Treasury Would Support Bankruptcy Of Ally's ResCap Unit-Official

The U.S. Treasury Department has agreed to support a bankruptcy filing for the struggling home-loan unit of government-owned lender Ally Financial Inc., if the company chooses to take that route, an official said Monday.

A bankruptcy filing for Ally's subsidiary, Residential Capital, has been 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.

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.

While no decision on a ResCap bankruptcy has been made, the official said the Treasury would support such a move if ResCap's board and Ally decide to do so. Dealing with ResCap's liabilities from bad mortgage investments will put the Treasury in the strongest position to maximize its investment in Ally, the official said.

An Ally spokeswoman didn't immediately comment.

Last month, Ally said it could lose up to $1.25 billion if ResCap files for bankruptcy.

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.

The U.S. owns about 74% of Ally, which received more than $17 billion in aid during the financial crisis. Of that, about $5.5 billion has now been repaid.

Ally has explored a so-called prepackaged bankruptcy that would result in the sale of ResCap's assets to Fortress Investment Group LLC (FIG), The Wall Street Journal reported in March.

Michael Carpenter, chief executive of Ally, has planned 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."

-By Alan Zibel, Dow Jones Newswires; 202-862-9263; [e-mail]