Ally Bank Considers Bankruptcy for Mortgage Unit ResCap Amid Financial Struggles

Ally Bank, part of Ally Financial—historically known as GMAC—is reportedly contemplating bankruptcy for its struggling mortgage division, ResCap. This decision comes in light of ResCap’s significant financial losses, which have exceeded half a billion dollars over the past two quarters. Compounding the issue, the mortgage unit is facing a staggering $2.3 billion in debt obligations due by the end of 2013, a figure that dwarfs its total reserves as of September.

Understanding Partial Bankruptcy

The potential bankruptcy of ResCap raises questions about the implications for Ally Bank. Here’s a breakdown of what this could entail:

• Separate Bankruptcy Filing: It’s important to note that Ally Bank itself would not file for bankruptcy protection. Many large corporations operate through distinct divisions, allowing them to manage financial difficulties in one part without jeopardizing the entire organization. This strategy can be likened to amputating a limb to save the body.
• Potential Reputational Damage: Despite the separation, analysts caution that a bankruptcy filing by ResCap could negatively impact Ally’s overall reputation. Even if the main bank remains financially stable, consumer and investor confidence might wane, leading to hesitance in future investments.
• Options for ResCap: Ally has two primary paths: it could opt for liquidation, effectively shutting down the mortgage unit, or it could pursue a reorganization strategy to restructure its debts and restore financial health.

Historical Context of Bailouts

While discussions about a potential ResCap bankruptcy are still in the preliminary stages, Ally’s history suggests that such a move could be on the table. Since its transition to a banking entity in 2008—primarily to access government bailout funds—Ally has rebranded itself as a financial institution focused on transparency and simplicity. This shift followed its previous identity as GMAC, which was heavily involved in automotive financing.

Comparison with Other Financial Institutions

The recent considerations surrounding ResCap echo a similar situation earlier this year when Bank of America evaluated the possibility of bankruptcy for its Countrywide mortgage division. Countrywide, known for its involvement in subprime mortgage lending, faced immense debt as defaults skyrocketed. However, Bank of America ultimately decided against filing for bankruptcy in that case, illustrating the complex choices financial institutions must navigate in challenging times.