Ally Bank, a unit of Ally Financial (which used to go by the name GMAC) is considering putting its struggling mortgage unit, ResCap, through bankruptcy to alleviate some of that division’s debts, according to the Christian Science Monitor.
Apparently, ResCap has not done well financially during the last two quarters, losing more than half a billion dollars. On top of its recent sub-par performance, the mortgage unit also reportedly has some serious debt coming due – about $2.3 billion between now and the end of 2013. That figure comes to about four times the mortgage company’s total reserves as of the end of September.
How Does Partial Bankruptcy Work?
So what does it mean that Ally is considering bankruptcy for just its mortgage division? Here’s a summary:
- The bank itself wouldn’t go into bankruptcy protection. Many large corporations separate their business operations into discreet arms so that they can manipulate them individually. In the case of financial difficulty, for example, a business might be able to put one part of itself through bankruptcy without greatly affecting its other parts. Think of it as amputating an arm to save a life.
- Despite official separation, the bank could face fallout. Some analysts think that a ResCap bankruptcy is unlikely specifically because of the effect it might have on Ally’s reputation. Even if the larger company were not financially hurt by the mortgage division’s bankruptcy, consumers and investors might start to question its viability and shy away from investments.
- It can choose between liquidation and reorganization. Depending on its needs, Ally could put ResCap through a liquidation bankruptcy that would terminate the mortgage arm’s operations or choose to reorganize the group’s debts and emerge as a (hopefully) stronger business.
A History of Bailouts?
As of now, the potential bankruptcy of ResCap is still very much in its speculative stages. While Ally may be considering liquidation or debt reorganization, it is likely also considering a number of other options.
But some analysts are pointing to Ally’s past as evidence that it might be likely to choose bankruptcy in the future. Ally officially became a bank in 2008 in order to take advantage of bailout money that was made available to banks at that time. Prior to its conversion, it operated as GMAC, the financing firm of General Motors.
The Federal Reserve Board approved its request to become a bank, Ally collected bailout money, and the firm now operates as Ally Financial. The new company offers a number of investment and savings products, emphasizing transparency and simplicity.
Earlier Mortgage-Division Bankruptcy Considerations
Earlier this year, Bank of America (the nation’s largest bank) considered a similar move for Countrywide, a mortgage division it bought during the financial upheaval. Countrywide specialized in subprime mortgage loans and, as borrowers defaulted in droves, quickly accumulated scads of debt.
As of now, though, Bank of America has opted to avoid a Countrywide bankruptcy filing. Ally may well file suit.
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