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The Circle Bastiat

Ally bank considers throwing mortgage unit into bankruptcy

Ally, which become a bank  in 2008 with the help of bailout money, is considering putting ResCap, its residential mortgage unit, into bankruptcy. What does this mean for the bank as a whole?

By Douglas FrenchGuest blogger / November 10, 2011

A screen shot of the Ally Bank logo, from ally.com. The bank is considering put its mortgage unit up for bankruptcy, raising questions about the financial health of the bank as a whole

allybank.com

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[Editor's note: The story headline and summary were corrected to reflect that Ally was considering the move.]

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Ally, that bank with the annoying or cute commercials, depending upon your perspective, is considering throwing the company’s residential mortgage unit (ResCap) into bankruptcy, according to the Wall Street Journal.

ResCap has lost over half a billion dollars over the past two quarters and has $2.3 billion in debt coming due between now and the end of 2013, nearly four times the cash the company has on hand as of September 30th.

Some may remember that Ally is the old GMAC, which was allowed to become a bank in December of 2008 and tap $17 billion in bailout money. As the NYT reported at the time, becoming a bank was “a crucial step that will help ensure the survival of the company.”

Some view a ResCap BK filing as unlikely. “Legal observers warn that the gambit is seen as a last resort for a good reason, in part because bankruptcy can be unpredictable.” “There’s a reputational hazard,” said Harvey Miller, a veteran bankruptcy lawyer at Weil, Gotshal & Manges. “Once you put a subsidiary into bankruptcy, people start to wonder: How safe is the parent? How safe are the other affiliates?”

Meanwhile, the work of Ran Duchin and Denis Sosyura is highlighted on Zero Hedge. The researchers from the University of Michigan looked at a sample of 529 public firms that were eligible for the government’s Capital Purchase Program, a key part of TARP.

What Duchin and Sosyura found was that banks at signed up for CPP took on more risk than banks that didn’t.

“Overall, the analysis of banks’ investment portfolios suggests that CPP participants actively increased their risk exposure after being approved for federal capital. In particular, CPP recipients invested capital in riskier asset classes, tilted portfolios to higher-yielding securities, and engaged in more speculative trading, compared to nonrecipient banks with similar financial characteristics.”

More bailing out of the bailed out dead ahead.

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