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Untrustworthy Ally

The Treasury Department is keeping billions of taxpayer dollars in America’s most troubled bank to spare President Barack Obama the embarrassment of another failed bailout, according to financial experts.

American taxpayers have given auto-lender Ally Financial more than $16.3 billion from the Troubled Asset Relief Program, leaving the government controlling 74 percent of the company. The company’s mortgage lending arm has been hemorrhaging money for years, but Treasury refuses to cut its losses for fear of embarrassing the administration.

"Geithner and the rest of Treasury doesn’t want to admit that it is a mess and they’ve been lying to us for three years," said Christopher Whalen, cofounder of Institutional Risk Analytics. "They’re waiting until after the election."

In March, Ally failed the federal stress test by the largest margin of any bailout recipient. The test measures a company’s ability to survive future economic crisis.

The company’s mortgage subsidiary, Residential Capital (ResCap), missed a $20 million interest payment on April 17. The following day, Fitch Credit Ratings downgraded ResCap to ‘C’ from ‘CCC,’ and placed Ally’s ‘BB-‘ rating to Rating Watch Negative.

Ally is now the worst performing bailout recipient, and many in the financial industry do not see a path to recovering taxpayer money.

Prior to May 2009, Ally was known as General Motors Acceptance Corporation (GMAC). It served as GM’s in-house auto-loan shop and provided financing to approximately 75 percent of the inventory at GM dealers.

In 2006, in order to generate capital, a struggling GM sold a 51-percent stake in a then-vibrant GMAC—which had entered the booming subprime mortgage business earlier in the decade—to Cerberus Capital Management for $14 billion.

"GMAC was taken out of GM in the first place because everyone thought it was so valuable," Whalen said. "Investors wanted to salvage it from a GM bankruptcy and GM needed the cash at the time." The sale also preserved GMAC’s credit rating, which allowed them to make even more subprime loans to house and auto buyers.

As the economic collapse took hold, GMAC/Ally looked to the government to stay afloat. Ally has spent nearly $9 million on lobbying since 2007.

Despite lacking the capital to qualify as a bank, the Federal Reserve granted Ally an exception and re-designated it a "bank holding company" in December 2008, a move that allowed it to receive bailout money. Within a week, the Fed bought a $5 billion stake in Ally and loaned the company another $1 billion.

After two more rounds of bailouts under the Obama administration, Ally received another $11.3 billion in 2009.

"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.

A GMAC/Ally collapse would not have sent shockwaves through the entire financial system the way a JP Morgan or Goldman Sachs would have, but it could have proven fatal to GM and cost thousands of United Auto Workers members—a key Obama constituency—their jobs, experts say.

Although GMAC/Ally split from GM, it still provided financing to a majority of GM and Chrysler customers. The bailout gave the carmakers the ability to keep selling cars with Ally financing nearly seven million vehicles.

GM must split its lending dollars with Ally, unlike other auto manufacturers who keep 100 percent of the profit on auto-financing through their in-house lenders. GM has weighed recreating a new finance wing in order to recover some of that money —a move that would devastate Ally.

"[Treasury] essentially forced GM and Chrysler to create a competitor against a bank that’s owned by the taxpayers," said Edward Niedermeyer, editor-at-large of TruthAboutCars.com. "Ally lost a lot of its position because the government didn’t…put it back together [with GM]."

Whalen proposed that Treasury should cut ties with Ally’s mortgage arm, ResCap, and sell the auto-lending business back to GM three years ago. He claims the Treasury Department refused to acknowledge the company’s risk when troubles cropped up in 2011 because it did not want to embarrass the Obama administration during an election year.

"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 merger would also pose problems for Treasury.

The companies will be looking to work out the best deal possible for their respective stakeholders, including government representatives on both sides of the negotiations. The dilemma of fighting for dueling interests on the behalf of the same taxpayer is enough to stump even an experienced litigator and negotiator such as Barofsky, an adjunct professor at New York University’s Law School.

"It’s impossible to talk about one bailed out company buying out another bailed out company, whose interest is Treasury looking out for?" Barofsky said. "That's one of the problems with bailouts in the first place."

"You may need the court to decide this thing," Whalen said.