U.S. Nudging Ally Toward Breakup, Sale

According to Bloomberg News, the U.S. Treasury Department is urging Ally Financial to split into at least two pieces, people familiar with the topic told Bloomberg. One part would be Ally’s auto finance unit and the other would be its online bank. Investor Elliott Management Corp. also recommends a sale, according to a letter sent to the board by Elliott and obtained by Bloomberg News.

Treasury officials are telling Ally executives, directors, and financial advisers that an IPO is unlikely soon because of the company’s high cost of capital relative to other banks, the potential bankruptcy of its mortgage unit, and its recent performance in Federal Reserve stress tests, said the people, who asked not to be identified because the talks are private.

The Fed’s stress tests released March 13 found Ally had some of the smallest capital cushions against losses among 19 of the largest U.S. lenders.

The firm may lose its preferred lender status with automaker Chrysler Group LLC, which is seeking banks like Wells Fargo & Co. and Santander Holdings USA Inc. to potentially replace Ally, people with knowledge of the matter said last month. Ally will also most likely put the Residential Capital mortgage unit into bankruptcy in the next few weeks and sell some assets in a court-supervised sale.

Ally Chief Executive Michael Carpenter, 65, and the company’s board have resisted the Treasury’s call for a split, the people said, adding that the department is reluctant to press Carpenter too hard for a sale out of concern about appearing as a heavy-handed owner. The Treasury owns 74% of Ally, the Detroit- based former finance arm of General Motors Corp.

“We’re supportive of management and continue to work closely with them,” the Treasury said in an emailed statement. Matt Anderson, a department spokesman, declined to comment on Treasury’s view of the IPO or the success of any potential sale.

“Every action the company has taken and contemplated has been with the objective to fulfill our mission to support the auto recovery and fully repay the taxpayer’s investment,” Gina Proia, an Ally spokeswoman, said in an emailed statement. “This is what will guide our decisions going forward.”

While no official Ally sales process has begun, the Treasury Department’s views have been shared with Ally senior executives, directors, and a number of the financial and legal advisers brought on to help pursue an IPO, the people said.

The Treasury has suggested Ally consider selling its captive-finance business to GM, said two of these people, with the rest sold to a traditional bank. GM and other companies aren’t interested in buying any of Ally until it resolves ResCap’s status, said another person familiar with the matter.

The U.S. determined that Ally, formerly known as GMAC, was crucial to the survival of the auto industry during the financial crisis in 2008 and 2009 and provided multiple bailouts in return for a 74% stake.

Last year, when Ally was close to a public offering, it considered a joint bid from GM and Toronto-Dominion Bank, Canada’s second-largest lender, until those discussions fizzled, a person familiar with the matter said last month.

Ally has financed about 6.7 million GM or Chrysler vehicles for dealers since 2009 and another 2.4 million for consumers, Proia said. Ally has so far paid $5.4 billion to the Treasury.