First of three parts
Al de Molina likes to compare running GMAC Inc. to "building the plane as we fly."
The chief executive of the $178 billion-asset car and home lender also has a message for the rest of the industry: receiving $12.5 billion of government bailout funds (and counting) does not give GMAC an advantage over other banks.
"There's no one that looks just like us and they should thank their lucky stars that they don't," de Molina said in an interview last week.
After the credit markets froze and GMAC's role of financing 6,000 auto dealers and their customers appeared to be in jeopardy, it hastily converted to a bank holding company. Since then, GMAC has become more banklike in practice, rapidly gathering deposits at its online Ally Bank using low rates and ads that mock traditional banks. The company's goal is eventually to get most of its funding from deposits.
The effort has met resistance from regulators, which de Molina called understandable given how Ally, which has no branches, has suddenly become a national brand.
"No one just drops in and says you're a bank. It's never been done before," said de Molina, a former chief financial officer of Bank of America Corp.
Some analysts question the sustainability of the company's Internet banking model. More broadly, with the Treasury Department poised to inject another $5.6 billion into GMAC this week, analysts also wonder how the lender can eventually wean itself off government support and return to profitability. The Federal Reserve said Monday that of the 10 banking companies that were told to boost capital under the stress tests, GMAC is the only one yet to do so. The pending Treasury infusion should get the company where it needs to be, the Fed said.
In May, the American Bankers Association sent a letter to the Federal Deposit Insurance Corp., complaining that Ally's aggressive deposit pricing was "particularly egregious" because of the government's investment.
De Molina says that view ignores the fact that GMAC pays a high dividend on the government's preferred shares.
"The notion that this is government funding is nonsense — all that 9% preferred money has no advantage," he said.
Ally's deposits have grown dramatically, up 58% from a year earlier, to $28.8 billion, in the third quarter. But quarter-to-quarter deposit growth slowed to less than 10% after the FDIC told the company to reduce its deposit costs as a condition of issuing $7.4 billion in government-guaranteed debt under the Temporary Liquidity Guarantee Program.
David Barr, an FDIC spokesman, would not discuss GMAC or Ally specifically. He said that after the savings and loan crisis, the FDIC implemented rules to regulate the amount banks can pay on deposits.
"A lot of banks used [high interest rates] to grow themselves out of their problems and they just made matters worse," Barr said.
De Molina said he has "a difference of opinion" with FDIC officials about whether Ally's brisk deposit growth should be curtailed.
"They wanted us to pay lower rates, so now we do and we'll continue trying to change their minds," he said. "Internet deposit-gathering is a new thing and I'm convinced I'm right and they can be just as stable as branch deposits."
Aggressive deposit growth on its own would be a problem if the bank's underlying assets were of poor credit quality, de Molina said.
"There's no question that if you're garnering deposits based on rates, those deposits are not as sticky; it's what they call 'hot money,' so you could have more liquidity risk, because the money could go away."
But he said deposit-gathering is "an art form" that could be perfected by combining "high-quality assets and good liquidity cushions."
Robert Hull, GMAC's chief financial officer, told analysts last week that the FDIC forced it to transfer $5.2 billion to Ally in the third quarter. The bank had a Tier 1 capital ratio of 14.4% on Sept. 30, well above the threshold to be considered well capitalized. De Molina said that if for every $100 in assets, Ally kept $15 in capital reserves, the bank should be allowed to raise deposit rates.
Mark Wasden, a vice president and senior credit officer at Moody's Investors Service Inc., said the FDIC's intervention on deposits laid bare the limitations of relying on an Internet model to attract "sticky" account holders — those who will stay put and not move to another bank offering better rates.
A larger concern, he said, is what will happen when investors regain confidence and move back into stocks and bonds and away from savings and money market accounts.
"I do wonder if GMAC will be able to have the same ability to raise and keep deposits when there are fewer deposit dollars to be had," Wasden said. "The question is can Ally Bank with an Internet model be the basis for GMAC transitioning to a full and complete bank? It remains to be seen and I kind of question that."
When asked if Ally might try expand the old-fashioned way, by eventually building or buying brick-and-mortar branches, de Molina said, "I certainly would not count that out."
Analysts said GMAC's prospects depend largely on those of General Motors and Chrysler Group LLC, which face uphill battles of their own after separate government bailouts.
"The government has made a decision that they are part of the whole restructuring effort at GM so at the end of the day, they're still very much reliant on GM," said Kathleen Shanley, an analyst at the bond research firm Gimme Credit LLC. "If GM and Chrysler can't turn themselves around, they're still hitched to two of the weakest brands out there."
GMAC's auto finance unit swung to a profit of $395 million in the third quarter, from a loss of $379 million a year earlier, and several analysts said the unit will remain profitable from now on.
But another string attached to government capital is that GMAC is restricted in the amount it can lend to dealers and customers of General Motors Corp., which still has a 9.9% direct stake in the finance company and a 14.6% stake through a trust.
William M. Isaac, a former chairman of the FDIC, said he was opposed to the Treasury's support of GMAC. "GMAC has nothing to do with bank supervision and systemic risk and everything to do with providing a back-door subsidy to the automobile industry," said Isaac, who is now chairman of LECG Global Financial Services. "I don't think anybody really made a judgment about what the endgame would be."
The company's biggest headache remains its mortgage unit Residential Capital LLC, which has contributed to a string of large quarterly losses that show no signs of abating.
"The legacy mortgage portfolio will continue to be a drag on earnings," Wasden said.
When asked for an outlook on for GMAC returning to profitability, de Molina said: "It's very difficult to give a forecast. The business that we're writing today will be profitable," but it depends on at "what speed we get through the legacy question."