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2nd Ally Financial Swings to 4th Quarter Profit On Tax Benefit, Mortgage Moves

Published Wednesday, 6th February 2013 01:03 am - © 2013 Dow Jones

--Company posted a profit of $1.45 billion profit because of improved performance and tax benefits

--CEO: Company will fight ResCap creditors over settlement

--Treasury Department has said it's weighing its options for exiting its investment in Ally

(Updated with response from the Treasury Department in paragraph 15.)

By Andrew R. Johnson

Ally Financial Inc., the government-owned auto lender formerly known as GMAC, swung to a fourth-quarter profit on tax-related benefits, moves distancing itself from the mortgage business and improving performance in its core auto-financing unit.

The company swung to an overall profit of $1.45 billion from a loss of $206 million a year earlier. Core pretax income, which reflects continuing operations before taxes and certain expenses, was $19 million compared with a loss of $172 million a year earlier.

The Detroit-based company has been working to shed noncore assets and sever ties with its mortgage subsidiary, Residential Capital, so it can focus on its U.S. auto-lending franchise and online banking unit.

Ally announced deals last year to sell businesses in Mexico, Canada, Europe, Latin America and China--transactions that ultimately could raise $9.2 billion in proceeds--in an effort to get out from under government ownership. In May, ResCap filed for Chapter 11 bankruptcy, a move that could eliminate for Ally billions of dollars of liabilities related to soured mortgage securities.

That move has also come with new challenges, though, as some bondholders and insurers fight Ally over how much the company is offering to pay to ResCap's estate to settle outstanding mortgage claims. Ally has offered to contribute $750 million to ResCap in return from a release from legal liabilities, though some of the mortgage subsidiary's creditors argue Ally should be on the hook for a larger amount.

The creditors say Ally stripped ResCap of value assets prior to the mortgage unit's bankruptcy and has essentially controlled ResCap to its benefit, despite Ally's claims that the two companies were operated as separate entities.

Ally Chief Executive Michael Carpenter vowed Tuesday to fight such critics.

"We are extremely confident that such claims are completely without merit," Mr. Carpenter said during a conference call, adding that Ally won't "be held to a ransom payment" by ResCap creditors and will "go the litigation route" if necessary.

Overall, steps taken last year have already put Ally in a stronger financial position, executives said Tuesday.

The company is seeking to slim down in hopes of paying back the U.S. Treasury, which owns a 74% stake after injecting $17.2 billion in federal funds in the company during the financial crisis.

Ally has said it plans to use proceeds from sales of its international businesses to pay back the government. Last week, Ally said it closed on one deal--the sale of its Canadian auto lending and deposit businesses to Royal Bank of Canada (RY)--that generated $4.1 billion for Ally.

The company expects sales of a Mexican insurance business to Swiss insurer Ace Ltd. (ACE) and European, Latin America and China operations to GM to close this year.

A chief goal on Ally's to-do list this year is repaying the Treasury Department, Mr. Carpenter said. The company is currently "working on a deal" to address "in the near future" mandatorily convertible preferred stock, or MCP, in Ally held by the Treasury. The Treasury in 2010 converted $5.5 billion of Ally preferred stock into common stock, increasing its stake in the company to 74%. The Treasury currently holds $5.9 billion of convertible preferred stock.

After proceeds from international sales are collected, its "first priority" will be to "deal with the MCP," Mr. Carpenter added, noting that such an action would involve input with the Federal Reserve.

A spokesman for the Treasury Department declined to comment on Mr. Carpenter's statement, referring to a recent letter from the agency in which it said it was weighing options to exit its investment in Ally. Options include public or private sales of the company's stock as well as additional asset sales, according to the letter sent to the Special Inspector General for the Troubled Asset Relief Program, the government's bailout program.

Ally had planned to do an initial public offering in 2011 as a way of repaying its bailout, but that plan was scrapped as mortgage woes tied to ResCap mounted.

The auto lender's fourth-quarter profit was affected by several charges, including $94 million in pension-related expenses, $148 million prepayment of Federal Home Loan Bank debt and $46 million in legal fees and other costs tied to ResCap's bankruptcy and international business sales. It also recorded a $1.3 billion release of a tax valuation allowance.

Ally said profit in its auto-finance business increased to $371 million from $285 million. It posted $8.9 billion in U.S. auto-loan originations, down from $9.2 billion, though its leasing volume increased to $2.1 billion from $1.3 billion.

Ally has been trying to improve its share of leasing volume as well as loans for used-car purchases to diversify beyond General Motors Co.(GM) and Chrysler Group LLC, its two largest customers. Ally's relationship with both auto manufacturers has been in flux as contracts to provide key financing services face changes in the coming months.

Chrysler notified Ally last year that it planned to let lapse a financing agreement the companies have after it expires April 1, 2013. The agreement covers so-called "subvented loans," or consumer loans that are offered at special rates to customers and subsidized by Chrysler.

Ally also has a special arrangement with GM that is set to expire at year end, though the lender has stressed that it already competes for business with both manufacturers against other banks that also provide auto financing through the manufacturers' dealers.

The company noted its reliance on subvented loans has declined substantially, thanks to deals struck with other manufacturers and efforts to increase lease and used loan originations. Subvented loans through GM and Chrysler accounted for about 19% of Ally's U.S. loan originations in the fourth quarter, down from about 27% a year earlier.

Aside from international sales, Ally is also in the process of selling a $122 billion mortgage-servicing portfolio held at its bank subsidiary. Ocwen Financial Corp. (OCN) and another company are bidding on the portfolio, a person familiar with the matter said last week.

Ocwen and Walter Investment Management Corp. (WAC) last year won the mortgage-servicing assets of ResCap as part of a bankruptcy auction. That deal will generate $3 billion for ResCap's estate, while a separate auction of home loans won by Berkshire Hathaway Inc. (BRKA, BRKB) will generate $1.5 billion for the mortgage unit's creditors.

Write to Andrew R. Johnson at

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