By Zachary A. Goldfarb
Washington Post Staff Writer
Thursday, December 30, 2010; 10:02 PM
The Treasury Department on Thursday announced changes to its investment in Ally Financial that may make it easier for the bailed-out lender to launch an initial public offering of stock and repay its government loans.
The Treasury said it plans to convert a portion of its ownership stake in Ally from preferred shares, which pay a dividend, to common shares, which have no dividend but are easier to sell on the open market. The government has received $2 billion in dividend payments from Ally.
Ally (which was previously known as GMAC and formerly the lending arm of General Motors) received $17.2 billion in government support during the financial crisis after suffering massive losses on home and auto loans. In exchange, Ally gave the Treasury a sizable ownership stake.
In converting its holdings, the government will forgo $500 million in annual dividend payments in hopes that the bank will follow in the footsteps of GM and net a nifty profit for taxpayers. It will then own 74 percent of Ally's common shares.
"Ally has made substantial progress in restructuring its operations and improving its financial performance during 2010, and this transaction will position us to begin to exit the investment," said Tim Massad, acting assistant secretary for financial stability.
Last month, GM went public, attracting significant interest from investors. But if Ally falters and delays a public offering, the transaction announced Thursday carries other risks.
For instance, the Treasury is more at risk under the new ownership arrangement if Ally falters, because preferred shares have a higher claim to the company's assets in a bankruptcy than common shares do.
Ally also faces a difficult economy, particularly a weak housing market, and increased competition as GM brings more of its auto loans in house. And Ally has faced recent legal challenges stemming from allegations of mishandling of foreclosure paperwork.
But Treasury officials see those risks as relatively remote, pointing out that Ally has been profitable for three straight quarters.
The plan announced Thursday does not involve any new taxpayer funds. Of the government's $17.2 billion investment in Ally, $8.2 billion will become common shares. An additional $5.9 billion will remain preferred shares, paying a 9 percent annual dividend. And $2.7 billion more are specialized securities that pay 8 percent.
Treasury officials said, before the change, that Ally's financial structure did not resemble the balance sheets of most banks, which are funded by a mix of debt, common shares, preferred shares and other instruments.
Now it should, making the company more attractive to investors, officials said.