Monday, March 26, 2012

Ally Financial Still Owes A Huge Sum to the Government. The Financial Crisis is not Over, and Canadian Banks Might Still be Left Holding the Bag.

Ally Financial, the Detroit based former finance unit of General Motors, is still owned 74 percent by the United States Treasury. This stake was received in return for over $17 billion in government investment during the height of the U.S. financial crisis. Though it intends on fully paying back the taxpayer's investment, recent news from Bloomberg indicates that the the company will be unable to fetch a large enough sum if it engaged in an initial public offering, or IPO.

It is now being suggested that Ally Financial split into an automotive finance unit, and a retail bank. The retail banking unit, which is what most of us are familiar with from their advertisements, already has $28 billion in deposits. The albatross around the company's neck is Ally's residential mortgage unit, which issued a flurry of bad loans prior to the housing and associated mortgage meltdown in the United States.

Thus far, Ally has paid back $5.4 billion to the United States Treasury. It also almost reached a deal to sell itself to TD Bank and General Motors last year, but those talks fizzled. Buying the beleaguered lender, however, might leave a Canadian bank with significantly more exposure to bad debts than it can handle, which might reverberate back to the Canadian marketplace and its shareholders. TD Bank already paid $6.3 billion for Chrysler Financial, which is not exactly always a prime lender.

Ally's current situation is an indication that though the financial crisis might be in our rear view mirror, it might still be closer to us than it seems. Shareholders of Canadian banks have to be careful that they know what they really own and watch out for their own bankers left holding a big bag of defaulting U.S. debt. The American government would be more than happy to let us share some of the risk.

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