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Future of Ally Bank as GMAC Tries to Repay Its TARP Debt?

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Ally Bank

This article from Bloomberg reported that GMAC has hired Citigroup and Goldman Sachs to help it repay its TARP debt. According to the article:

The oversight panel said in a report this month that GMAC may not be able to fully repay its TARP debt and the rescue may cost taxpayers $6.3 billion. GMAC is 56.3 percent owned by the government

This was from the Congressional Oversight Panel. It released the following report on March 10th, March Oversight Report - The Unique Treatment of GMAC Under the TARP (pdf).

More details about this report and GMAC's future were described in this post from the WSJ blog Deal Journal, What Will Happen to GMAC?. It reviewed "three issues GMAC needs to resolve if it's going to be a profitable stand-alone and publicly traded company." One of those three issues was Ally Bank, and the post cited several concerns mentioned in the oversight panel report. That had me worried so I searched the report. I did find some disconcerting notes regarding Ally Bank.

The following is an excerpt that starts on page 105 of the oversight panel report. Much of the excerpt is history of Ally Bank that I've covered over the last year such as the ABA letter to the FDIC and the FDIC rate restrictions. I've highlighted some new details that I have not seen before.

Although GMAC is cutting costs across the organization, its investment in Ally Bank is staying largely stable. GMAC has been engaged in an aggressive marketing campaign for Ally Bank. Among other things, Ally Bank has been attempting to interest depositors by offering CD rates that are nationally among the highest available. This strategy has been politically contentious regulators view unusually high rates as an indication of instability. In the summer of 2009, when Ally Bank’s rates were more than double the national average, the rates prompted a letter of complaint from the American Bankers Association (ABA) to the FDIC. The ABA letter stated that the Ally Bank strategy – aggressive courting of deposits and extremely rapid growth in assets – was risky and required regulatory supervision. The ABA was particularly incensed by Ally Bank’s strategy in light of the government bailout, arguing that Ally Bank was shielded from investor and market influences, and was therefore free to follow risky strategies. Citing the high interest rates paid by troubled financial institutions during the banking crisis of the 1980s, the ABA observed that such high rates and risky behavior can create a race to the bottom, in which other banks are also forced to raise their rates above the market rate. In response, Ally Bank vigorously contested the ABA’s characterization of Ally Bank as troubled, citing its capitalization ratio and protesting that its rates were supported by its relationship with the GM and Chrysler dealership network. Ally Bank’s arguments, however, did not persuade the FDIC, which sent a letter conditioning Ally Bank’s access to the TLGP on FDIC review of Ally Bank’s CD rates and later adopted new regulations setting a variety of standards for the interest rates permissible for insured depository institutions that are not well capitalized. At present, Ally Bank still offers rates that are among the highest available, although Mr. Carpenter has said that Ally Bank hopes to move away from aggressive rates and toward a more traditional banking model, albeit an online one. According to one analyst, however, internet banks do not have a history of success. Among other things, overhead is high because in the absence of branches the banks depend on expensive advertising. In addition, at present Ally Bank has approximately 10 percent of its deposits in brokered deposits. Bank’s proportion of brokered deposits and lack of restrictions on deposit withdrawals to be a warning sign of bank instability. Finally, as the Federal Reserve discontinues the extraordinary measures it has been using to keep interest rates low, interest rates are likely to rise and with them Ally Bank’s cost of funds. Although these shifts will affect the industry as a whole, Ally Bank already has high deposit costs and a high proportion of brokered deposits. Some commentators note Ally Bank’s high costs for acquiring and retaining depositors and low core deposits and liken Ally Bank to the unstable S&Ls of the 1980s. Given that Ally Bank’s deposits serve the same purpose for GMAC as commercial paper, GMAC instability affects not only GMAC and Ally Bank and, downstream, GM but also - and this brings to the fore the moral hazard of using government-insured deposits as the basis for monoline financing - Ally Bank’s depositors. Ultimately, Ally Bank appears to be both critical to GMAC and very much a work in progress, and whether it will be a success remains to be seen.

Note, Mr. Carpenter is the CEO of GMAC. I'm a little worried when he was reported to have said that:

Ally Bank hopes to move away from aggressive rates and toward a more traditional banking model, albeit an online one

I wonder what he considers as a "more traditional banking model"? Perhaps more like ING Direct?

The other interesting thing to note is the opinion of the analyst. I have a feeling the analyst must be from the ABA or from one of the giant banks. I don't understand the following:

According to one analyst, however, internet banks do not have a history of success. Among other things, overhead is high because in the absence of branches the banks depend on expensive advertising.

Of course internet banks don't have a history of success. The internet is only about two decades old. And I don't understand how not having branches creates more overhead. Is advertising really more expensive than running a huge brick-and-mortar branch network?

Another thing to note was the mention of the "lack of restrictions on deposit withdrawals." Was this referring to the small CD early withdrawal penalty? Or perhaps it's just referring to Ally's no-minimum requirements on its savings accounts?

I hope GMAC can quickly repay its TARP debt. It's not only for the sake of the taxpayers, but also to remove the regulatory oversight and restrictions on Ally Bank. We don't need any more downward pressures on our deposit rates.


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Comments
20 Comments.
Comment #1 by Virginia (anonymous) posted on
Virginia
I chatted with an Ally CSR about this today and she said "Regarding the TARP issue, Ally Bank is a key part of GMAC’s funding strategy and the funding at the bank is critical to in supporting the extension of credit for auto dealers and consumers. While we continually seek ways to prudently manage costs, we also need to continue to invest in key areas of our business in order to restore financial performance. Ally Bank rates are determined by several factors including conditions in the market and the state of competition. Ally Bank rates continue to be competitive. Like any financial institution, Ally Bank regularly monitors the marketplace and adjusts the rates of its savings products. Our plan is to offer rates that are among the most competitive in the country."

She was very friendly and nice to try and answer my questions, since they were probably way out of the usual range for her, but it sounds as though the plan that she's referring to and the CEO's plan are not the same thing. Most competitive usually equals most aggressive. I'm wondering now how they are planning to maintain highly competitive rates while NOT being aggressive and moving to a more traditional (low-rate? fee-based?) banking model. Very sketchy, in my opinion!

8
Comment #3 by Anonymous posted on
Anonymous
If you opened a 5 year CD with this unusual 60 day penalty, will the assuming bank have to preserve the conditions on the penalty or only the rates? If they have to preserve both, I assume they will cash you out rather than offering a "free" option on rate increase.

In fact, right now the 5 year 60 day penalty CD is a win-win type of deal. If the rates go up cash out for very little, if they go down, you may have a higher rate of return than a 30 year bond.

If, Ally goes under and the assuming bank doeas not have to repect the 60 day deal, then the ally CD may turn out to be a very bad deal.

1
Comment #4 by amit posted on
amit
Ally is still offering a .5% bonus to existing customers for renewing a CD. I guess thats one way of not advertising aggressive rates but still giving above average rates to retain deposits.

7
Comment #5 by Dale (anonymous) posted on
Dale
Should we be concerned re: how this affects the 2 yr. bump up cd,  since stated Ally is  tomove away from being a  rate leader?  Also, in view of instability concerns, thinking at this point,  a fixed 2 yr. 2% cd might  be preferable? Thoughts anyone?

2
Comment #7 by Anonymous posted on
Anonymous
Essentially, Ally already is evolving into a broad, mass-market online bank that offers a) an extensive line of products that offer more value than brick-and-mortar banks; b) excellent 24/7 customer service.

It's been many months since Ally offered best-in-market interest rates.

But arguably, Ally can be very successful without offering best-in-market interest rates. It can succeed by offering "competitive" interest rates--well above those of brick-and-mortar banks (which surely have higher cost structures)--and top-notch customer service (not hard to beat brick-and-mortars, which no longer, well, offer customer service).

Ally's customer service surely costs Ally significant money, but great customer service, and decent rates, seem a good way to retain customers and get good word of mouth. For a web business, word of mouth is critical.

Maybe Ally can be the Amazon.com of online banks. I know that I <could> find cheaper goods at other sites, but I routinely buy at Amazon because it's proven to me that it offers me fair value and good customer service.

I'm leaving a fair amount of my extra cash at Ally because my experience with the bank over the past year has been positive. I came in early 2009 (when it was GMAC Bank) for the higher interest rates, but I've stuck around because I have been impressed with the bank's service and services.

Any online bank that bases its operating premise on having the "highest" interest rates will run into trouble, for interest rate chasers will flee the moment someone else offers a few higher basis points. (Note: I have more cash at two other online banks than I do at Ally. But I don't have "relationships" with those other banks--I'll jump elsewhere if someone gives me a higher rate. In contrast, I am leaving cash in Ally as essentially my "permanent" online-bank home.)

Ally's strategy of a good product line, "fair prices" (that is, competitive interest rates) and good customer service can be a winning formula.

10
Comment #11 by Anonymous posted on
Anonymous
what is the answer to the question asked by 3?

If Ally is shut down and sold by the FDIC, will the receiving bank have to honor the 60 day penalty or just the rate on a 5 year CD?

2
Comment #12 by Anonymous posted on
Anonymous
Thanks, Ken, for your article. Since my funds at Ally are all insured, I'm just going to let it ride, and not try to what-if myself to death. You must know the cost of advertising for web-based banks, since there are two Ally ads right on this page!

6
Comment #13 by Anonymous posted on
Anonymous
A. #8 is right. Anyone who thinks differently had better start carefully checking all of their Ally paperwork -- especially interest calculations -- and see how long it takes you to be made whole after you notify them of their many errors.

This applies particularly to A. #7 who raves about Ally’s customer service. I grant you Ally is especially polite while engaging in “attempted robbery.” I’m planning to wallpaper my bathroom with their stack of replies that contain “I do apologize for the confusion …. “ Confusion is Ally’s word for mistake. The apology, though, does not necessarily mean it ever gets corrected.

Also suggest you read the comments on the Ally board.

-2
Comment #14 by Anonymous posted on
Anonymous
why does 9 get minus 1 yet 10 gets minus 5/>??? long term bonds at 5 percent only way 2 go

-3
Comment #15 by Anonymous posted on
Anonymous
Why are comments being removed? Also, what is the answer to question asked in #3?

If Ally fails, will the assuming bank have to go with a 60 day penalty on the 5 year CD or can they change that?

2
Comment #16 by Anonymous posted on
Anonymous
I’m concerned that if Ally Bank goes under, I will lose my ACH “hub.”  Can someone please recommend another bank that I can use to ACH money from one institution to another?

1
Comment #17 by Mike posted on
Mike
I have had very positive interaction with Ally Bank.  Recently, I used Ally to PULL money out of Emigrant Direct.  Emigrant direct reversed the transfer and took the money back.  Apparently Emigrant will only let you PUSH money out of their accounts, you are not "allowed" to take it out with another bank.  

ALLY called me to politely inform me of this.  No lecture, no penalty.

I had to call Emigrant to find out why.

The amount of money I have at Ally is a joke, yet they treated me like I was their top customer.  

I maintain many online accounts that I've had from the 5% days, hopeful for the return of good rates (like many here).  But I have taken advantage of CDs and reward accounts since (and paying down debt).

I've been trickling money into Ally, lately, because of my positive interaction there.

0
Comment #18 by Anonymous posted on
Anonymous
Where are post 2,6, 8 and 10?

0
Comment #19 by Anonymous posted on
Anonymous
What did the deleted posts say?

1
Comment #20 by Anonymous posted on
Anonymous
to 16:

Alternative "ACH Hub" banks:

Etrade

Sallie Mae Bank

2
Comment #21 by Anonymouse (anonymous) posted on
Anonymouse
WHERE IS COMMENT 21 22 23

1
Comment #22 by Anonymous 16 (anonymous) posted on
Anonymous 16
Thanks #20.  I appreciate the info

Anonymous - #16

1
Comment #23 by Investor Junkie (anonymous) posted on
Investor Junkie
Thank Ken.  Great work and research on this post! It will be intresting to see what happens with Ally.

3
Comment #24 by Anonymous posted on
Anonymous
now that ally has a ckg acct it is a great hub bank!  esp with the ACHs

1