Troubled Asset Relief Program: Status of Treasury's Investments in General Motors and Ally Financial
Released: 2013-10-29T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: As part of its Auto Industry Financing Program (AIFP), funded through the Troubled Asset Relief Program (TARP), Treasury committed $67.3 billion to automaker GM and to Ally Financial, a large bank holding company whose primary business is auto lending. TARP's authorizing legislation mandates that GAO report every 60 days on TARP activities.

This report examines (1) the current financial condition of the two companies and (2) the status of Treasury's investments in the companies and its plans to sell those investments.

To examine the financial condition of GM and Ally Financial, GAO reviewed industry, financial, and regulatory data for the time period from the beginning of 2008 through the second quarter of 2013. GAO also reviewed Treasury reports and documentation detailing Treasury's investments in GM and Ally Financial and its proposed strategies for divesting itself of the investments, as well as both companies' financial filings and reports. In addition, GAO interviewed officials from Treasury, the Board of Governors of the Federal Reserve (Federal Reserve), GM, Ally Financial, and financial analysts who study GM and Ally Financial.

In its written comments on a draft of this report, Treasury describes the auto industry's recovery and the progress Treasury has made in unwinding its investments in GM and Ally Financial. Treasury, the Federal Reserve, GM, and Ally Financial also provided technical clarifications, which were incorporated, as appropriate.

section_title: What GAO Found
paragraphs: Since receiving federal assistance, General Motors Company (GM) has shown increasingly positive financial results. For each of the past 3 years, GM has reported profits, positive and growing operational cash flow, and a stable liquidity position. This improved financial performance has been reflected in GM's credit rating, as each of the three largest credit rating agencies has increased GM's long-term credit rating. However, GM faces continued challenges to its competitiveness. For instance, its market share of vehicles sold in North America remains smaller today than in 2008. Furthermore, GM continues to carry large pension liabilities.

With Treasury's investments in Ally Financial, the company's condition has stabilized. For example, Ally Financial's capital and liquidity positions have stabilized or improved over the last 4 years. Such improvements have been noted by the three largest credit rating agencies, each of which has upgraded Ally Financial's credit rating. However, Ally Financial's credit rating remains below investment grade and its mortgage unit--Residential Capital LLC--impacted the company's financial performance. The mortgage unit filed for bankruptcy in May 2012, and these proceedings are ongoing. Analysts with whom GAO spoke indicated that the resolution of its mortgage unit's bankruptcy will be a positive development for Ally Financial's future financial performance.

As of September 18, 2013, the Department of the Treasury (Treasury) has recovered about $35.21 billion of its $51 billion investment in GM and reduced its ownership stake from 60.8 percent to 7.32 percent. By early 2014, Treasury plans to fully divest its GM common shares through installments and estimates that it will lose at least 19 percent of its original investment. Treasury is working to exit from Ally Financial with a recent agreement to sell all of its preferred stock to the company for approximately $6 billion, but Treasury faces challenges. As a regulated bank holding company, Ally Financial must be well capitalized to receive its regulator's approval to repurchase shares from Treasury. Earlier this spring, Ally Financial's tier 1 common ratio fell below the required 5 percent in the Federal Reserve's "stress test," and the Federal Reserve objected to the company's capital plan. Ally Financial also faces growing competition in the consumer lending and dealer financing sectors that could impact its financial performance in the future. The extent of Treasury's recoupment on its Ally Financial investment will depend on the ongoing financial health of the company.

section_title: Letter
paragraphs: In 2008 and 2009, the Department of the Treasury (Treasury) provided  significant support to the automotive industry—including both auto  manufacturers and automotive finance companies—after deteriorating  economic conditions resulted in a dramatic decline in auto sales and  significant financial losses in the industry. In particular, through the  Automotive Industry Financing Program (AIFP) under the Troubled Asset  Relief Program (TARP), Treasury committed approximately $51 billion to  help General Motors Company (GM). Through AIFP, Treasury also  provided about $16.3 billion to GMAC, a financial services company  whose businesses included providing consumer financing for vehicle  purchases and dealer financing for inventory. In 2010, GMAC LLC  became Ally Financial, Inc. (Ally Financial). While Treasury has  recouped much of its investments in these companies—most notably,  through GM’s initial public offering (IPO) in November 2010—more than  $29.57 billion of Treasury’s assistance to GM and Ally Financial remained  outstanding as of September 18, 2013.

This report is based on our continuing analysis and monitoring of  Treasury’s activities in implementing the Emergency Economic  Stabilization Act of 2008 (EESA), which provided GAO with broad  oversight authorities for actions taken under TARP.(1) the financial condition of GM and Ally Financial and (2) the status of  Treasury’s investments in the companies and its plans to wind down  those investments.

This report examines  To examine the financial condition of GM and Ally Financial, we reviewed  financial and industry data for 2008 and 2009, respectively, through June  2013 for both companies. To assess GM’s financial condition, we  reviewed its net income, operating income, operating cash flow, credit  ratings, sales of automobiles, share of the North American market, and  pension obligations and pension plan funding for its U.S. employees. For  Ally Financial, we reviewed capital ratios, net income, net interest spread,  return on assets, nonperforming asset ratio, liquidity ratio, bank deposits,  operating cash flow, and credit ratings. To describe the status of  Treasury’s investment in GM and Ally Financial, we reviewed Treasury’s  Section 105(a) Reports to Congress detailing the levels of the  investments made in GM and Ally Financial, including the number of  shares owned by Treasury and Treasury’s daily transactions reports. We  also interviewed Treasury officials.

Stress testing is one tool that helps bank supervisors measure whether a bank holding  company has enough capital to support its operations throughout periods of stress. The  Dodd-Frank Wall Street Reform and Consumer Protection Act requires the Federal  Reserve to perform an annual stress test of bank holding companies with $50 billion or  more in total consolidated assets. Pub. L. No. 111-203, § 165(i)(1)(A), 124 Stat. 1376,  1430 (2010)(codified at 12 U.S.C. § 5365(i)(1)(A)). The Comprehensive Capital Analysis  and Review is an annual assessment by the Federal Reserve of the internal capital  planning process and capital adequacy of large, complex U.S. bank holding companies.   12 C.F.R. §225.8. ensure that we, in all material respects, used the data in a similar manner  and for similar purposes. For a more detailed discussion of the scope and  methodology, please see appendix I.

We conducted this performance audit from March 2013 to October 2013  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: The decision to provide substantial amounts of funding to the auto  industry—more than 12 percent of all authorized TARP funds—and to  accept equity in the companies in return for some of the assistance  reflects Treasury’s view of the automotive industry’s importance to the  U.S. economy. According to Treasury officials, Treasury provided  assistance not simply because of the industry’s importance, but because  of the severity of the crisis and the desire to prevent significant disruption  to the economy that would have resulted from uncontrolled liquidations of  Chrysler and GM. To help stabilize the industry and avoid economic  disruptions, Treasury disbursed $79.7 billion through AIFP from  December 2008 through June 2009. The majority of the assistance was  used to support two automakers, Chrysler and GM, during restructuring,  along with their automotive finance companies, Chrysler Financial and  GMAC. In July 2009, Treasury outlined guiding principles for the  investments made to the auto industry, including: 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  can 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.
subsections: section_title: Assistance to GM
paragraphs: GM is one of the world’s largest automotive companies and does  business in more than 120 countries worldwide. As of December 31,  2012, it employed 213,000 workers worldwide and marketed vehicles  through a network of independent retailers totaling 20,754 dealers. In  North America, GM manufactures and markets the following brands:  Buick, Cadillac, Chevrolet, and GMC.

Treasury provided a $13.4 billion loan in December 2008 to the Old GM  to fund working capital.the purchase of additional ownership interests in a rights offering by  GMAC. In April 2009, Treasury loaned an additional $6 billion to fund Old  GM as it worked to submit a viable restructuring plan (working capital  loan). These funds, along with loans from the Canadian government and  concessions from nearly every stakeholder, including the company’s  primary labor union—the International Union, United Automobile,  Aerospace and Agricultural Implement Workers of America (UAW)—were  intended to give the companies time to restructure to improve their  competitiveness and long-term viability.

Treasury also lent $884 million to the Old GM for  As a condition of receiving this assistance, Old GM was required to  submit a plan to Treasury that would, among other things, identify how it  intended to achieve and sustain long-term financial viability. GM’s initial  viability plan submitted in February 2009 was rejected. The plan  established targets for addressing some of the company’s key challenges  to achieving viability, including reducing debt, numbers of brands and  models, dealership networks, and production costs and capacity. In 2009,  Old GM filed a voluntary petition for reorganization under Chapter 11 of  the U.S. bankruptcy code. Subsequently, in June 2009, Treasury  provided Old GM with $30.1 billion under a debtor-in-possession  financing agreement to assist during the restructuring. The newly  organized GM was able to purchase most of the operating assets of the  former company through a sale under Section 363 of the bankruptcy  code. When the sale was completed on July 10, 2009, Treasury  converted most of its loans into 60.8 percent of the common equity in GM  and $2.1 billion in preferred stock. In addition, $6.7 billion of the TARP  loans remained outstanding after the bankruptcy. In spring 2011, the  bankruptcy was completed, and Old GM’s remaining assets and liabilities  were transferred to liquidating trusts. As we concluded in our past work,  the federal assistance allowed GM to restructure its balance sheets and  obligations through the bankruptcy code and tackle key challenges to  achieving viability.

section_title: Assistance to Ally Financial
paragraphs: Ally Financial, previously known as GMAC, formerly served as GM’s  captive auto finance company. The primary purpose of auto financing is  to provide credit to consumers so that they can purchase automobiles. In  determining how to finance their purchases, consumers have many  financial institutions from which to choose, including banks, credit unions,  and auto finance companies, all of which may offer loans or other credit  accommodations for the purchase of new and used automobiles. In  addition to consumer financing, auto dealers have also traditionally used  manufacturers’ finance companies to finance their purchase of the  automobile inventory that they sell (known as floor-plan financing).

Prior to the financial crisis, GMAC’s subsidiaries expanded into other  areas of financial services, such as auto insurance and residential  mortgages, but GMAC remained a wholly owned subsidiary of the Old  GM. In 2006, Cerberus Capital Management purchased 51 percent of the  company. GM retained a 49 percent ownership stake. 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—which by  2006 had grown to be the country’s sixth-largest mortgage originator and  fifth-largest mortgage servicer—lost approximately $17 billion from 2007  through 2009. During the same time period, automobile sales in the U.S.  dropped from 16.4 million to 10.4 million, negatively affecting the  company’s core auto financing business.

According to Treasury, Treasury determined that without government  assistance GMAC would be forced to deny or suspend financing to  creditworthy dealerships, leaving them unable to purchase automobile  inventory for their lots. Without orders for automobiles from dealerships,  GM would have been forced to slow or shut down its factories indefinitely  to match the drop in demand. Given its significant overhead, a slow-down  or stoppage of this magnitude would have caused GM to topple,  according to Treasury.

However, GMAC was not initially eligible for assistance under the TARP  Capital Purchase Program (CPP). To become eligible for federal  financial assistance, GMAC sought to convert GMAC Bank’s charter from  an industrial loan company into a commercial bank in 2008 and applied to  the Federal Reserve for bank holding company status. GMAC also  submitted an application to participate in the Capital Purchase Program,  conditional upon becoming a bank holding company. The Federal  Reserve approved GMAC’s bank holding company application in  December 2008. Although GMAC originally applied for participation in  CPP, 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.  In December 2009, Treasury purchased additional shares—$2.5  billion of trust preferred securities and approximately $1.3 billion of  mandatory convertible preferred shares. Also, in December 2009, Treasury converted $3 billion of existing mandatory convertible  preferred shares into common stock, increasing its common equity  stake from 35 percent to 56.3 percent.  In December 2010, Treasury converted preferred stock in Ally  Financial that had a liquidation preference of $5.5 billion into common  stock. This stock conversion resulted in Treasury’s owning  approximately 74 percent of Ally Financial. In addition, as of  September 2013, Treasury continues to hold $5.9 billion of Ally  Financial’s mandatory convertible preferred shares. Ally Financial  pays a 9.0 percent fixed dividend annually to Treasury on these  preferred shares. As will be discussed later in this report, Ally  Financial has entered into an agreement with Treasury to repurchase  the mandatory convertible preferred shares with possible completion  of the transaction sometime later this year.

As of June 2013, Ally Financial was the 20th largest U.S. bank holding  company, with total assets of $150.6 billion. Its primary line of business is  auto financing—both consumer financing and leasing and dealer floor- plan financing. As a bank holding company, Ally Financial is regulated  and supervised by the Federal Reserve. Ally Bank, an Internet and-telephone-based, state-chartered nonmember  bank that is supervised by the FDIC and the Utah Department of  Financial Institutions. Ally Bank has over $92 billion in assets and $50.8  billion in total deposits, as of June 30, 2013.

12 U.S.C. § 1844(b)-(c).

section_title: Financial Condition of GM and Ally Financial
subsections: section_title: General Motors’s Financial Results Have Been Increasingly Positive Since Receiving Federal Assistance, but Questions Remain
paragraphs: Since receiving federal assistance, GM has shown increasingly positive  financial results. For each of the last 3 years, GM has reported profits, a  positive and growing operating cash flow, and a stable liquidity position.  This improved financial performance has been reflected in GM’s credit  ratings, with each of the three largest credit rating agencies increasing  GM’s long-term credit rating. Although Moody’s upgraded GM’s rating to  investment grade on September 23, 2013, Standard and Poor’s and Fitch  Ratings rate GM as below investment grade as of the same month.  Furthermore, GM’s market share of vehicles sold in North America was  smaller than in 2008, and it continued to carry large pension liabilities.

Based on our analysis of GM’s reported financial data, the company’s  financial performance has improved since 2008. We assessed GM’s  financial performance by examining its reported net income, operating  income, and operating cash flow.

Net income (loss): Net income (net profit or loss) is the difference  between total revenues and expenses and represents the company’s  income after all expenses and taxes have been deducted. For 2010,  2011, and 2012, GM reported net income of $6.5 billion, $9.3 billion,  and $6.1 billion, respectively (see table 1). In 2008, prior to the federal  government’s assistance and Old GM’s bankruptcy, GM reported a  net loss of $30.9 billion. As we found in our prior work, a key result of  the restructuring was that GM lowered its fixed costs by reducing the  number of employees, plants, and dealerships, among other things.  Reduced fixed costs allow GM to be profitable with fewer sales,  thereby lowering its “break-even” level.

Operating income (loss): Operating income (loss) describes a  company’s profit and loss from its core operations. It is the difference  between the revenues of a business and the related costs and  expenses, excluding income from sources other than its core  business (e.g., income derived from investments). GM reported  operating income of $5.1 billion and $5.7 billion in 2010 and 2011,  respectively (see table 1). In 2012, GM took an approximate $27  billion goodwill impairment charge that significantly reduced its  operating income, contributing to a $30.4 billion operating loss.

Operating cash flow: Operating cash flow refers to the amount of cash  generated by a company’s core business operations. Operating cash  flow is important because it indicates whether a company is able to  generate sufficient positive cash flow to maintain and grow its  operations, or requires external financing. In its 2010, 2011, and 2012  annual reports, GM reported operating cash flow of $6.6 billion, $7.4  billion, and $9.6 billion, respectively. Further, in 2010 GM reported  total available liquidity from automotive operations of $32.5 billion,  including $5.9 billion from credit facilities. This amount had increased  slightly by 2012, when GM reported total available liquidity of $37.2  billion, including $11.1 billion from credit facilities. Finally, GM  reported current assets greater than current liabilities from 2010  through 2012, indicating that it could meet all current liabilities without  additional financing.

These improvements in GM’s financial performance have been reflected  in its credit ratings. A credit rating is an assessment of the credit  worthiness of an obligor as an entity or with respect to specific securities  or money market instruments. Credit ratings are important because  investors and financial institutions may consider them when making  investment and lending decisions. The three largest credit rating agencies  have each increased GM’s long-term credit rating two steps in the past 3  years. Fitch Ratings and Standard and Poor’s raised their long-term  rating on GM from BB- to BB+. Moody’s raised its long-term corporate  family rating on GM from Ba2 to Baa3, an investment grade rating (i.e.,  the issuer or bond has a relatively low risk of default). Comparatively,  Standard and Poor’s also rates Ford Motor Company as one step below  investment grade, with a positive outlook. Fitch and Moody’s upgraded  Ford to an investment grade rating in April and May 2012, respectively.  Toyota, another competitor of GM, maintains an investment grade rating  with all three of these credit rating agencies.

Although GM’s financial performance has improved significantly since the  company initially received federal assistance, questions remain about  competitiveness and costs. One of the factors in GM’s improved financial  condition has been increased sales of automobiles generally, including  GM’s, over the last 3 years. Overall, North American vehicle sales  increased more than 23 percent from 2010 to 2012, rising from 14.4  million to 17.8 million. Over this same period, sales of GM automobiles in  North America increased 15 percent, from 2.6 million to 3 million.  However, GM’s North American market share generally has declined over  the past 5 years (see fig. 1).percent of the North American market, compared with 16.9 percent in  2012. GM reported that its North American market share was 17.2  percent through the second quarter of 2013.

section_title: Treasury Is Working to Exit from Its Remaining Investments in GM and Ally Financial
subsections: section_title: Treasury Plans to Exit from GM by Early 2014 but Projects a Loss on its Investment
paragraphs: Treasury invested over $51 billion in GM through AIFP. In exchange for  this assistance, Treasury received 60.8 percent of the common equity in  GM, $2.1 billion in preferred stock, and $7.1 billion in notes from GM.  Through September 18, 2013, Treasury had recovered about $35.21  billion of its investments in GM and reduced its ownership stake to 7.32  percent through three major actions. As of September 18, 2013,  Treasury has recouped $37.75 billion from its GM and Ally Financial  investment.

First, Treasury participated in GM’s IPO in November 2010, selling about  412.3 million shares at an average price per share of approximately  $32.75. This sale generated $13.5 billion for Treasury and reduced its  ownership share to 32 percent. As we found in our 2011 report, by  participating in GM’s IPO, Treasury tried to fulfill two goals—to maximize  taxpayers’ return and to exit the company as soon as practicable.

Second, GM and Treasury entered into an agreement that allowed GM to  repurchase 200 million shares in December 2012. According to GM, as a  general matter, GM was interested in reducing Treasury’s interest in GM  and facilitating Treasury’s eventual complete exit from GM ownership.   GM purchased the shares at $27.50 per share, about 7.8 percent over the  market price of about $25.50.  This generated about $5.5 billion in  revenue for Treasury and further reduced its ownership interest to just  over 22 percent. GM officials said that they determined the premium price  based on an arms-length negotiation between GM and Treasury.   According to GM officials, the decision to agree to a premium price  reflected the benefits GM and other stakeholders received from the  transaction, including increased knowledge as to when and how Treasury  was going to exit its holdings thereby eliminating the perceived  “overhang” on GM’s common stock price; mitigation of the stigma  associated with the “Government Motors” moniker that negatively  impacted customer perceptions; and the fact that the transaction was  accretive to earnings.  Furthermore, as part of the transaction, Treasury  agreed to remove certain governance and reporting requirements.   Treasury announced in December 2012 that it planned to divest fully of its  GM common equity stake within 12-15 months, subject to market  conditions.

Third, to achieve its goal of fully divesting by 2014, Treasury has  developed and is implementing an exit strategy to sell its shares in  tranches. Similar to the process Treasury used to divest its ownership in  Citigroup, Treasury began placing its GM shares on the market in  tranches, or “dribbles,” for a specific time period, beginning in January  2013. Treasury reports these sales after the end of each period for  selling a particular tranche. According to Treasury officials, in the case of  GM, the dribble approach is a better divestment method than discrete  large offerings given the remaining size of its equity holdings and time  frame in which it is planning to exit. Furthermore, the dribble approach  helps (1) secure the highest possible prevailing market price for  taxpayers, (2) limit the impact of additional supply in the market, and (3)  ensures that Treasury has flexibility to average the proceeds over time  and make adjustments if necessary. As of September 2013, Treasury has  sold over 811 million shares for more than $25 billion, leaving it with  101,336,666 shares which represent a 7.32 percent ownership stake in  GM. On September 26, 2013, Treasury announced it was launching a  third pre-defined written trading plan for its GM common stock.

Although Treasury has implemented a plan to divest itself of its ownership  stake in GM, it does not anticipate fully recouping its investments. In  September 2013, Treasury projected approximately at least a 19 percent  loss on its GM investment. The extent of the loss, however, will depend  on GM’s stock price. As shown in figure 6, the price of GM’s stock is not  at the level needed for Treasury to fully recoup its investment.

Nevertheless, according to Treasury officials, Treasury has continued to  sell its shares in line with its guiding principle of exiting its TARP  investments as soon as practicable while maximizing return to taxpayers.  Doing so, however, has increased the break-even price—that is, the price  the stock must reach for Treasury to fully recoup its investment—for its  remaining shares. Based on our analysis, we estimate that GM’s stock  price would have to reach $156 per share for Treasury to fully recoup its  investment as of September 16, 2013. At the beginning of September  2013, GM’s stock was trading at around $36 per share.

Although Treasury’s ownership stake in Ally Financial has remained  unchanged for the last 3 years at about 74 percent, the company has  recently announced planned actions that will facilitate Treasury’s exit,  pending regulatory approval. As of September 2, 2013, Treasury has  recovered about $2.5 billion of the $16.3 billion invested in Ally Financial  from a sale of trust preferred shares. Treasury’s remaining investment in  Ally Financial consists of common stock and $5.9 billion in mandatory  convertible preferred shares. In August 2013, Ally Financial announced  plans, discussed below, to repurchase the mandatory convertible  preferred shares.

Treasury has stated that it would like to divest itself of its ownership stake  in Ally Financial in a manner that balances the speed of recovery with  maximizing returns for taxpayers. Furthermore, Treasury has stated that it  will unwind its remaining common stock investment through a sale of  stock (either public or private sale) or through future sales of assets. As of  September 2013, Treasury has announced the plan for unwinding its  preferred stock investments in Ally Financial, though not for its common  stock investment. According to Treasury officials, Treasury will announce  its precise plans for the common stock investment once it is ready to take  action.

To accelerate repayment of Treasury’s investment and strengthen its  longer term financial profile, Ally Financial announced in May 2012 that it  was undertaking two strategic initiatives. These initiatives were (1) the  discontinuation of providing financial support to its subsidiary ResCap  pursuant to the ResCap bankruptcy and (2) the sale of its international  auto finance business. ResCap’s mortgage business created significant  uncertainty for Ally Financial and thus an impediment to Ally Financial’s  ability to repay Treasury’s investment. Also, Ally Financial sought to sell  its international operations as a means to accelerate repayment plans to  Treasury. At the same time as Ally Financial’s announcement last year,  Treasury stated that the company’s two strategic initiatives would put  taxpayers in a stronger position to continue recovering their investment in  Ally Financial. As previously noted, Ally Financial achieved a settlement  agreement with the ResCap creditors, which was approved by the  bankruptcy court in June 2013. In addition, during the second quarter of  2013, Ally Financial completed the sale of its international auto finance  business in Europe and the majority of its finance operations in Latin  America. Ally Financial plans to complete the sale of its remaining  international assets—its operations in Brazil and its joint venture in  China—in late 2013 and 2014, respectively.

However, in exiting its Ally Financial investment, Treasury faces  challenges and considerations, including Ally Financial’s failure to meet  Federal Reserve capital requirements and competition from other  institutions, which may ultimately affect the price of Ally Financial stock  once the company is publicly traded.

In contrast to GM, Ally Financial is a regulated bank holding company that  must receive the Federal Reserve’s approval before it can repurchase its  preferred shares from Treasury. However, Ally Financial’s initial plan to  repurchase the mandatory convertible preferred shares stalled after the  Federal Reserve objected to its proposed capital plan in the spring 2013  Comprehensive Capital Analysis and Review (CCAR). The Dodd-Frank  Wall Street Reform and Consumer Protection Act requires the Federal  Reserve to conduct 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. As part of the stress test  for each company, the Federal Reserve projects revenue, expenses,  losses, and resulting post-stress test capital levels, regulatory capital  ratios, and the tier 1 common ratio under three scenarios (baseline,  adverse, and severely adverse). In March 2013, the Federal Reserve  reported the results of its most recent 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.

Further, as previously indicated, the Federal Reserve objected to Ally  Financial’s capital plans during the 2013 CCAR. CCAR is an annual  exercise the Federal Reserve conducts to help ensure that financial  institutions have robust, forward-looking capital planning processes that  take into account their unique risks and sufficient capital to continue  operating during periods of economic and financial stress. As part of the  CCAR process, the Federal Reserve evaluates institutions’ capital  adequacy; internal processes for assessing capital adequacy; plans to  make 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  capital planning process or because one or more relevant capital ratios  would fall below required levels under the assumption of stress and  planned capital distributions.  If the Federal Reserve objects to the  proposed capital plan, the bank holding company is only permitted to  make capital distributions if the Federal Reserve indicates in writing that it  does not object and must resubmit the capital plan to the Federal  Reserve following remediation of these deficiencies. Of the 18 bank  holding companies reviewed in 2013, the Federal Reserve objected to  Ally Financial’s and one other company’s capital plans.

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 ratio of common capital of 1.52  percent, which is below the required level of 5 percent under the capital  plan rule. According to the Federal Reserve report, these results  assumed that Ally Financial remained subject to contingent liabilities  associated with ResCap. The Federal Reserve required Ally Financial to  resubmit a capital plan. Ally Financial resubmitted its new capital plan to  the Federal Reserve in September 2013, and in accordance with federal  regulation, the Federal Reserve will have 75 days to review the plan.

On August 19, 2013, Ally Financial announced that it had entered into  agreements with certain accredited investors to issue and to sell to them  an aggregate of 166,667 shares of its common stock (private placement  securities) for an aggregate purchase price of $1 billion. Ally Financial did  not identify the investors. According to Ally Financial, the agreement  would strengthen the company’s common equity base and support its  capital plan resubmission to the Federal Reserve. The agreement  requires that the private placement close no later than November 30,  2013. Also on August 19, Ally Financial and Treasury entered into an  agreement under which Ally Financial is to repurchase all of the  mandatory convertible preferred shares. The agreement is conditioned on  Ally Financial receiving a non-objection by the Federal Reserve on its  resubmitted CCAR capital plan and the closing of the private placement  securities transaction.

Ally Financial faces growing competition in both consumer lending and  dealer financing from Chrysler Capital, GM Financial, and other large  bank holding companies. This competition may affect the future  profitability of Ally Financial, which could influence the share price of Ally  Financial once the company becomes publicly traded and thus the timing  of Treasury’s exit. Similar to its GM investment, the eventual amount of  Treasury’s recoupment on its Ally Financial investment will be determined  by the share price of Ally Financial stock.

Chrysler Capital: In February 2013, Chrysler announced that it had  entered into an agreement with Santander Consumer USA Inc., a  subsidiary of Banco Santander, S.A., that specializes in subprime  auto lending, to provide a full spectrum of auto financing services to  Chrysler Group customers and dealers under the name of Chrysler  Capital. Under the 10-year, private-label agreement, Santander  Consumer USA was to establish a separate lending operation  dedicated to providing financial services under the Chrysler Capital  name, including financing for retail loans and leases, new and used  vehicle inventory, dealership construction, real estate, working capital,  and revolving lines of credit. The agreement grants Santander  Consumer USA the right to a minimum percentage of Chrysler’s  subvention volume and the right to use the Chrysler Capital name for  its auto loan and lease offerings. Santander Consumer USA will also  provide loans to Chrysler dealers to finance inventory, working capital,  and capital improvements. On May 1, 2013, Chrysler Capital started  its lending operations.

GM Financial: In 2009, GM acquired AmeriCredit Corporation  (AmeriCredit), a subprime automobile finance company, to serve its  subprime customers. AmeriCredit was renamed GM Financial and  made a wholly owned subsidiary of GM. Its target lending market is  lending to consumers who have difficulty securing auto financing from  banks and credit unions. According to GM officials, the purpose of GM  Financial is to drive incremental GM automobile sales by providing  solid and stable funding for GM dealers and consumers. GM Financial  would serve as a captive lender for GM, much as GMAC did. This  year, GM Financial increased its overall assets by purchasing Ally  Financial’s international assets in Europe and Latin America, including  the dealer financing arrangements in these countries.

Other bank holding companies: We compared the amount of Ally  Financial consumer auto lending with 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, only retail consumer automobile loans  for the time period. As shown in figure 7, the dollar amount of  consumer auto loans Wells Fargo & Company and Capital One  Financial Corporation made increased from March 2011 through June  2013. However, Ally Financial remained the leader among the four  institutions for the same time period.

Treasury officials noted that such competition could also be a benefit  because Ally Financial’s assets could be viewed as valuable to the other  competitors. Treasury officials noted that the value of Ally Financial can  be demonstrated by the recent private placement agreement. Specifically,  if Treasury sells its Ally Financial common stock at the share price agreed  to in the private placement agreement—$6,000 per share—Treasury  would receive a significant profit on its Ally Financial investment.

section_title: Agency and Third Party 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 excerpts  of the draft report to Ally Financial, GM, and Chrysler Capital to help  ensure the accuracy of our report.

Treasury provided written comments which are reprinted in appendix II.   Treasury agreed with the report’s overall findings.  In its written  comments, Treasury describes the auto industry’s recovery and the  progress Treasury has made in unwinding its investments in Ally  Financial and GM.  Treasury also noted that it expects to complete the  exit from GM by the first quarter of 2014 and wind down the remaining  Ally Financial investment either by selling stock in a public or private  offering, or through future asset sales.

The Federal Reserve, Treasury, Ally Financial, GM, and Chrysler Capital  provided technical comments that we incorporated as appropriate.  In its  technical comments, GM highlighted what third parties have suggested  could have happened had Treasury not provided assistance to the auto  industry, including the potential adverse effects on unemployment levels  and tax receipts of all levels of government.  FDIC did not provide any  comments.

We are sending copies of this report to 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 staffs 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 U.S.  Department of the Treasury’s (Treasury) activities in implementing the  Emergency Economic Stabilization Act of 2008 (EESA), which provided  GAO with broad oversight authorities for actions taken under the Troubled  Asset Relief Program (TARP). Under TARP, Treasury established the  Automotive Industry Financing Program, through which Treasury  committed $51 billion to help General Motors Company (GM) and $16.3  billion to GMAC LLC, a financial services company that provides  automotive financing and that later became Ally Financial, Inc. (Ally  Financial).

This report examines (1) the financial condition of GM and Ally Financial  and (2) the status of Treasury’s investments in the companies as well as  its plans to wind down those investments.

To assess the financial conditions of GM, we analyzed net income,  operating income, operating cash flow, operating income, sales of  automobiles, GM’s share of the North American market, credit ratings,  and pension obligations and pension plan funding for GM’s U.S.  employees from 2008 through the second quarter (June 30) of 2013. For  Ally Financial, we reviewed the institution’s capital ratios, net income,  operating income, net interest spread, return on assets, nonperforming  assets ratio, liquidity ratio, bank deposits, operating cash flow, and credit  ratings, generally from 2008 through the second quarter (June 30) of  2013. To obtain information on the financial ratios and indicators used in  their analyses of GM’s or Ally Financial’s financial condition, we  interviewed staff from Treasury, the Board of Governors of the Federal  Reserve System (Federal Reserve), Federal Deposit Insurance  Corporation (FDIC), GM, Ally Financial, and analysts from the three  largest credit rating agencies as well as investment firms. To select  analysts from investment firms to interview, we identified analysts who  covered GM. We identified them using GM’s investor relations webpage  (http://www.gm.com/company/investors/analyst-coverage.html) and  selected four to contact based on an electronic search for automotive  equity analysts cited in reputable trade and business publications. We  reached out to four analysts and interviewed two. We also interviewed  analysts responsible for covering GM from one of the credit rating  agencies and analysts responsible for covering Ally from all three of the  credit rating agencies. The views of these analysts cannot be generalized  to all analysts from investment firms and credit rating agencies.

We reviewed past GAO reports, information from GM’s and Ally  Financial’s annual 10-K filings with the Securities and Exchange  Commission, reports and documentation from Treasury and the  companies, and data from SNL Financial from 2008 through the second  quarter (June 30) of 2013. For both GM and Ally Financial, we collected  information, generally from 2008 through the second quarter (June 30) of  2013, the most recent information that was publicly available. We have  relied on SNL Financial data 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. For each data  source we reviewed the data for completeness and obvious errors, such  as outliers, and determined that these data were sufficiently reliable for  our purposes. We also reviewed the credit ratings from three rating  agencies for each of these companies. Although we have reported on  actions needed to improve the oversight of rating agencies, we included  these ratings because they are widely used by GM, Ally Financial,  Treasury, and market participants.

To examine the status of Treasury’s investments and its plans to wind  down those investments, we reviewed Treasury’s TARP reports, which  included monthly 105(a) and daily TARP updates on AIFP program data  for the time period from 2008 through September 2013. We have used  Treasury’s data on AIFP in previous GAO reports. We determined that  the AIFP program data from Treasury were sufficiently reliable to assess  the status of the program. 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, 2010, 2011, and 2012. AIFP  was included in these financial audits. Using the AIFP program data, we  analyzed Treasury’s equity ownership and recovery of funds in GM and  Ally Financial for the time period from January 2009 to September 2013.  We reviewed the data for completeness and obvious errors, such as  outliers, and determined that these data were sufficiently reliable for our  purposes. For the divestment of GM equity, we interviewed Treasury and  GM officials on the December 2012 repurchase of GM shares and the  “dribble” strategy developed by Treasury. For analyzing Treasury’s exit  from Ally Financial, we reviewed Treasury and Federal Reserve  documentation, such as Treasury’s monthly reports to Congress,  Treasury’s contractual agreements for the mandatory convertible  preferred shares, and the proposed capital plan that Ally submitted to the  Federal Reserve. We also reviewed two publicly available reports from  the Federal Reserve on the Dodd-Frank Wall Street Reform and  Consumer Protection Act and capital plan analysis, Dodd-Frank Act  Stress Test 2013: Supervisory Stress Test Methodology and Results and  Comprehensive Capital Analysis and Review 2013: Assessment  Framework and Results.Treasury’s Office of Financial Stability, Federal Reserve, Federal Reserve  Bank of Chicago, FDIC, GM, and Ally Financial.

In addition, we interviewed officials from  We conducted this performance audit from March 2013 to October 2013  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.

section_title: Appendix II: Comments from the Department of the Treasury

section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Raymond Sendejas (Assistant  Director), Bethany Benitez, Emily Chalmers, Nancy Eibeck, Matthew  Keeler, Risto Laboski, Sara Ann Moessbauer, Marc Molino, and Roberto  Pinero made key contributions to this report.


Question-summary annotations: questions: question: Why is GM showing increasingly positive financial results?
answer: Since receiving federal assistance, General Motors Company (GM) has shown increasingly positive financial results.
child_questions: question: How is GM showing positive financial results?
answer: For each of the past 3 years, GM has reported profits, positive and growing operational cash flow, and a stable liquidity position. This improved financial performance has been reflected in GM's credit rating, as each of the three largest credit rating agencies has increased GM's long-term credit rating.

question: What challenges is GM still facing despite positive financial results?
answer: However, GM faces continued challenges to its competitiveness. For instance, its market share of vehicles sold in North America remains smaller today than in 2008. Furthermore, GM continues to carry large pension liabilities.

questions: question: What effect did Treasury have on Ally Financial?
answer: With Treasury's investments in Ally Financial, the company's condition has stabilized.
child_questions: question: How has Ally Financial stabilized or improved?
answer: For example, Ally Financial's capital and liquidity positions have stabilized or improved over the last 4 years. Such improvements have been noted by the three largest credit rating agencies, each of which has upgraded Ally Financial's credit rating.

question: What problem did Ally Financial have?
answer: However, Ally Financial's credit rating remains below investment grade and its mortgage unit--Residential Capital LLC--impacted the company's financial performance.

question: How do analysts feel about Ally Financial's future?
answer: Analysts with whom GAO spoke indicated that the resolution of its mortgage unit's bankruptcy will be a positive development for Ally Financial's future financial performance.

questions: question: What is Treasury's involvement in GM?
answer: As of September 18, 2013, the Department of the Treasury (Treasury) has recovered about $35.21 billion of its $51 billion investment in GM and reduced its ownership stake from 60.8 percent to 7.32 percent. By early 2014, Treasury plans to fully divest its GM common shares through installments and estimates that it will lose at least 19 percent of its original investment.

question: What is Treasury's involvement in Ally Financial?
answer: Treasury is working to exit from Ally Financial with a recent agreement to sell all of its preferred stock to the company for approximately $6 billion, but Treasury faces challenges.
child_questions: question: What problems is Treasury having with Ally Financial?
answer: As a regulated bank holding company, Ally Financial must be well capitalized to receive its regulator's approval to repurchase shares from Treasury. Earlier this spring, Ally Financial's tier 1 common ratio fell below the required 5 percent in the Federal Reserve's "stress test," and the Federal Reserve objected to the company's capital plan. Ally Financial also faces growing competition in the consumer lending and dealer financing sectors that could impact its financial performance in the future.

question: What will determine the extent of Treasury's recoupment on its Ally Financial investment?
answer: The extent of Treasury's recoupment on its Ally Financial investment will depend on the ongoing financial health of the company.

questions: question: How did GAO examine the financial conditions of GM and Ally Financial?
answer: To examine the financial condition of GM and Ally Financial, GAO reviewed industry, financial, and regulatory data for the time period from the beginning of 2008 through the second quarter of 2013.
child_questions: question: What Treasury reports did GAO review?
answer: GAO also reviewed Treasury reports and documentation detailing Treasury's investments in GM and Ally Financial and its proposed strategies for divesting itself of the investments, as well as both companies' financial filings and reports.

question: How did GAO interact with others to examine financial conditions?
answer: In addition, GAO interviewed officials from Treasury, the Board of Governors of the Federal Reserve (Federal Reserve), GM, Ally Financial, and financial analysts who study GM and Ally Financial.