STOCK MARKET WATCH -- Wednesday, 2 May 2012

[Demeter]

14. Ally says may put mortgage unit in bankruptcy

http://newsandinsight.thomsonreuters.com/Legal/News/2012/04_-_April/Ally_says_may_put_mortgage_unit_in_bankruptcy/

Ally Financial Inc, the U.S. government-owned lender, said its mortgage unit could file for bankruptcy, in the company's most direct statement so far about its plans for the struggling business. Ally Chief Executive Michael Carpenter said its Residential Capital LLC unit has been examining options that range from "staying the course" to bankruptcy.

"We think that the single most important thing that we can do to preserve and enhance shareholder value is to distance Ally from the mortgage business," Carpenter said on a conference call with investors after the company posted quarterly earnings.

Sources have told Reuters that bankruptcy was an option for ResCap, possibly as early as mid-May, but the company had previously only hinted at the possibility. An executive said Ally failed a recent test from regulators for soundness in distressed economic situations, known as the Federal Reserve's "stress test," in large part because of liabilities linked to the mortgage business. Ally, which was originally the lending arm of General Motors, said it learned on Wednesday that Chrysler Group LLC was not renewing a preferred lending agreement that will now expire next year, but executives downplayed the importance of that loss on the call.

Ally is 73.8 percent owned by the U.S. Treasury after a series of bailouts spurred by its ballooning mortgage losses. The lender hoped to repay taxpayers through an initial public stock offering, but last year it shelved those plans as problems mounted at ResCap and market conditions deteriorated during the European debt crisis. As in the past, Carpenter emphasized that Ally and ResCap are separate entities and that a ResCap bankruptcy decision would be made by the mortgage unit's board, not Ally's. Sources familiar with the matter said Ally is preparing for a possible bankruptcy filing for ResCap, and that there is pressure to get the filing completed before mid-May, when unsecured notes come due for the unit.

On the conference call, Jeff Brown, Ally's finance and corporate planning executive, said the bank would offer a new capital plan to the Federal Reserve in the next 90 days, after failing the stress test. Ally has two secured lending facilities with ResCap that had $1.2 billion outstanding at the end of 2011, but the parent company feels confident about getting repaid, Brown said. This month, Ally did not renew a $500 million unsecured credit line with ResCap as part of its efforts to reduce mortgage risk, he said....Ally has made progress in shrinking its portfolio of troubled mortgage loans, reducing total assets to $10.5 billion at the end of March from about $19 billion at the end of 2009. But it still faces a slew of lawsuits and other claims related to mortgage-backed securities sold to investors during the housing boom, making it difficult to quantify potential losses. Ally in the first quarter moved to resolve one of its mortgage-related problems by joining four other lenders in a $25 billion settlement over foreclosure abuses. As part of the pact, Ally paid $110 million in penalties and agreed to provide $200 million in loan modifications to struggling borrowers. Ally took a $270 million charge for the settlement in the fourth quarter.