The lender, Residential Capital, a former part of General Motors, is 74%-owned by the US government after being given $17.1bn of taxpayers’ money in 2009 as part of the government’s financial support package for the car industry.
But the amount toxic debt its mortgage subsidiary Residential Capital holds have left it unable to cope, with the business going into bankruptcy on Monday.
Ally, had paid $5.5bn back to the government, but was forced to abort a planned flotation in 2010 due to deteriorating conditions in the mortgage market.
Ally will contribute $750m to the company’s creditors, including those in mortgage-backed securities, and will also pay $1.6bn for the mortgages held by Residential Capital.
The move will see Fortress Investment Group pay $2.5bn for Ally’s mortgage servicing business, although other bidders could outbid.
Mike Carpenter, chief executive of Ally, told the Financial Times that the move would guard taxpayers interests.
“Our alternative was to put billions of dollars into the company to redeem bonds and to meet these contingent exposures in a business that as a result of regulatory change is no longer terribly profitable.”
There are rumours that Bank of America could follow Ally and use bankruptcy laws on its own subsidiary Countrywide, but it is thought the BofA’s firm is too closely integrated for this to be possible.
