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

Given the market stresses that it was experiencing, in the fall of 2008 GMAC consulted with the FDIC, Treasury, and the Federal Reserve about strategies for how it might survive the crisis. It was out of these meetings that the plan to convert into a BHC arose, the application for which GMAC submitted on November 20, 2008 (COP 2010). We have not been able to determine the full scope or timing of these discussions, but it appears that these discussions might also have been the impetus for GMAC’s applying to access the discount window and TAF.^FAccording to the COP, based on interviews with GMAC staff, “In response to deteriorating market conditions, significant third quarter losses, and the prospect of looming fourth quarter losses, on November 20, 2008, GMAC requested the approval of the Board of Governors of the Federal Reserve System (the Board) under section 3 of the BHCA to become a BHC upon the conversion of GMAC Bank to a commercial bank. GMAC took this step after conversations with the FDIC and Treasury about strategies for surviving the financial crisis. GMAC’s management maintains that the final decision to seek BHC status was a joint decision resulting from discussions between GMAC management, the board of directors, Treasury, the Federal Reserve, and the FDIC” (COP 2010).

An alternative option that was considered, but eventually rejected as unpalatable, was to allow GMAC to file for bankruptcy (Rattner 2010, 147). One of the reasons for providing support so that this would not happen, cited in a 2010 congressional review, was that adding a third auto-related bankruptcy would increase the disruption to the economy caused by the potential bankruptcies of GM and Chrysler (COP 2010). The report cited the view that a GMAC bankruptcy could have impeded the pending merger between Chrysler and Fiat and disrupted GM’s own access to funding, a result contrary to the purpose of the Automotive Industry Financing Program (AIFP) (COP 2010).

In seeking to provide assistance to GMAC and to help it develop a strategy for survival through the crisis, the government had a variety of facilities and mechanisms to recommend. GMAC accessed a number of programs that the government had established to address the severe stresses caused by the crisis and a number of other regulatory mechanisms (see Figure 1 above). Of all the assistance, however, only the approval of the BHC conversion required a unique determination in that other aid relied on standing programs (Discount Window), broad-based emergency programs (TAF) or already established limited programs (SCAP and AIFP). That the government had such a wide toolkit to use in developing a strategy for GMAC was a function of the structural complexity of GMAC, timing, and the government’s willingness to assist it.

GMAC owned an industrial loan bank, GMAC Bank, that was already eligible to access the Discount Window. Applying for access in September 2008 involved merely the standard application, establishing an account with the Fed and depositing eligible collateral to secure any loans. Access to the Discount Window was granted in September 2008 and also provided access to the TAF.

Within weeks of consulting with the government, GMAC accessed other crisis-era liquidity programs, including the CPFF and TALF. These programs were two of the several that the Fed implemented in 2008 to “unstick” various markets that locked up after the Lehman bankruptcy. Had GMAC experienced troubles in 2007, these programs would not have been available, and government assistance would have had to be more customized.

The Fed’s was willing to expedite GMAC’s application to convert to a BHC (including both the first and second 23A waivers), which made it eligible for TARP and the FDIC’s TLGP. It is also characterized by Treasury’s willingness to consider GMAC under the umbrella of the AIFP, which originally targeted just auto manufacturers, but grew to assist related components of the industry.

The Treasury’s investment in GMAC was funded through the Automotive Industry Financing Program (AIFP), the umbrella program under which the government’s targeted assistance to GM, GMAC, Chrysler, and Chrysler Financial was structured (U.S. Treasury 2019b), as shown in Figure 1. GMAC also benefitted from several standing and unique programs implemented by the Federal Reserve and the FDIC. The AIFP also included financial assistance to certain companies in the auto manufacturing supply chain and funds to guarantee warranties (U.S. Treasury 2014b). The Treasury predicated its assistance to non-manufacturers on the integrated nature of the auto industry. Accordingly, its assistance to GMAC was explained in similar fashion given the position of GMAC as provider for GM dealer and customer financing.

The second capital injection, in May 2009, included $4 billion to support GMAC’s acquisition of Chrysler Financials’ floorplan financing work with Chrysler. The Congressional Oversight Panel indicated that this acquisition was a small addition to GMAC’s already sizable $26.5 billion in wholesale automobile loans (COP 2010). The Treasury pledged to support GMAC by providing financing to Chrysler, pursuant to which Chrysler would transfer the funds to the Dealer LLC which would be used solely to reimburse GMAC for losses that may be incurred in connection with the agreement (Treasury 2009).

The various elements of the multi-faceted assistance extended to GMAC were authorized under a number of laws as shown in Figure 6. A majority of the programs were in place in September 2008 when GMAC first sought assistance, and several came on track during the next month. They were with the exception of the BHC and SCAP/AIFP^FWhile the AIFP was announced in December 2008, the SCAP was not implemented until early 2009. The 14th-largest BHC following its conversion, GMAC was one of the 19 financial institutions first subject to the SCAP stress test and capital requirements. broad based plans.

As discussed, the Treasury made three capital investments in GMAC, in each case receiving preferred stock and a warrant to purchase common shares.

Between December 2008 and December 2009, the US Treasury invested more than $17.2 billion in capital with GMAC (U.S. Treasury 2014a). The investment was spread out over a series of three investments. The first of these investments was made on December 29, 2008, with respect to helping GMAC meet the capital requirements to convert to BHC. The second was made in May 2009.

While the Treasury had the option to provide GMAC with the required capital through the CAP, SCAP’s associated program, the Treasury financed GMAC under the AIFP instead. The Treasury stated “that we used the AIFP instead of the CAP because GMAC was already part of the AIFP and because it did not make sense to open the CAP for only one institution when that institution could receive funding elsewhere” (COP 2010).

GMAC filed an application to convert to a BHC on November 20, 2008, which was approved by the Board on December 24, 2008, a timetable that reflected waiver of the requirement that it provide 30 days for relevant federal and state authorities’ approval^FThe Fed did contact such agencies which did not object to the approval (BdofGov 2008e). (BdofGov 2008e). The Fed issued an order that specifically addressed the reasons for its expedited review:

In light of the unusual and exigent circumstances affecting the financial markets, and all other facts and circumstances, the Board has determined that emergency conditions exist that justify expeditious action on this proposal in accordance with the provisions of the BHC Act and the Board’s regulations…

For the same reasons, and in light of the fact that this transaction involves the conversion of an existing subsidiary of Applicants from one form of a depository institution to another and the retention of Applicants’ existing nonbanking subsidiaries, the Board has also waived public notice of this proposal (BdofGov 2008e).

Such expedited approval was similar to the Fed’s approval of conversion to BHC for Goldman Sachs and Morgan Stanley (BdofGov 2008a; BdofGov 2008b). Conversion to a bank holding company potentially made GMAC eligible for the FDIC’s TLGP program, although the FDIC did not approve its participation until May 2009. GMAC eventually raised $7.4 billion in FDIC-guaranteed debt.

GMAC requested two exemptions from Section 23A of the Federal Reserve Act and the Fed’s Regulation W—first, in December 2008, in connection with the BHC conversion, and second, in May 2009, in connection with the SCAP funding round (BdofGov 2008d; BdofGov 2009b).

Section 23A of the Federal Reserve Act and Regulation W limit to 10 percent of the bank’s capital stock and surplus the amount of transactions from a single affiliate, and to 20 percent the amount of transactions from all affiliates (BdofGov 2008d). At the time of the first, GM had yet to divest from GMAC and thus, GM was considered an affiliate of GMAC Bank. As noted above (see Background) GMAC’s interconnection with GM was significant.

The first exemption covered consumer loans. It permitted GMAC Bank to “lend to consumers to enable them to purchase automobiles from unaffiliated dealers in the United States that obtain floorplan financing from affiliates of GMAC Bank” (BdofGov 2008d).

On December 24, 2008, the Fed granted the first exemption, after consultation with the FDIC, noting that it would “benefit the public because it would allow GMAC Bank to extend credit to a greater number of retail customers”. Furthermore, the Fed stated that the exemption would “provide an important source of financing for U.S. retail purchases of GM vehicles from independent dealers and avoid further disruption in the credit market for such purchases” (BdofGov 2008d). The Congressional Oversight Panel noted that, “While the Board historically has required a parent company to provide a collateralized guarantee when it transfers assets to an affiliate, it did not obligate GMAC to provide collateral here because ‘GMAC’s financial position will be strengthened by an additional equity investment by Treasury.’’ As a result, the Board determined that ‘Treasury’s support helps ensure that GMAC will be in a position to honor its obligations under the guarantee’” (COP 2010b2010).

The second exemption in May 2009 covered both consumer loans and loans to dealers. It permitted GMAC Bank to “lend to consumers to enable them to purchase automobiles from unaffiliated dealers in the United States that obtain floorplan financing from Bank or affiliates of Bank (“Retail Loans”) and to provide floorplan financing to unaffiliated dealers (“Dealer Loans”) to purchase automobiles from General Motors Corporation” (BdofGov 2009b).

Treasury’s auto team believed the loans to dealers were not very risky, but FDIC staff expressed concerns about funding them through the insured bank (Rattner 2010, p. 171). (As noted, the FDIC was also hesitant to extend the TLGP guarantee to GMAC.) Sheila Bair, Chair of the FDIC at the time, notes in her memoir that she told Treasury she would reject GMAC’s second 23A waiver and the TLGP guarantee unless the Treasury increased the FDIC’s credit line and the administration supported legislation to increase the FDIC’s ability to demand loss-sharing from the biggest banks. “On May 20, 2009, legislation was enacted with the authority that we needed, and we followed through on our end by agreeing to the 23A waiver and guaranteeing about $7 billion in GMAC debt [through the TLGP program]” (Bair 2013, 176-180).

On the occasion of each additional program, loan, and policy decision, the government issued a press release. Due to the wide range of interventions, the relevant press releases came from the Treasury, the Fed, the FDIC, and on at least one occasion a joint statement from all three (see the References section for relevant links).

In addition to the technical press releases announcing specifics and term sheets, the rescue of GMAC and the broader auto industry was given significant public attention by President George W. Bush and Treasury Secretary Henry M. Paulson, Jr. (White House 2008). The crisis in the auto and financial industry spanned a change in presidential administrations. President Obama continued the path started by President Bush by keeping the auto industry rescue in his communications to the public (Obama 2009a).

The auto industry was such a large aspect of the economy and affected so many jobs that the government’s actions were closely watched and discussed in the broader public. One of the widely publicized efforts by the new administration was a special task force that was set up specifically to tackle the auto industry crisis (Wall Street Journal 2009).

The auto manufacturers granted to the collateral agent, Citibank, a continuing first priority security interest in their pledged collateral in order to secure the Special Purpose Vehicles’ financial obligations to the secured parties (Citi and Treasury 2009)

With each Treasury investment in GMAC, the Treasury was issued stock warrants. These warrants were exercised immediately each time.

To ensure that GMAC met the capital level required by the BHC conversion, and in addition to the direct capital injection, Treasury agreed to make a loan to GM for up to $1 billion to purchase GMAC shares. GM ultimately borrowed $884 million from the Treasury to participate (Treasury 2009b). The loan agreement, dated January 16, 2009, noted that GM’s obligations to the Treasury could be satisfied by GM’s transfer of the purchased GMAC common shares to Treasury (COP 2010). Treasury exercised that right in May 2009, acquiring the additional GMAC shares (Ally Financial 2012).

In addition to certain ownership and management changes required as a condition to converting to a BHC, GMAC was required to comply with certain terms and conditions under the Treasury capital injections. These included restrictions on: stock repurchases, dividends, and executive compensation, and expense policy requirements similar to those Treasury had required from GM (SIGTARP 2009).

It is not clear from public documents whether the government considered requiring GMAC to restructure its holding in ResCap prior to the provision of government support. The two companies were closely connected. In addition to holding ResCap’s equity, GMAC’s 2008 10-K noted it still had $4.1 billion in secured financing arrangements with ResCap and $500 million of ResCap notes as of January 31, 2009, after the debt restructuring. An accelerated bankruptcy would have been difficult and costly to GMAC. “We have extensive financing and hedging arrangements with ResCap, which could be at risk of nonpayment if ResCap were to file for bankruptcy… In addition, should ResCap file for bankruptcy, our investment related to ResCap's equity position would likely be reduced to zero. Based on January 31, 2009, balances, this would result in a $3.1 billion charge to our investment in ResCap.” (GMAC LLC 2009a, p.15).

In 2010, GMAC’s CEO described the company’s strategy toward ResCap at a COP hearing: “[T]he focus of our activities has been… to quantify the risk in ResCAP, to ring-fence that risk, and over time, to minimize that risk so that GMAC is freed from that burden, going forward.” He also alluded to systemic risk issues, noting “the important role of ResCAP as the fifth largest mortgage servicer to three million homeowners with $376 billion of outstanding mortgages” (COP 2010a).

Following the capital injection, GMAC transferred mortgages from Ally Bank to ResCap, COP noted. “With the capital contribution in Ally Bank, GMAC purchased high-risk mortgage assets at ‘fair value’ of $1.4 billion, resulting in a pre-tax charge of $1.3 billion. GMAC then contributed these high-risk assets to ResCap” (COP 2010b, p.44). Another expert witness told the COP: “Ally Bank wrote down a lot of assets, moved them to ResCAP, because they want to isolate the bank from the bad things that are going on at ResCAP” (COP 2010a).

Regarding the wind down of Treasury’s investments in GMAC, COP 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 2010b2010). In congressional testimony Treasury representatives outlined a number of steps GMAC needed to take before Treasury divested of its shares in GMAC, including: (1) refinancing its debt, (2) increase balance sheet liquidity, (3) gain access to the third-party credit markets, (4) bring down the cost of capital, (5) hire good staff, (6) support and expand a retail bank, (7) contain ResCap, and (8) prepare for an IPO. The representatives indicated that since an IPO would require the company to be on a path to profitability, Treasury may 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 (U.S. Treasury 2011b). The wind down of the Treasury’s common equity shares began in January 2010 and ended in December 2014 (Nygaard n.d.).