Ally Financial: Fighting the tide

GMAC Financial, now Ally Financial, is a wonderful example of a company who is making it's best effort to stabilize after a large US bailout.

Ally Financial, with liabilities of over $200B and a significant portion with dubious quality at the time of reckoning, received a total $20B infusion from the US Treasury in March of 2010 through the conversion preferred shares into common equity. With that, the Treasury essentially recapitalized the whole company and at the end of Q1 2010 had $14.8B in cash and cash equivalents. With stimulus across the world, Ally has been able to write up assets and unload risky assets from their balance sheet.

To that end, Ally Financial sold off it's European mortgage assets (1) but has continued exposure to Europe in auto loans and other areas.

This month, Ally Financial has attempted to securitize mortgage securities again by offering a senior not on a $166m mortgage pool with %25 credit enhancement.(2) This means that the pool of low LTV loans and prime borrowers can withstand 25% losses before the senior bond is at risk. The senior note was graded A by Moody's. The auction will not occur until next month.

Overall, Ally Financial is making great strides to reduce risk and return tradtional banking practices. It is still yet to be determined whether the company can stand on it's own. But due to the critical function the company performs in supporting the American auto industry, the implicit support from the US government will provide significant credit protection for all investors.

The author is long GKM until maturity.

(1)"Residential Capital (ResCap), the mortgage subsidiary of GMAC Financial Services, is selling its European mortgage assets and businesses to affiliates of alternative asset manager Fortress Investment Group (FIG: 3.37 -3.44%).

The transaction moves 10% of ResCap's total assets as of year-end 2009 — and 40% of total assets when adjusted for the required Financial Accounting Standard (FAS) 167 treatment of off-balance-sheet securitization — into Fortress ownership.

ResCap said the assets in the transaction are valued at levels established in Q4 2009, and it expects no material gain or loss from the transaction. With this deal, GMAC is essential out of the European market."

(2) "Moody's Investors Service assigned provisional ratings to a senior note issued by GMACM Mortgage Loan Trust Series 2010-1, a new residential mortgage-backed deal.
The securitization is sponsored by General Motors Acceptance Corp. Mortgage (GMACM). According to a source close to the deal, GMACM Mortgage Loan Trust 2010-1 priced on Tuesday.

Moody's has assigned a provisional single-A 2 status to one senior note with an original stated value of $166.35m. This note is supported by a subordinate certificate with an original stated value of $55.45m, which Moody's did not rate.

The transaction is backed by 1,981 loans with a combined unpaid principal balance of $222m originated and serviced by GMAC. Loans insured by the Federal Housing Administration (FHA) make up 97% of the pool, with the remainder insured by the US Department of Veterans Affairs (VA)."