Sale of TARP recipient delayed until after the election
It's nice to be a president, running for re-election, with trillions in taxpayer dollars to play around with. Case in point; a bank that has received more than $16 billion in TARP funds should be sold to save the taxpayer money, but the Treasury Department is delaying the inevitable until after the election.
Ally Financial isn't really a "bank" in the truest sense of the word. They were formerly known as General Motors Acceptance Corporation (GMAC) and were sold back in 2006 to Cerberus Capital Management for $14 billion. GM needed the cash and GMAC was an attractive buy because it had invested heavily in the sub-prime mortgage bubble.
Then came the crunch and Ally Financial needed a big bailout. But they lacked the capital to be defined as a "bank," so the Fed decided to designate them a "bank holding company" and showered them with a $16 billion over the next few years.
"Unlike most of the financial institutions that received extraordinary bailouts, the bailouts of Chrysler's financing arm and GMAC were targeted to benefit GM and Chrysler," former TARP Special Inspector General Neil Barofsky said.
"If you are the Treasury and you want a viable GM, you would sell it to them right now," he said. "But Treasury doesn't want to take a loss; they wanted to wait until after the election."
Barofsky, who served as bailout watchdog from 2008 to 2011, said Treasury should not let the prospect of Obama's re-election affect its decision to cut its losses.
"Whether this is being done in the best interest of the taxpayer, rather than bending to political consideration, that's a legitimate question," he said.
With GM and Chrysler increasingly turning inward for financing, Ally chose to give more money to risky buyers, hoping that the profits from successful loans would offset the losses from defaults. Ally president William Muir called the subprime lending model-the same one that doomed the mortgage industry-a "very attractive business today" in 2011.
"All the people with bad credit, dealers send them to Ally," Whalen said. "It takes the worst customers because that's what they need to do to make money."
In order to merge with GM, Ally would have to spin off ResCap, which has $382 billion in outstanding home loans and has almost no way of covering that debt with or without taxpayer help.
A successful merger could help both companies, but it would come at a considerable cost to taxpayers. Ally has only repaid $5.5 billion of its $16.3 billion bailout to the government. This month, Ally declared a dividends payment on preferred stock, and will make a $134 million payment to the U.S. Treasury on May 15.
A textbook example of crony capitalism that will cost taxpayers billions in the end because the administration doesn't want an embarrassment on its hands prior to the election.
Hat Tip: Ed Lasky