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Ally Financial Scores Poorly on Fed's Stress Test - Effect on Ally Bank?


The Federal Reserve announced the results of the latest round of bank stress tests. Of the 18 large banks that were tested, Ally Financial scored the lowest. According to MarketWatch:

Ally Financial Inc., majority owned by the government, was the only bank that failed to meet one of the key ratios. The test showed that Ally had 1.5% in capital set aside under a measure known as Tier 1 common ratio, which compares the bank’s common equity to its risk-weighted assets.

In a press release, Ally Financial stated that it "believes that the Federal Reserve’s analysis of Ally’s capital adequacy [...] is fundamentally flawed." In addition, Ally stated:

Ally continues to have strong capital levels and ample liquidity to support its automotive finance operations. In addition, Ally Bank continues to be a well-capitalized bank with a leading position in the market.

One thing that Ally did not mention in its press release was ResCap. Last year Ally Financial's mortgage unit, Residential Capital (ResCap), had filed for bankruptcy protection. According to this Dow Jones (via Fox Business):

Ally's potential costs tied to ResCap have grown more uncertain in recent weeks as the mortgage subsidiary's creditors have pushed the parent company to pay more money to ResCap's bankruptcy estate.

Effects on Ally Bank?

As an Ally Bank depositor, I'm not concerned with this news. As Ally stated in its press release, the bank continues to be well-capitalized. Our financial overview of Ally Bank shows an overall health rating of 5 stars (out of 5) with a Texas ratio of 3.47% (excellent) based on September 2012 data.

Of course, it always makes sense to stay under the FDIC limits. Ally Bank makes it easy to add POD/ITF beneficiaries to allow depositors to be insured for over $250,000. I have more details in this post.

My main concern with this news is that Ally Bank will continue to be pressured by the FDIC to lower its rates. Back in 2009 the Wall Street Journal reported that the FDIC asked Ally officials to keep the rates on deposits low enough so the bank wasn't one of the nation's top five rate payers, as measured by Bankrate.com. This came after the American Bankers Association complained to the FDIC about Ally's deposit rates. The ABA thought it was risky for Ally to be allowed to pay above-market rates since Ally was receiving government assistance.

I haven't been closely tracking Ally's ranking on Bankrate, but every time I check, Ally Bank's products always appear just under #5 on the Bankrate's tables. When I checked today, Ally's 5-year CD and savings account were #6 in the tables. Ally's 1-year CD was #8 on the table.

As I mentioned yesterday, Ally's loyalty rewards program for CD renewals can boost the CD rates so they are close to or exceed the top rates in the nation.

Related Pages: Ally Bank

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  |     |   Comment #1
The Federal Reserve's "stress" tests are worthless. They don't fully account for the differential effect of derivatives losses. Citigroup, JP Morgan Chase, Morgan Stanley, Goldman Sachs and Bank of America are collectively exposed to about $300 trillion worth of derivatives, several times the total size of the US economy. They have "hedged" this exposure mostly against each other as counter parties so, if they all go down, the losses will be incredible.

If we have a severe recession, given the huge amount of mal-investment activity has been stimulated by the Fed printing presses, a lot of credit default swaps will trigger, causing tens or hundreds of billions of losses for the casino bankers. If interest rates turn sharply upward, as a result of the Fed being forced, for some reason, to stop its printing presses, more than two hundred trillion worth of interest rate derivatives could be triggered, resulting in even bigger losses.

I have been criticized by some, including particularly the vocal ytytyt avatar, for claiming that the mega banks here and in Europe together form a cartel-like organization that seems to be above the law. Well, the US government now admits it. Eric Holder, the US Attorney General, says that the NYC banks are "too big to jail"! See,

  |     |   Comment #2
I should note that the casino-banker losses I have noted above will be solely and completely at the institutional level...that level that is guaranteed by the full faith and credit of the entire taxpayer base of the USA. IThere is no doubt that top ranked casino banking executives are, even now, preparing their personal portfolios to make money off such a massive highly inflationary depression, even when and if some or all of their companies go belly-up at the institutional level.
  |     |   Comment #3
I should also note that it is the Merrill Lynch division of Bank of America which is in the casino-banking business, not the entire bank, and further note that 99.9% of all the employees at such institutions are entirely innocent of wrongdoing, and have no idea what is going on in the "trading" and derivatives issuing divisions. Indeed, the FDIC insured divisions don't even earn the profits from the inherently fraudulent derivatives that are issued in their name, but they do accept all the risk. The profits go to executives inside the investment bank divisions.

The casino bankers place the derivatives inside the FDIC insured banking divisions to make more money, taking advantage of the fact that FDIC insured divisions have much higher credit rankings. The high credit ratings come because of the government guaranty to depositors, combined with the first priority lien that derivatives counterparties hold over assets if and when a bank enters bankruptcy or receivership. Derivatives counter-parties have first priority in bankruptcy court, and will take all the assets, leaving nothing for the FDIC to sell. All money paid to depositors will need to be printed or be raised by taxation.
  |     |   Comment #4
"My main concern with this news is that Ally Bank will continue to be pressured by the FDIC to lower its rates. Back in 2009 the Wall Street Journal reported that the FDIC asked Ally officials to keep the rates on deposits low enough so the bank wasn't one of the nation's top five rate payers, as measured by Bankrate.com."

I agree Ken. The FDIC has viewed Ally Bank with a jaundiced eye for years now. The ABA, which has hefty influence over the FDIC, would like nothing better than Ally's rates to be squashed once again by FDIC directive.

Meanwhile, the Fed's stress tests are rigged for the mega-banks as Wanderer posted above.

"U.S. rules allow banks to net out the derivative bets they make with each other, essentially erasing them from their financial statements. European rules generally rely on total potential losses or gains while the Fed's stress tests are essentially based on the more lenient U.S. accounting rules. That has alarmed some bank experts. In early February, FDIC governor and former JPMorgan Chase banker Jeremiah Norton criticized the reliance on U.S. accounting rules when it came to derivatives."

http://finance.fortune.cnn.com/2013/03/07/federal-reserve-stress-test/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed: fortunefinance %28Fortune Finance: Hedge Funds, Markets, Mergers & Acquisitions, Private Equity, Venture Capital%25
  |     |   Comment #5
I believe this is a deliberate attempt to force Ally to cut its rates.  Ally Bank is the only bank that has given a fair shake to savers, with its low early withdrawal penalty and better than average rates.  It does not surprise me that the Feds want to force it to get in line with other banks.  Obviously, after showering banks with money they would meet to so-called "stress test."  If every family in America was given free money the way banks were, we would all meet the stress test.
  |     |   Comment #6
I have my mortgage with Ally, and I received a letter a month ago that due to the bankruptcy, the mortgages were taken over by another company--can't remember the name right now, and it's late. 

Before all this started, I had my mortgage, a Visa and some CD's with Ally.  Since the government got involved, it's all fallen apart.

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