GM plans for financing unit could complicate Ally's bailout repayment

By Peter Whoriskey
Thursday, June 24, 2010

A General Motors proposal to develop its own auto-financing business has put the U.S. government in the middle of a multi-billion-dollar tug of war between two bailed-out companies in which the Treasury holds a majority stake.

The automaker and its onetime financial arm, the former GMAC Financial Services, were both rescued by the U.S. government during the financial crisis. The Treasury has invested $50 billion in GM and more than $17.2 billion in the GMAC; to recover those investments, the government needs both companies to prosper.

However, if executed, GM's plans could cut into the core lending business of GMAC -- now known as Ally Financial. That would hinder Ally's ability to repay its bailout money.

As negotiations between the automaker and Ally have unfolded, each company has sought support from the Obama administration. But the government has refused to take a position on the matter, administration officials said.

"Everyone tries to draw you into it. . . . For us, it's like choosing between your children," said an administration official who spoke on the condition of anonymity because of the sensitivity of the companies' talks.

After the Treasury acquired its stakes in GM and Chrysler as part of the automakers' restructuring, the administration developed principles for the government in its role as a shareholder. Essentially, officials said, the government would act in a hands-off manner, leaving the companies' boards free to make decisions.

Built-in tension

But given the friction built into the relationship between GM and Ally -- which provides a significant amount of financing to the automaker's customers -- administration officials said they had to monitor the ongoing discussions.

"We have to keep an eye on what's going on, for the sake of the taxpayer," one official said. "But this is exactly why the government shouldn't be in private-sector business."

Founded as a wholly owned subsidiary of GM, Ally is now a separate company that also works with Chrysler, providing financing for consumers seeking to buy cars and for auto dealers making wholesale purchases from manufacturers. It rebranded itself as Ally in May, jettisoning the GMAC name.

While GM and Ally executives say the relationship is strong, each company is uncomfortable relying on the other, according to sources familiar with their negotiations. In recent months, GM executives have said they are considering the development of an internal financing unit or other ways to arrange loans for consumers and auto dealers.

"There is a fundamental tension between the two because GMAC is trying to make money and GM is looking to GMAC to help them sell cars," said Jeremy Anwyl, chief executive of the automotive Web site "Those goals aren't necessarily the same. If it got really messy, I think Treasury would step in. Taxpayers have a vested interest in this relationship being successful."

GM executives say their company has a good relationship with Ally. "We believe the auto financing business will continue to evolve, and we will continue to assess our overall needs," GM spokeswoman Renee Rashid-Merem said.

"Our automotive financing operation is our core business, and clearly GM is a large part of that," said Gina Proia, an Ally spokeswoman. "Clearly we're in regular discussions with GM about how we can continue to support the sales of automobiles. They are an important customer to us."

Costly support for Ally

Propping up Ally has proved a sustained challenge for the Treasury, and its losses could be among the most significant in the government's Troubled Assets Relief Program. The company has required three infusions of government aid.

The government now owns 56 percent of the company, but the Office of Management and Budget has estimated that $6.3 billion of the $17.2 billion investment may never be returned.

The Congressional Oversight Panel, which is monitoring TARP, has faulted the government's rescue of GMAC.

"In light of the scale of these potential losses, the panel is deeply concerned that Treasury has not required GMAC to lay out a clear path to viability or a strategy for fully repaying taxpayers," the group said in a March report.

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