After taxpayers’ long winter, signs of life from Ally

March 27

Crocuses and various other bulbs are popping up in my garden, a tangible sign that our brutal East Coast winter has finally ended. Something similar is sprouting on Wall Street, of all places: a tangible sign that taxpayers are finally going to get enough cash to turn a profit on Ally Financial, which had long seemed fated to cost the U.S. Treasury big bucks.

I’m talking about Thursday’s announcement that the Treasury is planning to sell a chunk of its stake in Ally, formerly General Motors’ finance subsidiary, to public investors in an initial public offering at a projected range of $25 to $28 a share.

At those prices, the Treasury’s stake in Ally has an indicated value of $4.4 billion to $5 billion. That’s far more than the $1.9 billion that the Treasury is currently out of pocket on the $17.2 billion of taxpayer money it shelled out, beginning in 2008, to keep Ally—and thus GM’s dealer network, and GM itself — from collapsing during the financial crisis.

Even at the bottom projected range of the IPO — the Treasury selling 95 million shares at $25 each — taxpayers will be cash ahead on their investment.

This is my third swing at the topic of taxpayers’ investment in Ally, but it’s the first time that I can use tangible, projected sales prices rather than my own estimate of what Ally shares could fetch in an offering.

Taxpayers are coming out less ahead than I projected in the summer but somewhat further ahead than I projected two months ago.

There’s a profit for taxpayers despite the fact that the Treasury is now likely to realize less money from Ally’s common stock than it paid for it. That’s because the Treasury collected $3.7 billion of dividends on Ally preferred stock, some of which it ultimately sold and some of which it converted to Ally common stock.

But even though the Treasury will probably realize a small loss on the stock, this is an amazing outcome compared with how things looked for Ally not long ago.

The problem, you see, is that Ally had a former crown jewel called Residential Capital, which made a ton of money (for a while) in the subprime (a fancy word for “junk”) mortgage market. But ResCap turned toxic shortly after the Treasury began putting money into Ally to help it keep GM’s dealers afloat by financing their inventories of GM vehicles when other financing sources had dried up.

Ally ultimately threw more than $10 billion down the ResCap rathole: First, it spent $8.3 billion to keep it afloat before finally deciding to put ResCap into bankruptcy in June 2012. Then, Ally had to shell out $2 billion-plus to satisfy bankruptcy creditors to remove its ResCap liability so it could become a publicly traded company and offer the Treasury an orderly way to liquidate taxpayers’ Ally investment.

So there you have it: spring in the real world, spring in the Ally bailout world. It looks like winter has finally departed both worlds. Praise the Lord.

Footnote: Here’s how I calculated (for what I hope is the final time) the value of the Treasury’s stake in Ally: The Treasury currently owns 571,971 Ally shares, which Ally will split 310-for-1 to arrive at an attractive per-share price for a public offering. This means that the Treasury will own 177.311 million new shares. At $25 each, those are worth about $4.43 billion. At $28, $4.96 billion.

(Source: Ally public filings.)

Sloan is Fortune magazine’s senior editor at large.

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