Fortress Investment Grp. Llc (NYSE:FIG)
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Ally Financial Inc., the government-owned auto lender, said Friday it could lose up to $1.25 billion if its struggling mortgage subsidiary, Residential Capital, files for bankruptcy.
Separately, Ally said ResCap losses tied to litigation and demands to repurchase soured mortgages could cost up to $4 billion more than existing amounts it has set aside for such matters.
"As a Result of ResCap's current financial position, we believe ResCap's ability to pay for any such losses is very limited," Ally said in its quarterly report filed with the Securities and Exchange Commission.
In regards to a ResCap bankruptcy, Ally said it could face "significant charges" and "substantial litigation," with costs ranging from $400 million to $1.25 billion based on an estimate of "reasonably possible losses."
An Ally spokeswoman declined to comment on the figures Friday.
A bankruptcy filing for ResCap is widely expected in the coming weeks, when the unit faces more than $300 million of bond-related payments. It recently missed a $20 million bond-interest payment, which has a grace period until May 17.
Such a move could include a so-called prepackaged bankruptcy that would result in the sale of ResCap assets to Fortress Investment Group LLC (FIG), The Wall Street Journal has reported.
ResCap, once one of the largest subprime-mortgage lenders in the country, has been a drag on Ally, which halted plans for an initial public offering last year as mortgage woes mounted.
Michael Carpenter, chief executive officer of Ally, said Thursday during an earnings conference call that the company is considering various options for the subsidiary, including bankruptcy. Its quarterly report reiterated that, stating ResCap is "actively considering" a filing.
Carpenter's hope is to sever ResCap from Ally so that the company can focus on its core auto-lending and online banking business. He has repeatedly stressed that ResCap is a separate company from Ally with its own board of directors and has conducted transactions with Ally at "arm's length."
"It is the contingent liabilities on the capital structure of ResCap that are dragging the whole company down and we have to separate ourselves from those issues," Carpenter said Thursday.
It is likely that ResCap bondholders will argue the two companies are too intertwined to separate in a bankruptcy as a way to preserve their investments.
Elliott Management Corp., a hedge fund that owns ResCap and Ally debt, said last month in a letter to Ally that a ResCap bankruptcy filing would mire in Ally in mortgage-related litigation for years and kill any prospects for reviving an IPO.
Ally had $2.6 billion of intercompany credit agreements with ResCap as of Dec. 31 that were to mature April 13. That day Ally said it extended the maturity date on $2.1 billion of the financing arrangements to May 14 but did not extend a $500 million unsecured line of credit.
Ally has also supported ResCap financially by forgiving intercompany debt, most recently when the mortgage subsidiary's tangible net worth fell late last year below $250 million, a level it is required to meet each month by other lenders.
ResCap's tangible net worth was $399 million as of March 31, though Ally said in its filing Friday that its investment related to that amount would likely be wiped out if ResCap files for bankruptcy.
The U.S. owns about 74% of Ally, which received more than $17 billion in aid during the financial crisis. The former in-house financing arm of General Motors Co. (GM), Ally was bailed out as part of the government's broader rescue of the auto industry.
Ally said Thursday its first-quarter profit was $310 million, more than double its profit from a year earlier thanks to improvements in its mortgage-servicing operations. But executives stressed that the mortgage business would continue to be a smaller part of Ally's future.
"We think that the single most important thing that we can do to preserve and enhance shareholder value is to distance Ally from the mortgage business," Carpenter said.
Ally has already taken steps to shrink its mortgage exposure by scaling back its activities last year with correspondent lenders, which are typically smaller banks that originate loans and sell them to larger players, like Ally. This month it said would significantly limit its purchase of mortgages backed by the Federal Housing Administration, Department of Veterans Affairs and Department of Agriculture that are sourced from correspondent lenders and wholesale brokers.
-By Andrew R. Johnson, Dow Jones Newswires; 212-416-3214; firstname.lastname@example.org