (Treasury 2010b). As early as 2009, and peaking in December 2010 at 74%, the Treasury owned a significant portion of GMAC common shares (Nygaard n.d.).

Two principles that would guide Treasury’s use of voting rights were announced:

(1) Treasury intends to exercise its right to vote only on certain matters consisting of the election or removal of directors; certain major corporate transactions such as mergers, sales of substantial amounts of assets, and dissolution; issuances of equity securities where shareholders are entitled to vote; and amendments to the charter or bylaws; and (2) on all other matters, Treasury will either abstain from voting or vote its shares in the same proportion (for, against, or abstain) as all other shares of the company's stock are voted. (Treasury 2010b).

Wind-down of Treasury Investments

Regarding the wind-down of its investments, Treasury noted, “the goal is to dispose of the government’s interests as soon as practicable . . . and in a timely and orderly manner that minimizes financial market and economic impact” (COP 2010). In congressional testimony, Treasury representatives outlined a number of steps GMAC needed to take before the agency divested of its shares in GMAC, including: (1) refinancing its debt, (2) increasing balance-sheet liquidity, (3) gaining access to the third-party credit markets, (4) bringing down the cost of capital, (5) hiring good staff, (6) supporting and expanding a retail bank, (7) containing a deeply troubled mortgage subsidiary,^FNAmong the many reasons for GMAC’s financial troubles in 2007 and 2008 was their ownership in ResCap, a residential mortgage company (GMAC LLC 2009a). For undetermined reasons, the government decided not to force ResCap to separate from GMAC before the Treasury’s investments (COP 2010). Because of ResCap’s poor financials, GMAC’s originally targeted IPO date, originally scheduled for 2011, didn’t happen until 2014 (Massad 2012). In 2012, ResCap filed for bankruptcy (Massad 2012). and (8) preparing for an IPO. The representatives indicated that since an IPO would require the company to be on a path to profitability, Treasury might be required to hold onto the shares longer than anticipated (COP 2010).

The final preferred shares that Treasury owned were sold in March of 2011 (Treasury 2011a). Because of Residential Capital’s (ResCap) poor financials, GMAC’s originally targeted IPO date, first scheduled for 2011, didn’t happen until 2014. In 2012, ResCap filed for bankruptcy (Massad 2012). The wind-down of the Treasury’s common equity shares began in 2014 and can be seen in Figure 5 (Nygaard n.d.).

GMAC rebranded itself as Ally in May 2010 (Ally Financial 2010a). The bank holding company ended its emergency use of the Fed’s discount window and Term Auction Facility in the summer of 2010 as well, repaying all borrowed principal with interest (Nygaard n.d.). The Fed also collected fees on GMAC’s use of the Commercial Paper Funding Facility (BdofGov n.d., GMAC 2008b). After multiple term asset-backed securities issuances supported by the Fed’s Term Asset-Backed Securities Loan Facility, GMAC conducted a successful issuance without government support (GMAC 2010b).

In the final quarter of 2012, GMAC repaid all the senior unsecured debt it had issued under the FDIC’s Temporary Liquidity Guarantee Program (Ally Financial 2012). This program included fees paid to the FDIC (FDIC n.d.).

Between December 2008 and December 2009, the US Treasury invested more than $17.2 billion in capital in GMAC. The final sale of Treasury’s equity in GMAC was completed on December 19, 2014. The total return on the series of investments was $19.6 billion, for a taxpayer profit of $2.4 billion (Treasury 2014a).

In February 2010 GMAC was able to successfully issue unsecured long-term debt and in mid-2010 was able to turn a profit (GMAC 2010a; COP 2011).

GMAC continued to support ResCap following the Treasury capital injection. GMAC provided ResCap roughly $3.3 billion in 2008 and $4.0 billion in 2009.^FNThe 2008 figure includes $0.8 billion of forgiveness of debt in ResCap’s GMAC Mortgage Servicing Rights facility and $2.5 billion through contributions and forgiveness of ResCap debt held by GMAC. The 2009 figure includes “cash, mortgage loans held-for-sale (which GMAC acquired from Ally Bank), receivables, [and] the forgiveness of debt and affiliated payables. Uncertainty about the potential for further losses at ResCap forced GMAC to delay its initial public offering (IPO), originally planned for 2011. GMAC paid $2.1 billion to settle claims in ResCap’s bankruptcy in 2013 (Ally Financial 2013b).

The final sale of Treasury’s equity in GMAC was completed in an IPO on December 19, 2014. Treasury ultimately recovered $19.6 billion on its investments in GMAC, a taxpayer profit of $2.4 billion (Treasury 2014a).