Troubled Asset Relief Program: Government's Exposure to Ally Financial Lessens as Treasury's Ownership Share Declines
Published: 2014-08-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: As part of its Automotive Industry Financing Program, funded through the Troubled Asset Relief Program (TARP), Treasury provided $17.2 billion of assistance to Ally Financial (formerly known as GMAC). Ally Financial is a large financial holding company, the primary business of which is auto financing.
TARP's authorizing legislation mandates that GAO report every 60 days on TARP activities. This report examines (1) the status of Treasury's investments in Ally Financial and its efforts to wind down those investments and (2) the financial condition of Ally Financial.
To address these issues, GAO reviewed and analyzed available industry, financial, and regulatory data from 2009 through June 2014. GAO also reviewed rating agency analyses, Treasury reports and documentation detailing Treasury's investments in Ally Financial and its divestments from the company, as well as Ally Financial's financial filings and reports. GAO also interviewed officials from the Federal Deposit Insurance Corporation (FDIC), Federal Reserve, and Treasury, and representatives from Ally Financial.
GAO provided a draft of this report to FDIC, the Federal Reserve, Treasury, and Ally Financial. Treasury generally concurred with GAO's findings. Ally Financial provided technical comments, which GAO has incorporated, as appropriate. FDIC and the Federal Reserve did not provide comments.
GAO makes no recommendations in this report.
section_title: What GAO Found
paragraphs: The Department of the Treasury (Treasury) reduced its ownership stake in Ally Financial Inc. (Ally Financial) from 74 percent in October 2013, to 16 percent as of June 30, 2014. As shown in the figure below, the pace of Treasury's reduction in its ownership share of Ally Financial accelerated in 2013 and corresponds with two key events. First, in November 2013, the Board of Governors of the Federal Reserve System (Federal Reserve) did not object to Ally Financial's resubmitted 2013 capital plan, which allowed Ally Financial to repurchase preferred shares from Treasury and complete a private placement of common shares. Second, in December 2013 the bankruptcy proceedings of Ally Financial's mortgage subsidiary, Residential Capital LLC (ResCap), were substantially resolved. The confirmed Chapter 11 plan broadly released Ally Financial from any and all legal claims by ResCap and, subject to certain exceptions, all other third parties, in exchange for $2.1 billion in cash from Ally Financial and its insurers. As of June 30, 2014, Treasury had received $17.8 billion in sales proceeds and interest and dividend payments on its total assistance to Ally Financial of $17.2 billion.
Ally Financial's financial condition has continued to stabilize in late 2013 and early 2014 as illustrated by multiple capital, profitability, and liquidity measures. For example, Ally Financial's capital ratios have remained above regulatory minimum levels since 2009, which indicates that it is in a better position to absorb financial losses. In addition, the company raised significant levels of common equity through private and public share offerings. According to recent credit rating agency analyses, Ally Financial is competitive in automotive financing, particularly in the floor-plan business segment, which focuses on dealer financing. However, analysts reported that the company faces potential competitive challenges, such as the loss of certain exclusive relationships with General Motors Company and Chrysler Group LLC.

section_title: Letter
paragraphs: In 2008 and 2009, the Department of the Treasury (Treasury) provided  significant support to the automotive industry—including automotive  finance companies—after deteriorating economic conditions resulted in a  dramatic decline in automobile sales and significant financial losses in the  industry. Through the Automotive Industry Financing Program (AIFP)  under the Troubled Asset Relief Program (TARP), Treasury provided  $17.2 billion of assistance to GMAC LLC (General Motors Acceptance  Corporation), a financial services company that provided consumer  financing for vehicle purchases and dealer financing for inventory. In  2010, GMAC became Ally Financial Inc. (Ally Financial). As a result of its  actions to provide assistance to the company, the federal government  had an almost 74 percent interest in Ally Financial in 2010.
The Emergency Economic Stabilization Act of 2008 (EESA) provides  GAO with broad oversight authorities for actions taken under TARP,  including assistance under AIFP.  We have analyzed and monitored  Treasury’s activities in implementing TARP in a number of reports. More  specifically, in our October 2013 report, we analyzed Treasury’s  assistance to Ally Financial and its efforts to wind down its investments.This report examines (1) the status of Treasury’s investments in Ally  Financial as of June 30, 2014, and its efforts to wind down those  investments and (2) the financial condition of Ally Financial through March  31, 2014.
To determine the status of Treasury’s investments in Ally Financial, we  reviewed Treasury’s monthly reports to Congress detailing the levels of  the investments made in the company, including the number of shares  owned by Treasury, and Treasury’s daily transactions reports. To  analyze Treasury’s efforts to wind down those investments, we reviewed  Treasury documentation relating to its exit from Ally Financial. We  reviewed Ally Financial regulatory filings, including Securities and  Exchange Commission (SEC) filings; and publicly available reports from  the Board of Governors of the Federal Reserve System (Federal  Reserve) on its 2014 stress tests of bank holding companies and 2014  Comprehensive Capital Analysis and Review (CCAR). We also  interviewed officials from Treasury, Federal Reserve, Federal Deposit  Insurance Corporation (FDIC), and representatives from Ally Financial. To  assess the financial condition of Ally Financial, we measured the  institution’s capital ratios, net income, net interest spread margin, return  on assets, nonperforming asset ratio, liquidity ratio, bank deposits, and  operating cash flow, generally from 2009 through the first quarter (March  31) of 2014. We obtained these data from SNL Financial, a provider of  financial information. We also reviewed reports by several credit rating  agencies on how they rate Ally Financial’s financial strength. We  assessed the completeness and accuracy of all data used in this report  and determined they were sufficiently reliable for the purposes of this  report. For a more detailed discussion of the scope and methodology, see  appendix I.
We conducted this performance audit from March 2014 to August 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings based  on our audit objectives.
subsections: section_title: Background
paragraphs: Ally Financial is one of the country’s largest financial holding companies,  with total assets of $148.5 billion as of March 31, 2014. Its primary line of  business is automotive financing—both consumer financing and leasing  and dealer floor-plan financing. Ally Financial (when it was known as  GMAC) formerly served as General Motors Company’s (GM) captive  automotive finance company. GMAC’s subsidiaries offered financial  services such as auto insurance and residential mortgages. In 2006,  Cerberus Capital Management purchased 51 percent of the company  (GM retained 49 percent). As the housing market declined in the late  2000s, the previously profitable GMAC mortgage business unit began  producing significant losses. For example, the company’s Residential  Capital LLC (ResCap) subsidiary lost approximately $17 billion from 2007  through 2009. During the same period, U.S. automobile sales dropped  from 16.4 million to 10.4 million cars and light trucks, negatively affecting  the company’s core automobile financing business. On May 14, 2012,  ResCap and certain of its wholly owned direct and indirect subsidiaries  filed voluntary petitions for relief under Chapter 11 of the Bankruptcy  Code in the U.S. Bankruptcy Court for the Southern District of New York  (Bankruptcy Court). The bankruptcy created uncertainties about Ally  Financial’s financial obligations.
subsections: section_title: Regulation and Supervision of Ally Financial
paragraphs: As a financial holding company, Ally Financial is regulated and  supervised by the Federal Reserve. Under the Dodd-Frank Act and  implementing regulations, the Federal Reserve conducts an annual  supervisory stress test of bank holding companies with $50 billion or more  in total consolidated assets to evaluate whether the companies have  sufficient capital to absorb losses resulting from adverse economic  conditions. For the stress tests, the Federal Reserve projects revenue,  expenses, losses, and resulting post-test capital levels, and regulatory  capital ratios, including the tier 1 capital ratio and the tier 1 common ratio,  under three economic scenarios (baseline, adverse, and severely  adverse).holding companies to conduct an annual company-run stress test using  the same macroeconomic scenarios that the Federal Reserve uses to  conduct its supervisory stress test.
In addition, the Federal Reserve requires the same bank  The Federal Reserve also conducts an annual exercise, CCAR, to help  ensure that large bank holding companies have robust, forward-looking  capital planning processes that take into account their unique risks and  set aside sufficient capital to operate during periods of economic and  financial stress. The Federal Reserve evaluates capital adequacy;  internal processes for assessing capital adequacy; plans for capital  distributions, such as dividend payments or stock repurchases; and other  actions that affect capital.
The Federal Reserve may object to a capital plan because of significant  deficiencies in the planning process or because one or more capital ratios  would fall below required levels under the assumption of stress and  planned distributions. If the Federal Reserve objects to a proposed  capital plan, the bank holding company is permitted to make capital  distributions only if the Federal Reserve indicates in writing that it does  not object. The company also must resubmit the capital plan after  remediating the deficiencies.
In March 2013, the Federal Reserve reported the results of its 2013  supervisory stress test and of the CCAR exercise.
The Federal Reserve  found that Ally Financial’s tier 1 common capital ratio fell below the  required 5 percent under the severely adverse scenario. Ally Financial  was the only one of the 18 bank holding companies tested that fell below  this required level. The Federal Reserve objected to Ally Financial’s  capital plan during the 2013 CCAR. According to the Federal Reserve,  Ally Financial’s capital ratios did not meet the required minimums under  the proposed capital plan. Specifically, the Federal Reserve reported that  under stress conditions, Ally Financial’s plan resulted in a tier 1 common  ratio of 1.52 percent, which is below the required level of 5 percent under  the capital plan rule. According to the Federal Reserve CCAR results  paper, these results assumed that Ally Financial remained subject to  contingent liabilities associated with ResCap. The Federal Reserve  required Ally Financial to resubmit its capital plan, which Ally Financial did  in September 2013.
Ally Financial owns Ally Bank, an Internet- and telephone-based bank.  Ally Bank is a state-chartered nonmember bank supervised by FDIC and  the Utah Department of Financial Institutions. Ally Bank had more than  $55.9 billion in total deposits as of March 31, 2014.
section_title: Treasury Assistance through TARP
paragraphs: To help stabilize the automotive industry and avoid further economic  disruptions, Treasury disbursed $79.7 billion through AIFP from  December 2008 through June 2009. The assistance was used to support  two automakers, Chrysler and GM, and their automotive finance  companies, Chrysler Financial and GMAC.outlined guiding principles for the investments, including   In July 2009, Treasury exiting its investments as soon as practicable in a timely and orderly  manner that minimizes financial market and economic impact; protecting taxpayer investment and maximizing overall investment  returns within competing constraints;  improving the strength and viability of GM and Chrysler so that they  could contribute to economic growth and jobs without government  involvement; and managing its ownership stake in a hands-off, commercial manner,  including voting its shares only on core governance issues, such as  the selection of a company’s board of directors and major corporation  events or transactions.
In late December 2008, as a part of AIFP, Treasury agreed to purchase  $5 billion in senior preferred equity from GMAC and received an  additional $250 million in preferred shares through warrants that Treasury  exercised immediately.
Treasury subsequently provided GMAC with additional assistance  through TARP.
In May 2009, Treasury purchased $7.5 billion of mandatory  convertible preferred shares from GMAC. Also, in May 2009, Treasury  exercised its option to exchange an $884 million loan to GM for a 35.4  percent common ownership share in GMAC.
In December 2009, Treasury made additional investments in Ally  Financial—$2.5 billion of trust preferred securities and approximately  $1.3 billion of mandatory convertible preferred shares.December 2009, Treasury converted $3 billion of existing mandatory  convertible preferred shares into common stock, increasing its  common equity ownership from 35 to 56.3 percent.
In December 2010, Treasury converted $5.5 billion of existing  mandatory convertible preferred shares into common stock,  increasing its common equity ownership to approximately 74 percent  of Ally Financial.
Ally Financial announced a plan in 2012 to repurchase Treasury’s  mandatory convertible preferred shares, worth $5.9 billion, to reduce  Treasury’s investment in the company. However, this plan stalled after  the Federal Reserve objected to Ally Financial’s initial 2013 capital plan  submission, partly because of uncertainty about the company’s  obligations associated with the ResCap bankruptcy.
section_title: Resolution of Major Regulatory and Legal Issues Was Key to Treasury Reducing Its Ownership Share in Ally Financial
paragraphs: Two key regulatory and legal developments allowed Ally Financial and  Treasury to move ahead with plans to reduce Treasury’s investments in  the company in late 2013. First, in November 2013, the Federal Reserve  did not object to Ally Financial’s resubmitted capital plan. Second, in  December 2013, the bankruptcy proceedings of Ally Financial’s mortgage  subsidiary, ResCap, were substantially resolved. Following the resolution  of these issues, Treasury significantly reduced its ownership stake in Ally  Financial—primarily through sales of common stock—from 74 to 16  percent as of June 30, 2014. Also as of June 30, 2014, Treasury had  received $17.8 billion (including interest and dividends), which exceeds  the total Treasury assistance to the company of $17.2 billion.
subsections: section_title: Resolution of Regulatory and Legal Issues Removed Uncertainty about Ally Financial
paragraphs: Two key regulatory and legal developments in the second half of 2013  helped Treasury accelerate the wind-down of its investments in Ally  Financial.
Federal Reserve did not object to Ally Financial’s resubmitted  capital plan: In November 2013 Ally Financial received a  “nonobjection” from the Federal Reserve to its resubmitted 2013  CCAR capital plan, which enabled Ally Financial to move forward on  its repurchase of $5.9 billion of the remaining Treasury-owned  mandatory convertible preferred shares. As we previously reported,  Treasury and Ally Financial agreed in August 2013 that Ally would  repurchase the mandatory convertible preferred shares, conditioned  on receiving a nonobjection on the resubmitted capital plan and the  closing of a private placement securities transaction. Ally Financial  resubmitted its plan in September 2013 and the Federal Reserve  approved it on November 15, 2013. The Federal Reserve  nonobjection enabled Ally Financial to complete the private placement  of common shares valued at $1.3 billion announced in August 2013.  The private placement, intended in part to help finance the repurchase  of the $5.9 billion remaining Treasury-owned mandatory convertible  preferred shares, was completed in November 2013, as was the  repurchase of the Treasury shares. More recently, Ally Financial  received a nonobjection from the Federal Reserve in March 2014 on  its annual capital plan.
Completion of the ResCap bankruptcy: In December 2013, the  bankruptcy of Ally Financial’s ResCap subsidiary was substantially  resolved. The Bankruptcy Court entered an order confirming a  bankruptcy plan on December 11, 2013, which became effective on  December 17, 2013. The final bankruptcy agreement included a  settlement, which the bankruptcy court judge had approved in June  2013, releasing Ally Financial from any and all legal claims by  ResCap and, subject to certain exceptions, all other third parties, in  exchange for $2.1 billion in cash from Ally Financial and its insurers.
According to Ally Financial, its mortgage operations were a significant  portion of its operations and were conducted primarily through  ResCap. With the completion of the ResCap settlement, Ally Financial  largely exited the mortgage origination and servicing business.
Pub. L. No. 84-511, § 4(a)(2), 70 Stat. 133, 135 (codified at 12 U.S.C. § 1843(a)(2)).
Ally Financial settled allegations of violations of the Equal Credit  Opportunity Act by paying $98 million relating to the execution of consent  orders issued by the Department of Justice and the Consumer Financial  Protection Bureau.
section_title: Since December 2013, Treasury’s Ownership Share in Ally Financial Has Declined at an Accelerated Pace
paragraphs: After the legal and regulatory developments in late 2013, the pace of  Treasury’s reduction in its ownership share of Ally Financial accelerated.  From December 2013 through June 2014, Treasury reduced its  ownership share of Ally Financial by almost 80 percent (see fig. 1). In  November 2013, Ally Financial made cash payments totaling $5.9 billion  to repurchase all remaining mandatory convertible preferred shares outstanding and terminate an existing share adjustment provision.Additionally, Ally Financial issued $1.3 billion of common equity to third- party investors, reducing Treasury’s ownership share from 74 to 63  percent. In January 2014, Treasury completed a private placement of Ally  Financial common stock valued at approximately $3 billion, further  reducing Treasury’s ownership share of Ally Financial to 37 percent.  According to Treasury, the decision to undertake a private placement at  that time was based on market conditions, as well as information  Treasury received about increasing investor interest from the underwriter  of two previous private placements of Ally Financial shares—the $1.3  billion private placement Ally Financial completed in November 2013 and  an approximate $900 million private offering by GM of its remaining Ally  Financial stock in December 2013. These transactions contributed to  building an investor base for the stock, according to Treasury and Ally  Financial.
Treasury said the positive results of the March 2014 Federal Reserve  stress test and CCAR contributed to the decision to further reduce its  ownership share. The day after the release of the CCAR results in March  2014, Treasury announced that it would sell Ally Financial common stock  in an initial public offering (IPO) and in April 2014, completed the IPO of  95 million Treasury shares at $25 per share. The $2.4 billion sale reduced  Treasury’s ownership share to approximately 17 percent. Following the  IPO, Ally Financial became a publicly held company. In May 2014,  Treasury received $181 million from the sale of additional shares after  underwriters exercised the option to purchase an additional 7 million  shares from Treasury at the IPO price. This additional sale reduced  Treasury’s ownership share to approximately 16 percent. As of June 30,  2014, Treasury had received $17.8 billion in sales proceeds and interest  and dividend payments on its total assistance to Ally Financial of $17.2  billion.
Based on the stock prices, as of June 30, 2014, Treasury’s remaining  investment in Ally Financial, which consists of common stock, was valued  at almost $1.8 billion. Treasury stated that it would like to divest its  ownership stake in Ally Financial in a manner that balances the speed of  recovery with maximizing returns for taxpayers. Treasury officials told us  that Treasury does not have a specific date by which it intends to fully  divest from the company, but that its decision on timing will be based on  market conditions. These market conditions, in part, will reflect Ally  Financial’s financial performance.
section_title: Ally Financial’s Business Structure Has Been Evolving and Its Financial Condition Has Continued to Stabilize
paragraphs: Since 2013, Ally Financial has continued its evolution into a publicly held,  monoline finance company in the automotive sector with an Internet bank.  Ally Financial’s financial condition continued to stabilize in late 2013 and  early 2014 and the company raised significant levels of common equity  through private and public share offerings. According to recent rating  agency analyses, Ally Financial is competitive in automotive financing,  particularly in the floor-plan business segment, but faces potential  competitive challenges, such as its reliance on GM and Chrysler auto  financing relationships.
subsections: section_title: Ally Financial’s Evolving Business Structure
paragraphs: Ally Financial’s business structure has been simplified and clarified over  the past year, according to rating agency analyses and federal regulatory  officials. Specifically, the completion of the ResCap bankruptcy marked  the company’s exit from the mortgage origination and servicing business.  Ally Financial became a financial holding company in December 2013,  which, according to the company, enabled it to retain its insurance and  auction lines of business and maintain its full suite of products for dealers.  Ally Financial also completed sales of its European and Latin American  automotive finance operations to GM Financial, GM’s captive financing   Ally  company, and its Canadian operations to Royal Bank of Canada.Financial expects to complete GM Financial’s acquisition of its remaining  international operation—its China joint venture, in which the company is a  40 percent owner—in 2014, subject to government approvals in China.
section_title: Ally Financial’s Financial Condition Has Continued to Stabilize
paragraphs: Since our last review in 2013, Ally Financial’s financial performance has  continued to stabilize as illustrated by multiple capital, profitability, and  liquidity measures. Taking into account the resolution of ResCap, the sale  of international operations, and other factors, the three largest credit  rating agencies upgraded Ally Financial’s ratings, although the ratings  remain below investment grade.
subsections: section_title: Capital Position
paragraphs: Ally Financial’s capital position has remained the same or improved since  2009—the year it became subject to regulatory and reporting  requirements following its conversion to a bank holding company in  December 2008. Capital can be measured in several ways, but we  focused on tier 1 capital because it is currently the strongest form of  capital (see table 1). We examined Ally Financial’s tier 1 capital ratio and  tier 1 leverage ratio and compared them to minimums required under the  Federal Reserve’s capital adequacy guidelines for bank holding  companies. We also examined Ally Financial’s tier 1 common ratio. The  Federal Reserve has long held the view that bank holding companies  generally should operate with capital positions well above the minimum  regulatory capital ratios, with the amount of capital held commensurate  with a bank holding company’s risk profile.
Tier 1 capital and tier 1 common capital ratios: Higher tier 1 capital  and common capital ratios may indicate that a bank holding company  is in a better position to absorb financial losses. A tier 1 capital ratio  measures tier 1 capital as a percentage of risk-weighted assets. As  shown in table 1, Ally Financial’s tier 1 capital ratio increased from  2009 to 2010 but has declined slightly since 2011. Federal Reserve  Capital Adequacy Guidelines require bank holding companies to have  a tier 1 risk-based capital ratio of at least 4 percent. Ally Financial’s tier 1 capital ratio exceeded the required minimum each year from  2009 through 2013. In 2013, Ally Financial reported that the tier 1  capital ratio declined, in part, because of the repurchase of Treasury’s  mandatory convertible preferred shares, which qualified as tier 1  capital. A tier 1 common capital ratio measures common capital—that  is, the common equity component of tier 1 capital as a share of risk- weighted assets. Ally Financial’s tier 1 common ratio has increased   from 4.85 percent at the end of 2009 to 8.84 percent at the end of  2013.
Tier 1 leverage ratio: A tier 1 leverage ratio shows the relationship  between a banking organization’s core capital and total assets. The  tier 1 leverage ratio is calculated by dividing the tier 1 capital by the  firm’s average total consolidated assets. Generally, a larger tier 1  leverage ratio indicates that a company is less risky because it has  more equity to absorb losses in the value of its assets. As shown in  table 1, Ally Financial’s leverage ratio has been reduced by 20  percent since 2009 but remains well above the regulatory minimum  guideline of 3 or 4 percent, depending on the bank holding company’s  composite rating.
12 C.F.R. 225, Appendix D, § II. profitability, including net income (loss), net interest spread, return on  assets, and nonperforming asset ratio.
Net income (loss): Ally Financial suffered a net loss in 2009 of $10  billion, but has reported net income for 4 of the last 5 years. As shown  in figure 2, the 2009 loss was driven by substantial losses in its  mortgage business operating unit. Ally Financial reported net income  of $361 million in 2013, down from net income of $1.2 billion in 2012.  The company attributed the decline to circumstances including a tax  valuation adjustment of $1 billion in 2012; the 2013 payment of $1.4  billion as part of the ResCap settlement agreement; and the $98  million payment in connection with the Department of Justice and  Consumer Financial Protection Bureau consent orders.
Net interest spread: The net interest spread is the difference  between the average rate on total interest-earning assets and the  average rate on total interest-bearing liabilities, excluding  discontinued operations for the period. In general, the larger the  spread, the more a company is earning. Ally Financial’s net interest  spread increased from a reported 0.31 percent at the end of 2009 to  1.75 percent at the end of 2013, meaning that Ally Financial is earning  more interest on its assets than it is paying interest on its liabilities  (see table 2).
Return on assets (ROA): ROA is calculated by dividing a company’s  net income by its total assets. It is an indication of how profitable a  company is relative to its total assets and gives an idea of  management’s efficiency in using its assets to generate earnings. A  higher ROA suggests that a company is using its assets efficiently.  Ally Financial reported improved ROA from 2009 to 2013, with a  reported negative 5.81 percent ROA for 2009 and a positive 0.23  percent in 2013.
Nonperforming asset ratio: This ratio measures asset quality by  dividing the value of nonperforming assets by the value of total  assets. The lower the ratio, the fewer poorly performing assets a  company holds. Ally Financial’s nonperforming asset ratio fell from  4.36 percent in 2009 to 1.19 percent in 2013 (see table 2).
Ally Financial’s liquidity position generally has stabilized since 2009. To  examine Ally Financial’s liquidity position, we examined the company’s  total liquidity ratio, bank deposits, and operating cash flow.
Total liquidity ratio: Liquidity ratios measure a bank’s total liquid  assets against its total liabilities. Generally, the ratios indicate a  bank’s ability to sell assets quickly to cover short-term debts—with a  higher ratio providing a larger margin of safety. Overall, Ally  Financial’s liquidity ratio remained fairly stable from the third quarter of  2009 through the fourth quarter of 2013 (see fig. 3). Declines in  liquidity levels in 2012 and 2013 were associated with repayments of  government assistance. For example, according to Ally Financial, the  decline in liquidity in 2013 was due to the repurchase of the Treasury  mandatory convertible preferred shares and the redemption of certain  high-coupon, callable debt. For the quarter ending March 31, 2014,  Ally Financial reported a total liquidity ratio of 16.01 percent.
Bank deposits: Bank deposits are the funds that consumers and  businesses place with a bank, and growth in deposits is an important  factor in the bank’s liquidity position. From December 2008 to March  2014, deposits at Ally Bank, Ally Financial’s Internet bank, grew  almost 190 percent, from $19.3 billion to $55.9 billion, of which  approximately $45.2 billion were retail (consumer) deposits. Deposits  accounted for 43 percent of Ally Financial’s total funding as of the first  quarter of 2014, providing the company with a low-cost source of  funding that is less sensitive to interest rate changes and market  volatility than other sources of funding.
Operating cash flow: From the first quarter of 2010 through the third  quarter of 2013, Ally Financial generated positive cash flow from  operating activities (see fig. 4). Since the third quarter of 2013, cash  flows have varied, with Ally reporting negative cash flow in the fourth  quarter of 2013 and positive cash flow at the end of the first quarter of  2014. According to Ally Financial, 2013 declines in operating cash  flow (compared with the prior year) were driven by the settlement of   derivative transactions, but were partially offset by sales and  repayments of mortgage and automotive loans.
Ally Financial’s changing financial condition is reflected in its credit rating.  Although Ally’s credit rating remains below investment grade, its long- term credit rating with the three largest credit rating agencies has been  upgraded multiple times since 2009. Most recently, Ally’s long-term  ratings with Moody’s, Standard and Poor’s, and Fitch Ratings were  upgraded to Ba3, BB, and BB+, respectively.
section_title: Ally Financial Continues to Face Competitive Challenges
paragraphs: According to rating agency analyses, Ally Financial is a strong competitor  in automotive financing, although the company faces competitive  challenges. Analysts have said that Ally Financial is competitive in  automotive financing, particularly in the floor-plan business segment. In  addition, as mentioned previously in this report, Ally Bank has continued  to increase its level of retail deposits.
Analysts have pointed to potential competitive challenges for Ally  Financial, such as its reliance on GM and Chrysler automotive financing  relationships. As we previously reported, GM and Chrysler have  established captive financing units. Ally’s exclusive lending relationships  with GM and Chrysler have ended as the two automakers have begun to  rely on their captive financing units. For example, the agreement between  GM and Ally Financial on dealer and consumer lending was revised in  early 2014. Among other changes, Ally Financial no longer enjoys   The captive  exclusivity with regard to GM lending arrangements.financing units of GM and Chrysler have begun to increase their financing  activities. However, according to Ally Financial representatives, the  company is the only automotive finance company that offers a suite of  products to dealers (financing, insurance, and auction services) and as a  result, the company expects to continue to be competitive in this  segment. Moreover, Ally Financial representatives told us that the  company has been focusing more on increasing profitability than on  market share—consistent with its goals as a publicly held company,  which include maximizing return to shareholders. Company  representatives also have said in public statements that Ally Financial has  been focusing on reducing its noninterest expenses and lowering its cost  of funds.
Ally Financial also faces competition from other large bank holding  companies in consumer automobile financing. We compared the amount  of Ally Financial consumer automobile financing with that of four large  bank holding companies (Bank of America Corporation, Capital One  Financial Corporation, JPMorgan Chase & Company, and Wells Fargo &  Company) that reported consumer automobile loans. These data do not  include all types of automobile financing, such as automobile leasing and  dealer financing, but only retail consumer automobile loans for the time  period.lending exceeded that of Ally Financial (see fig 5). The dollar amount of  consumer automobile loans that Wells Fargo, JPMorgan Chase, and  Capital One made increased from March 2011 through March 2014, while  the dollar amount of Ally Financial financing has declined since the fourth  quarter of 2012. According to Federal Reserve officials, this decline likely  reflects the sale of the international automotive finance operations.
section_title: Agency Comments
paragraphs: We provided a draft of this report to FDIC, the Federal Reserve, and  Treasury for their review and comment. In addition, we provided a copy of  the draft report to Ally Financial to help ensure the accuracy of our report.  Treasury provided written comments that are reprinted in appendix II. Ally  Financial provided technical comments, which we have incorporated, as  appropriate. FDIC and the Federal Reserve did not provide comments.
In its written comments, Treasury generally concurred with our findings.  Treasury noted that approximately $17.8 billion has been recovered to  date from Ally Financial through repayments, a private placement, and an  initial public offering. Treasury also noted that it will unwind its remaining  ownership stake in a way that balances the speed of recovery with  maximizing returns to taxpayers.
We are sending copies of this report to FDIC, the Federal Reserve, and  Treasury, and the appropriate congressional committees. This report will  also be available at no charge on our website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-8678 or clowersa@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Key contributors to this report are listed in  appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report is based on our continuing analysis and monitoring of the  Department of the Treasury’s (Treasury) activities in implementing the  Emergency Economic Stabilization Act of 2008 (EESA), which provided  us with broad oversight authorities for actions taken under the Troubled  Asset Relief Program (TARP). This report examines (1) the status of  Treasury’s investments in Ally Financial Inc. (Ally Financial) as of June  30, 2014, and its efforts to wind down those investments; and (2) the  financial condition of Ally Financial through March 31, 2014.
To examine the status of Treasury’s investments, we reviewed TARP  reports, which included monthly reports to Congress and daily TARP  updates regarding the Automotive Industry Financing Program (AIFP)  program data. Using the AIFP program data, we analyzed Treasury’s  equity ownership and recovery of funds in Ally Financial for the time  period from January 2009 through June 2014. We have previously  assessed the reliability of the AIFP program data from Treasury. For  example, we tested the Office of Financial Stability’s internal controls over  financial reporting as they related to our annual audit of the office’s  financial statements and found the information to be sufficiently reliable  based on the results of our audit of the TARP financial statements for  fiscal years 2009—2013. AIFP was included in these financial audits. addition, for this review, we reviewed the data for completeness and  obvious errors such as outliers. Based on this review, we determined that  the data were sufficiently reliable for our purposes.
EESA, which was signed into law on October 3, 2008, established the Office of Financial  Stability within Treasury and provided it with broad, flexible authorities to buy or guarantee  troubled mortgage-related assets or any other financial instruments necessary to stabilize  the financial markets. § 101(a), 122 Stat. at 3767 (codified at 12 U.S.C. § 5211(a)).
Review 2014: Assessment Framework and Results.interviewed officials from Treasury, the Federal Reserve, the Federal  Deposit Insurance Corporation (FDIC), and representatives from Ally  Financial.
To assess the financial condition of Ally Financial, we measured the  institution’s capital ratios, net income, net interest spread margin, return  on assets, nonperforming asset ratio, liquidity ratio, bank deposits, and  operating cash flow, generally from 2009 through the first quarter (March  31) of 2014. We obtained these data from SNL Financial, a provider of  financial information. We have determined that SNL Financial data are  sufficiently reliable for past reports, and we reviewed past GAO data  reliability assessments to ensure that we, in all material respects, used  the data in a similar manner and for similar purposes. We also reviewed  reports by several credit rating agencies on how they rate Ally Financial’s  financial strength. Although we have reported on actions needed to  improve the oversight of rating agencies, we included these ratings  because the ratings are widely used by Ally Financial, Treasury, and  market participants. To obtain information on the financial ratios and  indicators used in the analyses of Ally Financial’s financial condition, we  reviewed relevant documentation and interviewed officials from FDIC, the  Federal Reserve, Treasury, and representatives from Ally Financial. For  the comparison of retail (consumer) automotive lending for five large bank  holding companies, including Ally Financial, we used Federal Reserve  regulatory filings (Form FR-Y9C). For each data source we reviewed the  data for completeness and obvious errors and determined that these data  were sufficiently reliable for our purposes.
We conducted this performance audit from March 2014 to August 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Department of the Treasury
section_title: Appendix III: Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Karen Tremba (Assistant  Director), Catherine Gelb (Analyst-in-Charge), Bethany Benitez, William  Chatlos, Risto Laboski, Terence Lam, Barbara Roesmann, and Jena  Sinkfield made significant contributions to this report.