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

Letter

Background

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.

Assistance to GM

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.

Assistance to Ally Financial

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).

Financial Condition of GM and Ally Financial

General Motors’s Financial Results Have Been Increasingly Positive Since Receiving Federal Assistance, but Questions Remain

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.

Treasury Is Working to Exit from Its Remaining Investments in GM and Ally Financial

Treasury Plans to Exit from GM by Early 2014 but Projects a Loss on its Investment

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.

Agency and Third Party Comments

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.

Appendix I: Objectives, Scope, and Methodology

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.

Appendix II: Comments from the Department of the Treasury

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

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.