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

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.