Bankruptcy aims to free Ally of bad mortgage assets after auto rescue
By Nathan Bomey, Detroit Free Press
May 14–Ally Financial, which still owes the government about two-thirds of the $17.2 billion in emergency loans it received as part of the General Motors and Chrysler rescues, nudged its residential mortgage subsidiary into Chapter 11 bankruptcy today to shed toxic mortgage-related securities.
Residential Capital (ResCap) filed for bankruptcy protection following a meeting of ResCap’s board of directors Sunday.
A statement about the bankruptcy filing was released early Monday and can be found here.
“The action by ResCap will enable Ally to achieve a permanent solution to its legacy mortgage risks and put these issues behind us,” said Ally Chief Executive Officer Michael A. Carpenter in the statement. “This action, along with pursuing alternatives for the international businesses, will allow Ally to focus 100 percent of its energies on further strengthening its already leading U.S. auto finance and direct banking franchises.”
Ally Financial was founded in 1919 as the General Motors Acceptance Corp. (GMAC), a provider of financing to automotive customers. Over the years, GMAC expanded into insurance, direct banking, mortgage operations and commercial finance. A 51% stake was spun off to Cerberus Capital Management in 2006. It changed its name to Ally in 2010.
Ally has 14,800 employees, including “well over a thousand” in metro Detroit, spokeswoman Gina Proia said. Most ResCap employees are in Pennsylvania, not at Ally’s headquarters at the Renaissance Center in Detroit, she said.
Taking ResCap into bankruptcy carries political implications because it is one part of the auto loans that didn’t turn out as planned. The U.S. government still owns 74% of Ally. Taxpayers have recovered only $5.5 billion of $17.2 billion provided to Ally through the Troubled Asset Relief Program (TARP) in 2009. Ally received more than twice the taxpayer assistance offered to Chrysler.
The bankruptcy, which does not include Ally’s core auto finance and online banking operations, is a painful step designed to free Ally’s profitable business from the burden of ResCap’s bad mortgage assets.
“It is clear to me this is part of a housecleaning exercise,” University of Michigan bankruptcy law professor John Pottow said. “They want to take Ally public soon, and they think (ResCap would) weigh down on it.”
Read More»Ally estimates $1.3 billion 2Q loss after ResCap files for bankruptcy
By Nathan Bomey, Detroit Free Press
May 14–Detroit-based Ally Financial Inc. estimated that it would lose about $1.3 billion during the second quarter as a result of the Chapter 11 bankruptcy of its Residential Capital unit and other mortgage subsidiaries.
But the corporation, formerly known as GMAC, also projected today that by the end of the year it would repay another one-third of the $17.2 billion in emergency loans the U.S. government provided in 2008 and 2009 during the financial crisis.
The U.S. government, which signed off on the filing, owns 74% of Ally and has recovered about $5.5 billion of its investment so far. The Treasury Department believes it can recover more cash after Ally extricates ResCap from its balance sheet.
Ally, whose ResCap unit filed for bankruptcy protection in New York as expected this morning, said it would explore “strategic alternatives” for all of its international businesses. That does not include the company’s U.S. auto lending arm, which provides financing for loans extended in the showroom to buyers of General Motors and Chrysler vehicles.
Ally agreed to pay $750 million to help fund the bankruptcy obligations of ResCap and revealed it would bid $1.6 billion for certain ResCap mortgage assets. It will also extend $150 million in bankruptcy lending, often referred to as debtor-in-possession financing, to help ResCap pay its bills during the Chapter 11 proceedings.
Ally has about 14,800 U.S. employees, including more than a thousand in the Detroit area, but most of its mortgage employees are based in Pennsylvania.
Ally expects to lose its equity stake in ResCap and to effectively remove the unit from its books after the bankruptcy is complete. ResCap becomes the latest in a string of financial companies that failed to outrun a pile of toxic mortgages and securities compiled during the housing craze, which was fueled by subprime mortgages, speculators, consumers, political actions and irresponsible financial institutions.
Nationstar Mortgage LLC, its affiliates and hedge fund Fortress Investment Group LLC are expected to pursue an acquisition of some ResCap assets, according to the bankruptcy filing.
ResCap reported total assets of $15.7 billion and total debts of $15.3 billion. Its top creditors included Deutsche Bank Trust Co. Americas, BNYMellon, U.S. Bank, Deutsche Bank AG and the Federal Housing Finance Agency.
Read More»Is Europe a safe place to buy? Not exactly
By MATTHEW CRAFT
NEW YORK – It often pays to zig when everybody else zags. If you were brave enough to put cash into the stock market three years ago – and very few small investors were – you’ve doubled your money.
European stocks have lost about 15 percent since mid-March. Renewed worries about the region’s long-running debt crisis have rattled markets. So it might look like a chance to buy cheap.
The trouble, money managers say, is that nobody knows when the crisis there will end. Most of them predict it will get worse, perhaps far worse, before it gets better.
“You can’t pick the bottom,” says Martin Jansen, lead manager for international equities at ING Investment Management U.S. “And if things get worse in Europe, today’s cheap won’t look so cheap anymore.”
To hear Jansen and other money managers tell it, a rule for shopping applies for investing: Not everything that goes on sale is a bargain.
If Greece drops out of the 17-country euro currency group this year, as analysts worry it will, it could spread havoc throughout the financial system. And Europe’s underlying problems – slumping economies, deep debt burdens and ever-rising interest rates – could take years to fix.
That doesn’t mean it’s time to sell everything connected to Europe. The best approach, fund managers say, is to divide the continent into struggling countries and stronger ones.
Investors who take this approach keep clear of Greek banks but favor German giants. All European markets could get hammered in a panic, but stocks in the stronger countries stand a better chance of bouncing back months, or maybe years, later.
“Put it this way: Are European markets a screaming buy?” Jansen says. “No, right now it’s time to be cautious, time to be selective.”
Some questions and answers:
Q: Which European countries are in better shape?
Among the 17 countries that use the euro currency, Germany is an outlier. It has the largest economy in Europe and the fourth-largest in the world. But it’s not just Germany’s size that sets it apart. Key measures of the German economy make it look as if the country broke away from the continent.
Read More»Toyota plans aggressive recovery: Automaker aims to push hybrids, low-priced cars, new models
By Nobuyuki Kojima, The Yomiuri Shimbun
May 10–Toyota Motor Corp. is aiming to cement its recent recovery by aggressively pushing new models, hybrids and low-priced cars in domestic and foreign markets.
The auto giant is also rehabilitating its domestic business, which experienced a decline in profits due to the high appreciation of the yen.
On Thursday, Toyota revealed it expected a V-shaped recovery.
In regard to its fiscal 2012 operating profit–which has been sluggish since the 2008 Lehman Shock–Toyota said it expected to earn more than 1 trillion yen.
In addition to the 250 billion yen Toyota lost as a result of the yen’s appreciation, the company’s operating profits fell by 270 billion yen due to the Great East Japan Earthquake and massive flooding in Thailand.
However, Toyota was able to halt the decline in its profit margin during the first half of fiscal 2011 at 112.6 billion yen and secured 355.6 billion yen in operating profits.
President Akio Toyoda showed confidence in the results of the automaker’s management reform at its earnings report press conference.
“Profits for [fiscal 2011] were not big. But we could have ended in the red due to the disasters and the super-strength of the yen,” Toyoda said at the conference.
The company expects the disasters’ effects on its profits will diminish in fiscal 2012.
It also expects sales of its hybrid cars will increase thanks to hikes in gasoline prices in the United States and a Japanese government subsidy program for eco-friendly car purchases.
In emerging nations experiencing rapid growth, such as China and Brazil, Toyota plans to start operating new plants by the end of this year with the aim of placing strategic, low-priced cars in those markets.
The company also plans to strengthen marketing strategies at home and abroad by successively selling new models with an eye to securing more than 1 trillion yen in operating profits.
If Toyota is successful, it would be the first time the automaker’s annual operating profits exceeded 1 trillion yen since fiscal 2007.
Better days ahead?
Read More»Detroit Free Press Tom Walsh column
By Tom Walsh, Detroit Free Press
May 9–As Mitt Romney was assailing President Barack Obama in Lansing on Tuesday as “a catastrophe for a lot of us,” Obama’s top economic adviser, Gene Sperling, delivered a rousing defense in Detroit of what he called decisive — if unpopular — actions that left the U.S. in far better shape than Europe or other nations following the economic plunge of 2008.
“Let’s just remember what was,” Sperling said in a luncheon speech to the Jewish Council for Public Affairs. The U.S. economy was contracting at 8% a year in late 2008 and early 2009, a rate unseen since the Great Depression and industrial demobilization after World War II.
“When history looks back, the idea that President Obama came into office and moved with such speed and force will be remembered as one of the quickest and most bold responses,” said Sperling, a Michigan native who has chaired the National Economic Council for stints in both the Obama and Bill Clinton presidencies.
Detroit has been one of the major beneficiaries of Obama’s economic policies, Sperling said, although the bailouts of auto companies and banks were politically unpopular.
Even though Obama’s political advisers said the bailouts were “unbelievably unpopular, a total political loser … he decided to make the right call, to do the right thing,” Sperling said.
“You don’t always get the rewards from doing the right things, but when you look at the American automobile industry, this is a case — a visual and tangible case — of what bold action in the face of political unpopularity can do.”
Romney, a virtual lock to be Obama’s Republican opponent in the November election, has employed some rhetorical gymnastics on the campaign trail to criticize Obama’s handling of the auto bailouts, while cheering the survival of General Motors and Chrysler, and even — in Ohio on Monday — saying that he, Romney, deserves “a lot of credit” for the auto industry revival because he suggested managed bankruptcies for GM and Chrysler.
After his speech Tuesday, Sperling wouldn’t react to Romney’s claim of credit for the auto rescue, other than to say, “I’m just going to comment on our policies.”
Read More»OPINION: Profits up, deficit rising – blame tax breaks
By Dan Morain, The Sacramento Bee, Calif.
May 9–In California, corporate profits are not merely up. They are “booming,” the Legislative Analyst’s Office reported not long ago.
Apple reported profits of about $1 billion a week and is the world’s most valuable company. Twitter expands rapidly, and the fabulously successful Facebook is on the verge of going public, creating large numbers of new millionaires.
But while corporate profits are up, corporate tax collections are 6 percent below estimates, the result of corporate tax breaks added or expanded in recent years. The latest numbers come as a surprise to state budget writers, and that ought to sound alarms.
“It is pretty clear that something is far off,” said Jason Sisney of the Legislative Analyst’s Office. “The impact of one or more policy changes is greater than expected.”
Gov. Jerry Brown’s office plans to release a revised budget next week. The budget deficit likely will have grown to $10 billion or more, necessitating more cuts to state services.
Corporate taxes make up an ever shrinking share of the state budget, accounting for $9.4 billion in the current fiscal year, slightly less next year. Corporations won’t pay the pre-recession high of $11.8 billion for at least another four years.
The corporate tax rate is 8.84 percent, but that’s theoretical. The legislative analyst pegs the effective rate at about 5 percent, largely because of various tax breaks.
Believe it or not, and I know that many of you won’t, but legislators are not stupid. Legislative staffers definitely are pros, who are steeped in their areas of expertise.
But they’re no match for corporate tax wizards. Just as successful companies strive for the latest innovation in their cool new widgets, lawyers and accountants are paid to squeeze every penny out of every tax code section.
Part of the problem dates to when then-Gov. Arnold Schwarzenegger and legislators sought to speed corporate tax collections to solve immediate budget needs. To win support, they created new tax breaks that are taking effect now.
Various changes have cut corporate tax collections by $1.2 billion compared to what corporate taxes would have been without these changes, the analyst has said.
Read More»