Ally Financial Inc., the auto lender majority owned by U.S. taxpayers, has received conditional approval from the U.S. Treasury Department on plans to put its struggling mortgage servicing and lending unit into bankruptcy, Bloomberg reported, citing an anonymous Obama administration official.
If the directors at Ally and Residential Capital think filing for bankruptcy is the best choice for them, Treasury officials will support that decision, Bloomberg said, citing the source who asked for anonymity because the arrangements have not been made public. The approval is conditioned on a review of the final terms, the person said.
When General Motors Company (NYSE: GM) was bailed out in 2009, the government injected $17 billion of taxpayers' money into GM's troubled finance arm, GMAC, which is now known as Ally Financials. While taxpayers today own roughly a quarter of G.M., the still own 74 percent of Ally.
Excluding one-time charges, GM reported solid first-quarter earnings of $1.6 billion, or 93 cents a share last week, topping analysts' forecast of $1.4 billion, or 85 cents per share.
However, Ally has been having a rough time. While the company's overall numbers are improving, its mortgage unit, ResCap, is sinking into deeper trouble. And the clock is ticking for ResCap.
ResCap missed a $20 million debt payment in mid-April and it faces about $300 million in debt payments coming due between May 15 and June 1, which put more pressure on Ally to make a decision on ResCap's fate.
Separately, Ally said ResCap losses tied to litigation and demands to repurchase soured mortgages could cost up to $4 billion more than existing amounts it has set aside for such matters.
As a Result of ResCap's current financial position, we believe ResCap's ability to pay for any such losses is very limited, Ally said in its quarterly report filed with the Securities and Exchange Commission.
Ally, which is based in Detroit, said it could lose up to $1.25 billion if ResCap files for bankruptcy protection.