[Senate Hearing 111-462]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 111-462

     GMAC FINANCIAL SERVICES AND THE TROUBLED ASSET RELIEF PROGRAM

=======================================================================

                                HEARING

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               ----------                              

           HEARING HELD IN WASHINGTON, DC, FEBRUARY 25, 2010

                               ----------                              

        Printed for the use of the Congressional Oversight Panel


                       Available on the Internet:
   http://www.gpoaccess.gov/congress/house/administration/index.html








                                                      S. Hrg.   111-462

     GMAC FINANCIAL SERVICES AND THE TROUBLED ASSET RELIEF PROGRAM

=======================================================================

                                HEARING

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, FEBRUARY 25, 2010

                               __________

        Printed for the use of the Congressional Oversight Panel


                       Available on the Internet:
   http://www.gpoaccess.gov/congress/house/administration/index.html





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                     CONGRESSIONAL OVERSIGHT PANEL
                             Panel Members
                        Elizabeth Warren, Chair
                              Paul Atkins
                           J. Mark McWatters
                           Richard H. Neiman
                             Damon Silvers













                            C O N T E N T S

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                                                                   Page
Opening Statement of Elizabeth Warren, Chair, Congressional 
  Oversight Panel................................................     1
Statement of Paul Atkins, Member, Congressional Oversight Panel..     5
Statement of Richard Neiman, Member, Congressional Oversight 
  Panel..........................................................     6
Statement of J. Mark McWatters, Member, Congressional Oversight 
  Panel..........................................................     9
Statement of Ron Bloom, Senior Advisor to the Secretary of the 
  Treasury, Presidential Task Force on the Auto Industry.........    10
Statement of Jim Millstein, Chief Restructuring Officer, U.S. 
  Department of the Treasury.....................................    12
Statement of Michael Carpenter, Chief Executive Officer, GMAC 
  Financial Services.............................................    37
Statement of Robert Hull, Chief Financial Officer, GMAC Financial 
  Services.......................................................    43
Statement of Christopher Whalen, Senior Vice President and 
  Director, Institutional Risk Analytics.........................    64
Statement of Michael Ward, Analyst, Soleil-Ward Transportation 
  Research.......................................................    87

 
     GMAC FINANCIAL SERVICES AND THE TROUBLED ASSET RELIEF PROGRAM

                              ----------                              


                      THURSDAY, FEBRUARY 25, 2010

                                     U.S. Congress,
                             Congressional Oversight Panel,
                                                    Washington, DC.
    The Panel met, pursuant to notice, at 10:01 a.m. in Room 
SD-342, Dirksen Senate Office Building, Elizabeth Warren, Chair 
of the Congressional Oversight Panel, presiding.
    Present: Elizabeth Warren [presiding], Richard Neiman, Paul 
S. Atkins, and J. Mark McWatters.

  OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    Chair Warren. The February 25, 2010 hearing of the 
Congressional Oversight Panel is now called to order. Good 
morning, my name is Elizabeth Warren, I am the chair of the 
Congressional Oversight Panel.
    Because today's hearing will focus on Treasury's efforts to 
stabilize GMAC through the Troubled Asset Relief Program, it 
makes sense to begin with an accounting of the assistance, to 
date.
    As of today, taxpayers have spent $17.2 billion to bail out 
GMAC. We now own 56.3 percent of this company. Other banks have 
received tens of billions of dollars under TARP, but aspects of 
GMAC's funding are without precedent. Of all of the banks 
bailed out under TARP, only GMAC received money through the 
Automotive Industry Finance Program, an initiative originally 
established to support General Motors and Chrysler. Of all of 
the banks bailed out under TARP, only GMAC needed additional 
TARP funds to meet the capital buffers required under the 
stress test.
    GMAC's unusual treatment by Treasury may be due, in part, 
to the company's unusual history. It was founded in 1919 as a 
wholly-owned subsidiary of General Motors, intended to provide 
financing for clients to buy cars and dealers to buy inventory.
    Since then, GMAC has expanded far beyond the realm of 
automotive lending to provide home mortgages, auto insurance 
for both dealers and consumers, and even credit to various 
manufacturers and distributors in the non-auto industries. In 
2006, it ceased to be a subsidiary of GM, and it now ranks as 
the 14th largest bank in the United States.
    Even in light of GMAC's unique background, Treasury's 
exceptional actions require special scrutiny. Today's hearing 
will help inform the Panel's March Oversight Report, which will 
examine the ways that TARP was used to support GMAC, the 
rationale behind the support and the approach being taken by 
GMAC's new management to return the company to profitability, 
and to repay the taxpayers.
    The Panel would also like to explore the issue as to 
whether GMAC is lending again, and whether it is lending on 
favorable terms.
    Let us not forget, as we do this hearing, that Treasury 
bailed out GMAC on no fewer than three occasions: in December 
2008, in May 2009 and again in December 2009. On each occasion, 
Treasury had a choice to make on behalf of taxpayers: Was 
another bailout worth it? Was GMAC such a unique, irreplaceable 
player in our financial system that it must not be allowed to 
collapse? Or should it be required to bear the full cost of its 
mistakes and suffer failure?
    Three times, GMAC asked Treasury to cast it a lifeline, and 
three times, Treasury said yes. The critical question we must 
ask going forward is whether this was the best and most 
appropriate possible use of taxpayer dollars under TARP, and 
whether we can expect a request for a fourth bailout in the 
future.
    To help the Panel examine these issues, we will hear from 
three panels of witnesses. On our first panel, we are joined by 
two members of the Administration. On our second panel, we will 
hear from two executives from GMAC. And, finally, on our third 
panel, we will hear from industry analysts.
    To all of our witnesses, please note that we sincerely 
thank you for being here. These are complex issues of national 
importance, and we appreciate your willingness to help us learn 
from your perspectives.
    Before we proceed with the first panel, allow me first to 
offer my colleagues an opportunity to provide their opening 
remarks.
    [The prepared statement of Chair Warren follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
STATEMENT OF PAUL ATKINS, MEMBER, CONGRESSIONAL OVERSIGHT PANEL

    Mr. Atkins. Well, thank you very much, Madam Chair. Today's 
hearing on General Motors Acceptance Corporation is a 
significant one for this panel. It marks the first time that we 
will explore the circumstances of a particular recipient of 
TARP funding, and what a recipient GMAC is.
    GMAC is sort of a hybrid: Two automobile companies were 
given a special deal under TARP and all of the other recipients 
of TARP funds, besides GMAC, were truly banks and had operated 
as banking institutions for years. They had grown, supposedly, 
too big to fail.
    It's widely acknowledged that GMAC was not one of these 
institutions. It was not of great systemic significance in and 
of itself. In what, basically, was a series of ad hoc political 
decisions, the U.S. government has advanced approximately $17 
billion in taxpayer funds, so far, to GMAC on top of, of 
course, the other billions that were given to GM and Chrysler 
in the auto bailouts.
    Unlike the automobile companies, GMAC never went through 
bankruptcy; it never went through a reorganization. Every step 
of the way it's being treated a bit differently and is, I 
think, in a way, a model for moral hazard. Its shareholders 
were not wiped out--unlike the millions of shareholders of 
General Motors--all of this has been done in the name of trying 
to keep low cost lending available to support GM's automobile 
sales, but ironically most of the money that's being poured 
into GMAC has gone into its mortgage loan portfolio.
    The government now owns a majority interest in GMAC and 
appoints board members. The original shareholders still have 
their ownership interests, albeit diluted. The government 
appoints board members, but how are they chosen? Who do these 
board members represent? Under State law, they have fiduciary 
duties to all shareholders; does Treasury try to influence 
them? How will they judge management? Directors have a critical 
advisory role, as well as an oversight role, and so what 
attributes is Treasury looking for?
    GMAC was artificially declared to be a bank holding company 
only after it reorganized itself so that the Fed could even 
consider its application. It changed its industrial loan 
corporation to a State bank so it could be eligible for TARP 
and other programs.
    GMAC, at the time, didn't meet the Fed's criteria for bank 
holding companies. The Fed, of course, required it to raise 
capital. But GMAC could not raise capital in the private 
sector. Government money has flown into GMAC three times now, 
and each time we hear that it's the last. First, Treasury put 
in about $5.25 billion at the end of 2008, then five months 
later, of course, in May 2009, another $7.88 billion, and then 
just last month, another $3.98 billion. And most of this money 
has not necessarily gone into automobile loans but, of course, 
into ResCAP.
    So, I guess today what I will be interested in hearing is 
what GMAC management is doing to work on a plan to get the 
company out from under Uncle Sam's wing and to be back 
independent, again. Is it viable? Has Treasury ever made an 
assessment to that effect? If it made such an assessment before 
putting in money, it's obviously not being much publicly 
discussed. We need to talk about Ally Bank, as well, and other 
aspects. So, I'll be interested in exploring these with you 
today.
    Thanks.
    Chair Warren. Thank you, Mr. Atkins.
    Superintendent Neiman.

 STATEMENT OF RICHARD NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT 
                             PANEL

    Mr. Neiman. Thank you and good morning.
    I am very pleased that the Panel is devoting its March 
report and this hearing to the subject of GMAC. Support for 
GMAC is an especially significant TARP initiative, because GMAC 
is both a large bank holding company and a critical part of the 
American automobile industry. Therefore, the support uniquely 
embodies both large governmental interventions in the financial 
system, and in the auto industry.
    As we know, GMAC was the only one of the 19 stress tested 
bank holding companies that did not raise sufficient private 
capital. It therefore required additional governmental support 
in order to meet its SCAP mandated capital buffer requirement.
    As a result of a series of TARP infusions, the U.S. 
Treasury and the U.S. taxpayer now own 56 percent of GMAC's 
equity, and over $17 billion invested.
    Importantly, GMAC was rescued not because it is too big to 
fail, but because it is too interconnected to fail. Or, to be 
more precise, too co-dependent with General Motors, with 
Chrysler and the American automobile industry. It was deemed 
that a failure of GMAC would have significantly undermined or 
fatally derailed the stabilization of the American auto 
manufacturers with significant impact on our economy.
    GMAC is the nearly exclusive provider of inventory lending 
to GM and Chrysler dealers, essentially enabling their 
distribution system of cars and trucks to function. The 
importance of GMAC's role was actually increased last year when 
Chrysler Financial was absorbed by GMAC. In fact, GMAC is 
arguably even more interconnected today than it was before the 
financial crisis, given the Treasury's current investment and 
controlling positions in GMAC and the auto companies.
    During the hearing, I will be most interested to learn from 
our distinguished witnesses how you are addressing the ongoing 
risk of interconnectedness. I'd like to hear about your near-
term business plans for GMAC's existing lines of business, as 
well as your strategic vision over the long term.
    I hope to learn about your specific plans to ensure GMAC's 
viability, and to reduce the auto companies--and GMAC's--
codependence, going forward.
    I recognize it is possible that the goal of reducing GMAC's 
codependence with the auto industry may, at times, run counter 
to the goal of increasing GMAC's profitability.
    I very much look forward to hearing how you will balance 
these considerations and manage the difficult strategic issues 
that confront you, and I look forward to hearing your 
testimony.
    [The prepared statement of Mr. Neiman follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Chair Warren. Thank you, Superintendent Neiman.
    Mr. McWatters.

STATEMENT OF J. MARK McWATTERS, MEMBER, CONGRESSIONAL OVERSIGHT 
                             PANEL

    Mr. McWatters. Thank you, Professor Warren. I very much 
appreciate the attendance of the witnesses and I look forward 
to hearing your views.
    On three separate occasions over the past 15 months, the 
American taxpayers have involuntarily invested approximately 
$17 billion in GMAC. Since the CBO, the Congressional Budget 
Office, has assigned a 59 percent subsidy rate to the various 
auto-related bailouts--including GMAC--as of December 2009, it 
is not unreasonable to assume that the taxpayers will lose 
approximately $10 billion of the $17 billion of TARP funds 
allocated to GMAC.
    Given the magnitude of these projected losses, three 
fundamental issues remain for our consideration. First, prior 
to committing taxpayer resources to GMAC, Treasury was 
obligated to demonstrate that GMAC--and GMAC alone--was capable 
of providing the auto finance services to both the retail 
customers and dealers of Chrysler and GM and that no other 
group of new or existing financial institutions could 
reasonably fill the void upon the liquidation of GMAC.
    It is not unreasonable to anticipate that many financial 
institutions and private equity firms would welcome the 
opportunity to extend credit to the retail customers and 
dealers of Chrysler and GM and to securitize the instruments 
received in such transactions. Even if GMAC--and GMAC alone--
possessed the expertise necessary to conduct an auto finance 
business, a question nevertheless arises as to why the United 
States government sanctioned and subsidized such monopolistic 
power, instead of encouraging healthy competition from other 
private sector financial institutions seeking to enter the 
market.
    Second, if Treasury carries the burden of the first issue, 
Treasury must next demonstrate that it had no choice but to 
bail out GMAC's ill-conceived bets in the subprime market in 
the hopes of saving GMAC's auto finance business. In satisfying 
this burden, Treasury must show that no viable approach existed 
under the U.S. Bankruptcy Code, or otherwise, to extricate 
GMAC's auto finance business from the taint of its insolvent 
mortgage finance business, other than through the expenditure 
of $17 billion of taxpayer-funded resources.
    GMAC could have, for example, and without limitation, sold 
its auto finance business for fair market value to a third 
party outside of bankruptcy, or sold its auto finance business 
to a third party under Sec. 363 in a bankruptcy proceeding. If 
GMAC's auto finance business is truly viable and profitable, it 
is not unreasonable to consider that other financial 
institutions and private equity firms would welcome the 
opportunity to acquire GMAC's auto finance business with its 
captive group of customers.
    Third, even if GMAC carries the burden on both issues, 
Treasury must also demonstrate why GMAC was too big or too 
interconnected with the financial system and the overall 
economy to fail, and why GMAC merited such unprecedented 
largesse when so many other American businesses and families 
are suffering from the worst economic downturn in several 
generations.
    It is also troublesome that Treasury would commit the 
taxpayers to fund three rounds of bailouts for an institution 
that placed risky bets on the subprime market. Although GMAC 
faced bankruptcy and potential liquidation as a result of its 
ill-advised investments, the taxpayer-funded bailouts of the 
company injected unwarranted moral hazard risk into the market 
and all but established the United States government as the 
implicit guarantor of any future losses arising from such 
activities. Such action will also encourage other private 
sector participants to engage in less-than-prudent behavior, 
confident in the expectation that the taxpayers will again 
offer a bailout upon the reversal of their economic fortune.
    A market economy, by necessity, must cull the products and 
services of the weakest participants so that those who have 
developed innovative and competitive ideas may prosper on a 
level playing field. The opportunity for entrepreneurs to 
succeed or fail, based upon their own acumen and judgment, must 
survive the current recession and the implementation of the 
TARP program.
    Thank you for joining us today, and I look forward to our 
discussion.
    Chair Warren. Thank you very much, Mr. McWatters.
    I want to note the absence of panel member Damon Silvers. 
Mr. Silvers has recused himself on all matters relating to the 
auto industry before the Panel. All of us who serve on this 
panel do so on a part-time basis and Mr. Silvers, in his day 
job, is the Director of Policy and Special Counsel to the AFL-
CIO.
    The AFL-CIO has expressed views on the use of TARP funding 
in the auto industry and for that reason, Mr. Silvers did not 
feel it was appropriate for him to be involved in our oversight 
of Treasury's assistance to GMAC.
    We miss his good counsel, but we understand that he's 
working to protect the integrity of the process.
    So, with that, I'd like to introduce our first panel. We 
have Ron Bloom who is the Senior Advisor to the Secretary of 
the Treasury on the Presidential Task Force on the Auto 
Industry, and we have Jim Millstein, Chief Restructuring 
Officer for the U.S. Department of Treasury. Thank you both for 
being here. I'll ask you for opening statements, I'll ask you 
to hold them to five minutes, but any written remarks will be 
included in the record.
    Mr. Bloom.

STATEMENT OF RON BLOOM, SENIOR ADVISOR TO THE SECRETARY OF THE 
     TREASURY, PRESIDENTIAL TASK FORCE ON THE AUTO INDUSTRY

    Mr. Bloom. Thank you. Good morning, Chair Warren, and 
members of the Congressional Oversight Panel, thank you for the 
opportunity to testify before you today. We are here to report 
on the auto financing market and the relationship between GMAC 
and the Treasury's investments in General Motors and Chrysler.
    Over the past year, the Obama Administration has been 
working to manage an historic crisis in the American automobile 
industry. Working with their stakeholders and the President's 
Auto Task Force, both GM and Chrysler underwent fair and open 
bankruptcies and have emerged as stronger global companies. The 
steps that the President took kept many hundreds of thousands 
of Americans working and gave GM and Chrysler a chance to be 
competitive businesses.
    A viable auto industry requires financing for both dealers 
and consumers. The vast majority of automobile purchases in the 
U.S. are financed, including an estimated 80 to 90 percent of 
consumer purchases and substantially all dealer inventory 
purchases. For the last 80 years, the auto industry has largely 
relied upon dedicated financing providers which have unique 
resources and long-term experience underwriting automotive 
credit.
    GMAC has been the primary source of financing for GM's 
dealers and consumers for over 90 years. At the time of 
Treasury's initial investment in GMAC, in December 2008, GMAC 
provided wholesale financing for 85 percent of GM's dealer 
inventories and consumer financing for 25 percent of GM's 
retail sales.
    As a result of the financial crisis, credit availability to 
auto dealers and consumers became severely impaired. 
Uncertainty about the future of GMAC and Chrysler impaired the 
ability of their captive finance companies--GMAC and Chrysler 
Financial--to access the capital markets. Some estimates 
suggest that the contraction in the auto finance market reduced 
auto sales by 1.5 to 2.5 million cars per year.
    By late 2008, one of GMAC's primary sources of funding, the 
securitization market, was in severe distress, forcing GMAC to 
dramatically restrict its lending activities to auto consumers 
in order to preserve necessary capital for dealers. GMAC was 
not able to access alternative sources of funding. Without 
government assistance, GMAC would have been forced to suspend 
financing lines to creditworthy dealerships, leaving them 
unable to purchase inventory for their lots.
    Without orders for cars, GM would have been forced to slow 
or shut down its factories indefinitely to match the drop in 
demand. Given its significant overhead, a slow-down or stoppage 
in production would have toppled GM.
    When the prior Administration decided to provide assistance 
to GMAC in December 2008, GMAC at the time was providing $23.3 
billion of financing for GM dealers. Had Treasury allowed GMAC 
to fail, no single competitor or group of competitors could 
have stepped in to absorb GMAC's entire loan portfolio. At that 
time, 75 percent of GM dealers received their financing from 
GMAC, while the next five lenders made up only 8 percent of 
such lending. The remaining dealers were serviced by 200 banks, 
most of which provided financing for only a single dealer.
    Many large national banks faced significant threats to 
their own financial health and lacked the capacity to 
aggressively grow their auto lending portfolios. Moreover, GM 
estimates that it would have taken a new provider up to six 
months to create the infrastructure, systems, and human capital 
necessary to replace GMAC.
    Like GMAC, Chrysler Financial also faced a severe liquidity 
crisis last year. In the spring of 2009, it became clear that a 
Chrysler bankruptcy could well be required to effectuate a 
restructuring of the company. Chrysler Financial had 
approximately $20 billion of conduit financing that was slated 
to expire by July 2009, some of it immediately upon the 
occurrence of a Chrysler bankruptcy. Without these conduits, 
Chrysler Financial would have been forced to discontinue 
financing any new inventory for Chrysler dealers, the dealers 
would have been unlikely to find alternative financing, and the 
purchase of new vehicles from Chrysler by dealers through 
Chrysler Financial would have ceased entirely.
    Since Chrysler Financial financed approximately 60 percent 
of dealer purchases from Chrysler, this would have resulted in 
a near-total collapse of Chrysler revenues. Given the state of 
the credit markets and the threat of a Chrysler bankruptcy, 
Chrysler looked for, but found no, refinancing alternative. 
Without a viable financing source for its customers and 
dealers, a successful restructuring of Chrysler would, 
likewise, not have been possible.
    Now, let me turn to my colleague, Jim Millstein, to speak 
to the particular strategies we employed to deal with this 
situation.
    Chair Warren. Mr. Millstein.

 STATEMENT OF JIM MILLSTEIN, CHIEF RESTRUCTURING OFFICER, U.S. 
                   DEPARTMENT OF THE TREASURY

    Mr. Millstein. Thank you Chair Warren, members Neiman, 
Atkins and McWatters.
    I appreciate the opportunity to be here this morning, my 
name is Jim Millstein, I am the Chief Restructuring Officer of 
the Treasury Department. I joined Treasury in late May of 2009 
after 28 years of working in the private sector on financial 
restructurings.
    I am going to focus on the actual investments that we made, 
and the staging of those investments over the three different 
tranches that we did.
    As Mr. Bloom indicated, GMAC applied for, and received, 
approval to become a bank holding company in December of 2008. 
Shortly thereafter, the prior Administration invested $5.0 
billion in GMAC, and GMAC was able to raise an additional $2.0 
billion from its existing shareholders.
    After the Obama Administration took office, Secretary 
Geithner announced the Financial Stability Plan, a key 
component of which was the ``stress test.'' The Treasury worked 
with federal banking supervisors to develop the Supervisory 
Capital Assessment Program (SCAP) to determine whether the 
nation's largest bank holding companies had a capital buffer 
sufficient to withstand losses and sustain lending in a 
significantly more adverse economic environment. Domestic bank 
holding companies with year-end 2008 assets exceeding $100 
billion were required to participate in the SCAP. GMAC, with 
$173 billion in assets as of year-end 2008, was one of these 19 
institutions.
    On May 7, 2009, the Federal Reserve released the initial 
results of the stress test, which required--in GMAC's case--
that it raise $13.1 billion of new capital. In consultation 
with the banking supervisors, Treasury agreed to help meet GMAC 
meet that requirement by investing additional capital in two 
traunches. The first investment of $7.5 billion was made on May 
21st to address its immediate capital needs. Treasury 
ultimately invested an additional $3.8 billion on December 
30th, about $1.8 billion less than was originally anticipated, 
largely due to less disruption to GMAC's business from the GM 
and Chrysler bankruptcies.
    Concurrent with the May transaction, GMAC also received 
regulatory approvals that enabled it to enhance its liquidity. 
The FDIC approved GMAC's application to issue debt under the 
Temporary Liquidity Guarantee Program, and the company 
ultimately issued $7.4 billion of unsecured debt, guaranteed by 
the FDIC, under that program. The FDIC also increased the 
amount of brokered deposits that GMAC's bank subsidiary could 
raise. Today, those are at about $31 billion.
    In addition, the Federal Reserve Board granted a waiver 
under Sec. 23-A of the Federal Reserve Act expanding its bank 
subsidiaries' ability to fund consumer and dealer finance loans 
for GM and Chrysler with deposits traded to Chrysler Financial, 
given the lack of funding options for Chrysler Financial and 
the ramifications its failure would have had on Chrysler, as 
Mr. Bloom has testified, several options were reviewed. It was 
determined that the most effective method to provide financing 
to Chrysler dealers and customers was to capitalize GMAC's 
existing auto origination platform to a level adequate for it 
to assume these financing responsibilities.
    Therefore, in May, as part of the stress test results, the 
Federal Reserve determined that GMAC required $4 billion in 
additional capital to fund Chrysler's dealer and customer 
originations, and that $4 billion was part of the $7.5 billion 
that was put in, in May.
    So, in conclusion, the Administration's investment in GMAC 
has been, and continues to be, a critical component of the 
effort to stabilize the auto industry. Providing GM and 
Chrysler with a viable source of financing enabled Treasury to 
facilitate the successful restructuring of each of these auto 
companies. GMAC was uniquely positioned to provide the 
personnel and infrastructure to originate and service auto 
loans and is now the largest provider of retail and wholesale 
financing to both GM and Chrysler customers and dealers.
    It has now capitalized at levels well above historical 
industry averages and it has, in fact, procured $2.0 billion of 
new, unsecured financing based on the capitalization efforts 
that Treasury has made.
    As the owner of 56.3 percent of GMAC's common equity, we 
have already designated two members of GMAC's Board, we have 
two more that we are in the process of identifying, and soon to 
designate. And as we have said on a number of occasions in 
other contexts, as well, the United States government is a 
reluctant shareholder in these circumstances, and we intend to 
dispose of our investments as soon as practical, consistent 
with protecting the taxpayers' interests.
    I thank you.
    [The joint prepared statement of Mr. Bloom and Mr. 
Millstein follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Chair Warren. Thank you very much, Mr. Millstein.
    So, I'll start with our questions here. Many analysts and 
academics have pointed out that, in their view, bankruptcy 
would have been a preferable way to deal with GMAC. That, 
ultimately, it would have put it in a better long-term 
financial position, permitted it to recover on stronger 
footing, and cost less money for the taxpayer.
    So, the first question I have is whether Treasury ever 
considered bankruptcy as an option, either for GMAC or for a 
sub-set of GMAC, more specifically, for ResCAP.
    Mr. Bloom.
    Mr. Bloom. Let me address your GMAC question.
    Chair Warren. You're going to have to turn your microphone 
on. That's all right.
    Mr. Bloom. You know, I'm sick, but I'm here today anyway.
    At the time we were looking at the situation evolving for 
GM and Chrysler, obviously the situation with GMAC was integral 
to that. And we did look at a number of different options for 
GMAC.
    Our conclusion at the time was that bankruptcy for Chrysler 
and GM would be very hard to avoid. We obviously didn't make 
the final decision until the last minute, but as we were 
strategizing our way through this in April and in May, our 
conclusion was that a bankruptcy for Chrysler and for General 
Motors would be very, very hard to avoid. And that, in order to 
successfully reorganize these companies, we would have to 
support them going into bankruptcy.
    Those were exceedingly complex and challenging 
transactions. Both of them had enormous execution risks inside 
of them. The decision we had to make----
    Chair Warren. I'm sorry, execution risks? There were people 
who were executed? What are you talking about?
    Mr. Bloom. Execution risks, meaning the ability to conduct 
the bankruptcy successfully and have the companies come out the 
other side.
    Chair Warren. All right.
    Mr. Bloom. As reorganized entities.
    Chair Warren. So, you were concerned that if you put them 
into bankruptcy, they might actually fail?
    Mr. Bloom. Right.
    Chair Warren. No matter how many taxpayer dollars we pumped 
in.
    Mr. Bloom. Right, right. That's what we were thinking about 
with General Motors and Chrysler.
    Chair Warren. Okay.
    Mr. Bloom. But we made a decision----
    Chair Warren. And I presume that's because there was 
concern that people wouldn't buy their cars?
    Mr. Bloom. There were many concerns. People might not buy 
their cars, you're in a legal process, as you well know, the 
bankruptcy judge is the entity responsible--no complex 
bankruptcy is without risk.
    Chair Warren. Okay.
    Mr. Bloom. So, but we concluded--weighing the risks and the 
benefits, the rewards, the alternatives--that that was the 
proper route to take with General Motors and Chrysler.
    To add a GMAC bankruptcy into that equation, in our 
judgment, would have exponentially increased the risk of 
concluding all three transactions in a successful way.
    Chair Warren. And why is that?
    Mr. Bloom. Because you now added an independent set of--if 
you'll use my phrase again--execution risks for concluding a 
GMAC bankruptcy, number one. And number two, the effect of a 
GMAC bankruptcy failing would have been that both the Chrysler 
and the GM bankruptcies would have failed.
    Chair Warren. So, but wait a minute. You decided to go 
forward with the auto industry bankruptcy ultimately because 
you believed it was the chance--the only chance, I take it--to 
get that industry back on firm footing. And you wiped out all 
of its equity, you caused its debt to have to take a haircut, 
and that's what helped put it back on firm footing. That, and 
billions of dollars of taxpayer money.
    Mr. Bloom. Correct.
    Chair Warren. When it came to GMAC, you didn't wipe out the 
equity.
    Mr. Bloom. Right.
    Chair Warren. You left the equity intact, all of the debt 
continued to be repaid at 100 cents on the dollar; a far better 
deal to have been an investor in GMAC than to have been an 
investor in GM. I'm still not understanding why not? Why the 
difference in the treatment?
    Mr. Bloom. Because these two are connected. If we had 
allowed GMAC to go in, as well, we felt--and I'll give you a 
second answer in a minute, but let me deal with your first 
point--if GMAC had gone in as well, we felt like we would have 
been putting the success of the GM and Chrysler bankruptcies at 
substantially higher risk.
    Chair Warren. But what is the additional risk that's 
added--you're telling us----
    Mr. Bloom. Because----
    Chair Warren [continuing]. That GMAC is deeply intertwined, 
which is the sole reason to save it.
    Mr. Bloom. No, what I'm saying is, that if the GMAC 
bankruptcy had not been successful, which was an independent 
event that had its own independent risk factors associated with 
it--that would have caused the failure of the GM and Chrysler 
bankruptcies, even if they would have otherwise have been 
successful. So, the risk is sitting on top of--and therefore 
influencing--our judgment, because you've got to make one 
judgment about the totality of this situation. That's the first 
point.
    The second point is that the investment dollars that we had 
to consider if GMAC had gone into bankruptcy, were very, very 
substantial. There was obviously a lot of money invested in the 
case we're examining, the stress test called for $13 billion, 
it's wound up to only be $11.3 billion, but obviously that's a 
lot of money. But the alternative was not free of very, very 
substantial investment, as well.
    Chair Warren. So, let me stop you there. I'm going to be 
disciplined about time, because I've been bad about this 
sometimes at hearings in the past. I'm going to stop there, 
we'll just return to this when I----
    Mr. Bloom. Okay.
    Chair Warren [continuing]. When I have my next question. 
Because I have some questions about why that would be more 
expensive.
    Mr. Bloom. Okay.
    Chair Warren. Mr. Atkins.
    Mr. Atkins. Well, actually, I would want to----
    Chair Warren. Please.
    Mr. Atkins [continuing]. Continue in that vein, and you 
should finish your thought because I guess when we look back at 
it, as Professor Warren was saying, the disparate treatment of 
the various shareholders, it may be, perhaps, here the 
shareholders put in more skin in the game, ultimately, and 
maybe that's what you were getting to but I just--I wanted to 
hear you out as far as your justification of this treatment?
    Mr. Bloom. Well, just on the specific point you make, I 
would point out that the GMAC shareholders have been very, very 
substantially diluted by the transactions that----
    Mr. Atkins. But not wiped out.
    Mr. Bloom. They have not been completely wiped out, that is 
correct, but I just want to note for the record that there's 
been very, very substantial dilution for the shareholders, the 
investments that were made were made in a series of instruments 
that Mr. Millstein can talk more about, but they were preferred 
shares and so they are senior to existing equity. There was not 
any particular effort to protect shareholders, there was simply 
a judgment made that to bring the company into bankruptcy, as 
well, (a) would have exponentially decreased the success 
probabilities of GM and Chrysler, and (b) that when we looked 
at the overall possible exposure we would face, in addition to 
the execution risk, even in a transaction that went exactly as 
planned, the dollars that would have been required to execute a 
GMAC bankruptcy would have been very, very substantial. In 
excess of the dollars that were invested, in fact.
    Mr. Millstein. May I just--I obviously wasn't part of the 
Treasury team making decisions at the time, but I have been in 
and around the bankruptcy courts a little bit over the course 
of my career and one thing I would add in this regard is that 
there are very few instances in which a finance company has 
been successfully reorganized in Chapter 11. Finance companies, 
obviously, are intermediaries between people who lend to them 
and their own lending they make.
    And as Chair Warren knows, the ability for a finance 
company to continue to draw on its pre-petition lines of credit 
is terminated upon the filing of a bankruptcy. So, GMAC would 
have had no ability to fund ongoing originations, both for 
dealers or customers, after a filing of Chapter 11. It would 
have required a massive DIP.
    And if you look today at, you know, the outstanding 
customer receivables, that is, the loans that GMAC makes to 
individual lessors and buyers of cars, as well as to the 
dealers, you're looking at a $40 billion to $50 billion 
outstanding balance of receivables.
    So, in the spring of 2009 after one of the greatest 
seizures in the credit markets in the history of the world, 
when DIP financing was not available at all from the regular 
lenders--had the government of the United States wanted to 
facilitate the reorganizations of Chrysler and GM by ensuring 
that there was continued availability of dealer floor plan 
financing as well as financing available to customers to 
purchase GM and Chrysler cars, it would likely have had to have 
been the DIP lender to the reorganization.
    Mr. Atkins. But, in effect, the United States is the DIP 
lender. I mean, it has stepped in----
    Mr. Bloom. Well, no----
    Mr. Atkins [continuing]. To, I mean, the only reason why 
GMAC can even attract any sort of money from the marketplace is 
because the U.S. government is there. And, you know, I don't 
know--if you look at it, at its inventory and what's able to be 
financed, you know, is the quality there to stand independently 
from the U.S. government, I guess is the----
    Mr. Bloom. I think the point we're making, though, is that 
the dollars required to finance GMAC in a bankruptcy would have 
been, literally, on the order of $50 billion. Because all of 
the financing, as it ran off and assuming you--and our judgment 
was you needed to support dealer financing, because if you 
don't do that, the dealers can't buy cars, and if the dealers 
can't buy cars, the companies don't make cars, in addition to 
the retail. So, the total dollars that would have been required 
since there was no alternative financing market; these markets 
were in very, very severe stress at that time--
    So, to finance all of this, it would have been all 
government money. And eventually what would have happened to it 
is unknowable, but we're literally talking about $40 billion or 
$50 billion.
    Mr. Atkins. Okay, but Ford has been able to make it through 
this whole time, right? And, they were able to make----
    Mr. Bloom. Ford wasn't in bankruptcy.
    Mr. Atkins. Right. But, if you compare the two companies, I 
mean, I'm just--my time is out here, but what I want to explore 
later is have we created this huge moral hazard by supporting 
bad bets in the past, the U.S. government taking over those 
bets in effect, and you look at somebody like Ford that has not 
gone down that road, is independent, has not had to rely on the 
U.S. government.
    Thank you, sorry.
    Chair Warren. Thank you, Mr. Atkins.
    Superintendent Neiman.
    Mr. Neiman. Thank you.
    And having already thanked you for being at the hearing 
today, I also do want to, though, thank you for your government 
service. We all know that there are, you know, millions of 
dedicated individuals who spend their full life working in 
governmental service, but the fact that you have all decided to 
leave, for this period of time, private practice to join the 
government, this is as critical a time as any, and I appreciate 
you for your government service.
    Mr. Bloom. Thank you.
    Mr. Neiman. You know, I want to come back to my opening 
statement regarding interconnectedness between the two entities 
as well as forward-thinking strategic issues going forward.
    You know, given the government's control of both GM and 
GMAC and that your destinies are so interrelated, are there 
issues that arise where you might need to distinguish between 
GMAC's long-term survivability and its deference to the needs 
of GM?
    So, obviously, there are certain actions or practices which 
may benefit GM, but may be at odds or actually conflict with 
the interests of GMAC. And just one obvious example would be 
pricing and underwriting the terms of dealer loans.
    I'd be interested in your thoughts, going forward, as well 
as how you actually manage these types of conflicts?
    Mr. Millstein. I think it's an excellent question. There's 
no game plan, there's no roadmap for what the government of the 
United States has done, here. And so we're all guided by first 
principles. And among the first principles that we in the 
Treasury Department certainly are deploying in this regard is 
that we don't bring any special expertise to the management of 
private commercial enterprises. We don't have any monopoly of 
wisdom on the right strategy for GM as a car manufacturer, or 
for GMAC as a finance company.
    So, we have said and we are--I can tell you with someone 
overseeing some of our biggest investments--we are avoiding any 
effort to try to micromanage these companies. The approach 
we've taken is that, unfortunately our capital was required in 
one of the worst financial crises of our generation, to help 
sustain financial stability, but that we have populated the 
companies that we've invested in, largely changed the boards 
over, in many cases, with people we think are qualified to make 
these kinds of strategic decisions and to help guide the 
managements in evaluating the strategic alternatives available 
to them and we have tried to stay away from even pretending 
that we bring some special knowledge of this.
    Mr. Neiman. Well, let me give another example of where 
these conflicts could arise. Certainly in approving a strategic 
plan going forward, there are issues around shedding the 
mortgage business. On one hand, you would think that increasing 
interdependence and concentration of risk with respect to GM 
after shedding this would present an increased risk to the 
taxpayer.
    On the other hand, it may also decrease risk if you're 
avoiding a diversification of the business. So, how do you 
manage these risks, and how have you assessed the risks around 
shedding a volatile business like the mortgage business? Is it 
in the interests of the taxpayer, or is it not in the interests 
of the taxpayer?
    Mr. Millstein. Again, the Board of Directors of GMAC has 
done an evaluation of the strategic alternatives around ResCAP, 
they've shared that analysis with us--ResCAP being the mortgage 
subsidiary--and we think the conclusions they've reached, 
particularly around the recapitalization that we participated 
in December--we think the conclusions they reached are 
reasonable. Again, we have not independently directed, guided 
or tried to manage that process.
    Mr. Neiman. So, the role with respect to the Treasury and 
GMAC is no different than others. We have heard from staff 
discussions that Treasury did play a stronger advisory role 
with respect to GMAC than other entities, than to GM. Is that 
an accurate characterization?
    Mr. Millstein. I can't speak to GM or Chrysler, the car 
companies--I mean, we have a lot invested in GMAC, we have a 
lot invested in the car companies. We are taking our oversight 
responsibilities seriously, we have frequent contact with the 
management to evaluate the strategies they are employing and 
the results of their operations, but again, I don't think we're 
in a position to dictate policy for them.
    Mr. Bloom. And it's hard to compare. Jim works more on 
GMAC, I am more responsible for oversight of GM and Chrysler. 
But I can tell you, again, we're quite engaged in terms of 
knowing what's going on at GM and Chrysler, but we likewise, 
with GM, we are not saying to them, ``You know, we think this 
is the right strategy,'' and most assuredly not giving them 
advice on how to manage their relationship with GMAC. We take 
that--just like they manage their relationship as another 
supplier--as something that the Board and the management are 
responsible for.
    Chair Warren. Thank you.
    I want to go back to this number you mentioned, Mr. Bloom--
$40 to $50 billion dollar--oh, I'm sorry, Mark. I apologize. I 
was----
    Mr. McWatters. You know, when you're fourth in line----
    Chair Warren. I apologize.
    Mr. McWatters. All of the good questions are taken.
    Chair Warren. Mr. McWatters, I do apologize.
    Mr. McWatters. Mr. Bloom, on a fair market value basis, is 
GMAC solvent today?
    Mr. Bloom. I think----
    Mr. McWatters. Solvent meaning assets greater than 
liabilities, including contingent liabilities?
    Mr. Bloom. The balance sheet would suggest it is. And 
remember, this is now an entity that is subject to federal 
supervision of two different banking regulators. The bank 
itself, Ally Bank of the FDIC, and the bank holding company, by 
the Federal Reserve Board.
    It went through the stress test, which was a reasonably 
rigorous testing of the assets on its balance sheet, under 
adverse scenarios, and the stress test concluded it needed--
originally the conclusion was, it needed $13 billion of 
incremental capital. That turned out to be--after we saw the 
results of the GM and Chrysler bankruptcies, it proved to be 
$1.8 billion less. But the point being that federal banking 
supervisors are on top of this company, as any other banking 
institution. And it has had the benefit of significant capital 
injections from the United States Treasury. But I think the----
    Mr. McWatters. Do you anticipate any more capital 
injections?
    Mr. Bloom. Well, no, I certainly hope not. I think this is 
worth talking about because it answers another question that 
was posed earlier. Which is, we sit today holding 56 percent of 
the common stock, but we also hold significant convertible 
preferred stock, which if there is further deterioration in the 
quality--this is how banking regulators talk about capital--the 
quality of its capital, common stock has a higher quality 
capital, more loss absorbing than preferred stock. We, 
actually, sit on a lot of preferred stock that is convertible 
into common. It would be further dilutive of the other 
shareholders' interests were we to do it, but it would help 
sustain GMAC's capital position, if needed.
    I think we sort of recognize that if it needs us to 
convert, we may very well have to. But from the point of view 
of our exit strategy, we think the most likely way the 
taxpayers will be paid back is through an initial public 
offering--remember, this is now a private company. And we think 
that sometime in the near future, there will be an opportunity 
to do an initial public offering for this company and in 
connection with that, most likely we will convert some of our 
preferred into common so as to give ourselves access to the 
public markets to reduce our investment and repay the 
taxpayers.
    Mr. McWatters. Okay, so your view is that GMAC is solvent 
today and will most likely not require any more taxpayer funds?
    Mr. Bloom. I certainly hope so.
    Mr. McWatters. If the CBO is correct and the taxpayers lose 
anywhere near $10 billion on this investment, how can the pre-
bailout shareholders, equity holders of GMAC still be in 
existence? I mean, is there a possibility that taxpayers will 
take a $10 billion hit, but a shareholder, that, let's say, 
owned GMAC in 2008 will someday receive a greater return?
    Mr. Bloom. No, I think--I think the answer is that first 
thing, the final valuation of what we receive is yet to be 
determined. The CBO report I think you refer to refers to the 
overall----
    Mr. McWatters. It does.
    Mr. Bloom [continuing]. In the auto space. That is subject, 
obviously, to the particular investments and it is certainly 
not impossible that we will not receive all of the money back. 
That is not impossible.
    I think the answer to your question, however, unfortunately 
raises the practical question. Which is, the only way to 
completely wipe out shareholders who have legal rights in the 
other extent, is to go through a bankruptcy proceeding. And as 
we've been dialoguing about before--and I've tried to explain, 
and Jim as well, and you may not accept the explanation--but 
the judgment was that a bankruptcy filing for GMAC was not a 
prudent course of action under the circumstances.
    So, there's been very, very substantial dilution, the 
investments were made in preferred stock, the conversion prices 
were set by arm's length valuations, so we believe we've 
received as fair a value as was available, and the 
alternative--which is to completely, entirely eliminate all 
other shareholding interests--was one that was just not deemed 
to be practical.
    Mr. McWatters. Well, my time's up, so just let me recap. It 
sounds like the taxpayers could lose a lot of money on this 
transaction with the existing shareholders as of 2008 pre-
bailout----
    Mr. Bloom. I don't think I said the shareholders could lose 
a lot of money, I said there are scenarios where the 
shareholders will not receive all of their money back. The 
precise consequences of the investment and what the 
shareholders--and what the government gets back--is yet to be 
determined.
    Mr. Millstein. May I just weigh in on that? I think it 
highly unlikely that the independent third-party shareholders 
of GMAC are going to get a return if the taxpayers of the 
United States are not paid in full.
    Mr. McWatters. Okay. Fair enough.
    Chair Warren. So, I want to go back, then, to the question 
about the dollars.
    Mr. Bloom, you were just testifying that you thought that 
the cost of a bankruptcy, in effect, what we would have to put 
for DIP financing, would be somewhere in the range of $40 
billion to $50 billion, is that right?
    We've been having conversations, as you know, for the last 
couple of months, and the numbers that have been quoted to us 
by Treasury up to now has been about $6 billion per month, for 
a total of somewhere between $10 billion and $18 billion for 
what would have been required in DIP financing if GMAC had been 
in bankruptcy. So, I'm puzzled about how the number grows this 
morning to potentially $50 billion.
    Mr. Bloom. The number had a very wide range associated with 
it. The issue is that at that time, if GMAC had gone into 
bankruptcy as Jim and you dialogued about before, all of their 
securitizations, their conduits, would have gone into runoff. 
And so all new origination of dealer financing and retail 
financing would have had to have been done by somebody. And, at 
the time, the only reliable somebody was the United States 
government.
    So, the question is, how long would the company have been 
in bankruptcy for--which is quite hard to know, in fact, I 
think unknowable at the time--and for the pendency of that 
event, all new dealer originations, which roll off on a regular 
basis, and all new consumer originations, would have had to 
have been provided by the government, because that was the only 
entity available.
    Chair Warren. Well, but if we're talking about time, I 
mean, I presume the possibility of a quick 363 sale, as 
happened in the auto industry, could have made this a 
relatively speedy procedure----
    Mr. Bloom. No, because----
    Chair Warren. But, it still doesn't help me understand why 
it is that, in our conversations with Treasury to this point, 
we have heard $6 billion per month and a total of $10 billion 
to $18 billion as Treasury's own estimate, until this morning, 
of what DIP financing would have----
    Mr. Millstein. Madam Chair----
    Mr. Bloom. Let me deal with the 363 and then Jim can talk 
about the numbers.
    Mr. Millstein. Yes.
    Mr. Bloom. A 363 sale of GMAC would have been a 363 sale of 
the platform. The new company would still have had to originate 
car financing. So, whether it would have been a DIP or a 
capitalization of the new company, all of the originations of 
the--first thing, you would have had to have been successful 
with the 363. Second thing, if you were successful with the 
363, you still would have had to have capitalized the new 
company with all origination funds that were required.
    Chair Warren. I understand--I do understand that. And I 
understand how this works.
    Mr. Bloom. Okay.
    Chair Warren. The difference is, that you're trying to 
capitalize what is now a much stronger company.
    Mr. Bloom. No question about that.
    Chair Warren. Because you have wiped out its old equity----
    Mr. Bloom. Right.
    Chair Warren [continuing]. And you have wiped out some 
portion of its old debt.
    Mr. Bloom. No question about it.
    Chair Warren. So, the notion that somehow we save money by 
propping up a weaker, more impaired company than we do by 
cleaning it up and putting it on the block just doesn't add up 
for me.
    Mr. Bloom. I think what I said was that weighing all of the 
risks, we believed this was the most prudent course of action. 
If everything had occurred absolutely perfectly, it might have 
been optimum to do it that way. But what we had to take account 
of in the real world was the cumulative execution risks that 
would have occurred if we had all three of these companies in 
bankruptcy at the same time. And given that it was now putting 
at risk--it was our judgment--that it would put at risk the GM 
and the Chrysler bankruptcies, the consequences of those 
failures were, from our perspective, outweighed the risks that 
might have occurred if everything had gone perfectly.
    Chair Warren. So here's what I never understand about GMAC, 
when we talk about this, when we try to read everything here. 
It's that at some moments GMAC is so deeply integrated with the 
auto industry, I notice the bailout did not come in its 
capacity as a bank, in effect, it came through the auto 
portion. And as a result, GMAC did not have to do the ordinary 
things that a bank would have done in terms of under the 
capital infusion program, they didn't have to give the same 
kind of projections about their business plan, and so on. We 
did this as part of the auto bailout.
    But then, it shifts over. And you say, ``No, no. It's 
really not like the auto industries, it's really an independent 
bank, it's got a very different financing structure, we've got 
to go ahead and bail it out.'' Only we didn't bail it out as 
part of a bank bailout program.
    So, it looks to me like this thing keeps moving back and 
forth. I'm not understanding what's going on here, Mr. Bloom.
    Mr. Bloom. Let me make two comments on that. One is, 
obviously GMAC is a finance company. So, no question about 
that.
    Chair Warren. Of course.
    Mr. Bloom. As you know, the prior Administration chose to 
make the original infusion into GMAC under the auto finance 
program.
    Chair Warren. And why is that?
    Mr. Bloom. I don't know why the prior Administration chose 
to make the decision they made. But they did.
    Chair Warren. So, they treat it as part of an integrated 
approach to deal with the problem in the auto industry.
    Mr. Bloom. I'm not commenting on what the prior 
Administration did, I'm just observing what they did.
    I think we chose not to move it, but it had already been 
established there.
    I also think--and Jim can give you more color on this--but 
I don't think there is a substantive difference in terms of 
which program they were financed under.
    Mr. Millstein. All of these programs are under TARP. And 
whether it's the----
    Chair Warren. It's always the taxpayers' money.
    Mr. Millstein. Exactly. And the TARP restrictions are 
pretty uniform across each of the different programs in terms 
of restrictions on executive pay, the luxury expense policies--
one incremental burden or requirement that would have been 
placed upon GMAC had it been funded under the CAP program or 
the CPP program, rather than AIFP--the automobile program--is 
they would have been required to produce regular reports on 
their lending activities.
    Chair Warren. Yes, and are they doing that?
    Mr. Millstein. But, in fact, they are doing that.
    Chair Warren. So, you are having them follow the same 
procedures they would have----
    Mr. Millstein. It's part of our ongoing monitoring of this 
entity that they provide us with that information.
    Chair Warren. Thank you. I'm past my time.
    Mr. Atkins.
    Mr. Atkins. Okay, thank you. I just wanted to go back 
quickly to the existing shareholders so that--not to beat that 
one too much--but there are other ways to, you know, really 
actually get rid of them besides reorganization or bankruptcy. 
It happens all of the time in the VC situation where former 
management has, you know, perhaps not done what's--what the 
market wants--so new capital comes in and basically the old 
guys are diluted out so much that there's really nothing left 
and they basically hit the road unless they're insiders or they 
have some special expertise to bring. You know, is that the 
case here?
    Mr. Bloom. Most of our investment is in preferred stock 
which, by its nature, is superior to the common shareholder. 
So, in fact, if there's not a return, common shareholders--as 
Jim pointed out--don't receive recovery when preferred 
shareholders aren't fully compensated.
    So, I don't think as a practical matter, the shareholders 
are getting--the old shareholders, excuse me--are getting 
anything out of this thing if the government doesn't get its 
money back.
    Mr. Millstein. And in terms of just the structure of 
investment, because this is actually something that we were 
very concerned with, and we looked exactly at that model, in 
terms of how to think about the next step, we hold $2.5 billion 
of senior preferred in the capital structure, but we also hold 
north of $10 billion of convertible preferred.
    So, when the opportunity comes to access the public equity 
markets in an IPO, we will convert that convertible preferred 
in common--in whole, or in part--in order to access and find 
ourselves an exit. That will be further substantial dilution to 
the other shareholders.
    Mr. Atkins. Okay.
    Well, then let's look quickly, too, because time is short 
here, with respect to the stress test. The one thing that this 
panel has pointed out about a stress test is that basically 
they only looked through this year, and not beyond. So, GMAC 
recently had a 144A offering, where they raised $2 billion, but 
at a pretty high price--even more than Ally Bank pays at its 
advertised rates, 8.3 percent for 5-year notes--and so there is 
$24 billion in debt coming due this year, $22 billion next 
year, and $13 billion the year after.
    At those rates, you know, with car sales still rocky and 
this debt coming due, what is the outlook? It's solvent now, 
but what's the outlook on capital in the future?
    Mr. Millstein. Yes, let me see if I can address that, I 
mean, it's hard to predict the future. If you look back a year 
and a half there's been a little volatility in the markets, and 
my guess is we'll see similar volatility going forward, good 
and bad.
    Clearly these finance companies--GMAC is not unique in the 
problems it faces in terms of how it's going to fund itself 
forward. And I think the funding program remains a work in 
process. Clearly the unsecured credit markets--what they call 
the wholesale funding markets, which is where this company 
funded itself and other finance companies fund themselves 
primarily in the period prior to the crisis--are in shaky 
shape. There is unsecured financing available again, in the 
long-term debt markets, but it is more expensive and the 
spreads are higher.
    And the fact that they've accessed the market is a good 
start, but they've got, as you mentioned, work to do.
    Mr. Atkins. Yeah, but even--oh, I'm sorry.
    Mr. Millstein. So, what I was going to say is it's a work 
in process. And in part, they've got access to deposits now 
through Ally that they hadn't had before, which lowers their 
cost of capital, but the wholesale funding markets have got to 
come back. The ABS market, the Asset Backed Securities market, 
is back. TALF was an enormous catalyst to getting those markets 
to function again, the spreads have come down enormously there.
    So, we're by no means out of the woods in this crisis, and 
this company--as a finance company and a bank--is by no means 
out of the woods, but it's gotten off to a good start.
    Mr. Atkins. But if you compare these rates and this track 
record with Ford, for example, and GMAC has huge government 
backing, obviously, as the majority shareholder----
    Mr. Millstein. That's right.
    Mr. Atkins [continuing]. The majority stakeholder there, 
you know, the market loves auto paper, so why is there this----
    Mr. Millstein. You know, in fact, I mean, here's the--it's 
more general phenomenon rather than GMAC-specific. Those rates 
are right on top of where Ford Motor Credit is borrowing money 
without government support. So, it's really a function of the 
remaining dislocation in the unsecured, long-term bond market.
    Chair Warren. Okay, I'm going to stop you there.
    Mr. Atkins. Thanks.
    Chair Warren. Superintendent Neiman.
    Mr. Neiman. Following on this interdependence and 
interconnectedness, have you, in any way, considered a strategy 
of recombining GMAC and GM in recognition of that 
interdependence and presumably also the viewpoint of the 
capital markets? And, if so, what are the considerations on 
both sides of that?
    Mr. Bloom. There is no consideration of that going on. 
GMAC's long-term strategy is an evolving thing, which we are 
obviously very mindful of, but there is no active consideration 
of that idea at the moment.
    I think we've all learned--as Jim pointed out--from the 
last year and a half to never say never, but no, that is not 
something that's on the table at the moment.
    Mr. Neiman. How about a strategy of encouraging alternative 
sources of dealer financing to encourage competitors to GMAC to 
foster a sound industry?
    Mr. Bloom. Well, I mean, we do need to start by taking the 
world where we find it. Roughly 80 percent of dealer financing 
is provided by the captives of one sort or another. So, if you 
kind of walk across the companies, they all have between 70 and 
80 percent of their dealers provided by their captives. The 
exception is, obviously, Chrysler which is sort of now part of 
GMAC. But Ford does 77 percent, and the numbers are similar.
    The largest single provider of dealer financing in the 
third-party market, the unaffiliated market, is less than 2 
percent of total dealer financing. Those banks are, obviously, 
free and welcome to come and finance auto dealers, which would 
be wonderful, you know, this is a competitive environment, it's 
free to happen. But again, as Jim points out, the capital 
markets--while enormously more stable than they were--are not 
fully healed and banks are not rushing in, today, into that 
market. So, we have to take what we have, and the reality is, 
for 80 years the almost exclusive model for dealer financing 
has been captives. Or, if you will, companies that specialize 
in it.
    And whether there's a new model that would need to evolve 
over time is something certainly worth thinking about, but we 
walk into this situation taking it as we found it.
    Mr. Neiman. Now, recognizing that there is no assurance of 
the viability of GMAC going forward, are there any contingency 
plans being made for the assumption of this dealer financing 
role in the event that GMAC was unable to provide dealer 
financing going forward?
    Mr. Bloom. I mean, General Motors and Chrysler, as part of 
their long-term planning, I am sure, are looking at many, many 
things. I would have to direct that question to them, though, 
given the role we play.
    I think we believe--as Jim has said--that GMAC at this 
point is stable. Over the long term, is General Motors going to 
be considering a variety of alternatives? Again, I would direct 
that question to them.
    Mr. Neiman. Do you have any comment?
    Mr. Millstein. I mean, I'd have to--if Mr. Bloom is 
unwilling or unable to share with----
    Mr. Bloom. Unable.
    Mr. Millstein [continuing]. Unable to share with you what 
GM's strategic plans may be in this regard, I certainly have no 
insight into that.
    Mr. Neiman. Right.
    Well, thank you. Recognizing that we have the executives 
from GMAC on the next panel, are there any recommendations that 
you would make to us now to make sure we explore, or maybe 
areas of frustration that you have seen in your role at 
Treasury that we should be sure that we explore in our next 
panel?
    Mr. Millstein. No, listen, I have to say I think that we've 
got a very professional management team, a very good Board, 
they've been very cooperative with us in answering our 
questions and information requests, and I think they will be 
very forthcoming with you, as well.
    Mr. Neiman. That raises another point. In the AIG 
situation, which you know extremely well, Treasury utilized a 
trust to hold its shares. Is that something that was considered 
here, or do you see benefits for those shares being held in 
trust? And because they're not, what were the considerations--
--?
    Mr. Millstein. I'll give you a little AIG tech time, but 
just to correct the record, the Federal Reserve--when it made 
its original investment in September of 2008--took 79 percent 
of the shares of AIG and established--it established a trust.
    Mr. Neiman. Right, correct, thank you.
    Mr. Millstein. The Treasury preferred is actually held by 
the Offices of Financial Stability inside of the Treasury 
Department.
    Mr. Neiman. So, was there any consideration of utilizing a 
trust in this situation? Recognizing the difference?
    Mr. Bloom. I think we have--both with GM and with Chrysler, 
and with GMAC from time to time--we have looked at various 
structural options and our conclusion is that it does not 
enhance our position to do that.
    Mr. Neiman. Thank you.
    Mr. Bloom. Thank you.
    Mr. Neiman. My time is expired.
    Chair Warren. Mr. McWatters.
    Mr. McWatters. Thank you.
    Would you please provide a little more detail and color 
respecting your exit strategy--how it will work and the timing 
that you anticipate today?
    Mr. Millstein. Yes. I think, as Mr. Atkins pointed out, 
there's a significant wall of maturities on the debt side that 
GMAC faces, and that they're doing a good job chipping away at. 
This first offering of $2 billion of unsecured debt is part of 
it.
    We think until that wall of maturity is confronted and 
dealt with, and successfully hurdled, it's unlikely that we can 
sell stock in this company--you have to have a stable platform 
going forward for stock and equity investors are longer term 
investors. And so, the first path towards an exit, here, 
requires the refinancing of the balance sheet, and creating a 
longer runway of liquidity.
    The management team and board know that, and they're 
working hard at it. Assuming that is accomplished--and we're 
hopeful it will be--we think that the, given that it's a 
private company--the most likely path for us to facilitate an 
exit is for an IPO to occur. And, you know, it's hard to know 
what market conditions will be, whether they will be favorable, 
but my guess is that we're looking at some time at least a year 
out.
    Mr. McWatters. Okay, thank you.
    If GMAC is ``too big to fail,'' if it continues to be too 
big to fail, what specific actions are you taking to negate 
that? I mean, how do we know that a year from now we won't have 
this problem again? Because you have two automobile 
manufacturers that are building cars, but they're going through 
this gridlock that is GMAC that will back up and stop 
everything behind it. So, how are you addressing that?
    Mr. Bloom. I think Jim has spoken about the very hard work 
that we've asked the Board and the management to take on to 
make GMAC a viable company. So, that is obviously our principal 
strategy, and as I responded to--I think it was Superintendent 
Neiman--General Motors and Chrysler are obviously deeply aware 
of GMAC's circumstance, but I can't speculate because I simply 
don't know exactly what the nature of their contingency 
planning is.
    But, as Jim says, we're trying to be very cautious about 
this and not be more optimistic than the facts warrant, but we 
do believe that GMAC has been stabilized, we do believe it has 
challenges ahead, and so our principal focus right now is 
supporting the management and the Board as they make this a 
long-term, viable enterprise.
    Mr. McWatters. But, my question is the creation of the 
monopoly. GMAC has become a greater monopoly with respect to 
the ability to finance floor plan for Chrysler and GM dealers. 
If there were other competitors out there, we wouldn't have had 
this problem, right?
    Mr. Millstein. That's right.
    Mr. McWatters. A year ago, GMAC would have----
    Mr. Bloom. I'm not sure how they're more of a monopoly. I 
mean, their share of GM dealers is about what it was.
    Mr. McWatters. I know, but they have the implicit guarantee 
of the United States government, it's very difficult to compete 
against that.
    Mr. Bloom. I'm not sure I agree with that.
    Mr. McWatters. That's fine.
    Mr. Millstein. Mr. McWatters, when you have the next panel, 
I think you should explore with the management team why it is 
that the dealer financing market is dominated by, effectively, 
the affiliates of manufacturers or former affiliates of 
manufacturers. There's a reason which, I think, they can 
explain to you better than I can, because whatever I would tell 
you would have come from them.
    But, I think there are good and valid reasons for why each 
of the manufacturers sort of dominates the financing of its 
dealers.
    Mr. Bloom. And, again, going back in history, the dealers--
there were dealers who chose to not finance with the captives, 
historically, but it was a very small group. And they were able 
to do it, but the fact is--as Jim points out--there is quite a 
bit of expertise in organizing this platform. It is less true 
on the retail side, but on the dealer side, this is a very 
specialized kind of lending. And banks, historically, were free 
to go into it if they wished to, but most have taken very, very 
small positions in the aggregate.
    Mr. McWatters. Okay. Thank you.
    I'll stop there.
    Chair Warren. Thank you very much.
    Mr. Bloom, Mr. Millstein, I appreciate your coming today. 
We ask that you stay, if you can, during the next two panels. 
We may have some questions we want to ask at the end. I know 
you have very difficult schedules, but we would be grateful if 
you could stay and hear the rest of the witnesses.
    With that, you're excused for now, the record will be held 
open for additional questions that we may send, but we 
appreciate your appearance here today.
    I ask Mr. Carpenter and Mr. Hull to come and sit. While 
they are coming our way, I will introduce them.
    Michael Carpenter is Chief Executive Officer of GMAC 
Financial Services, and Robert Hull is Chief Financial Officer 
of GMAC Financial Services.
    Thank you both for being here with us today, we appreciate 
it. As soon as you're settled, Mr. Carpenter and Mr. Hall, I'll 
ask each of you if you'd like to make opening remarks. We ask 
that you hold them to no more than five minutes. We will put 
any written remarks in the record that you wish to have printed 
there.
    So, Mr. Carpenter.

 STATEMENT OF MICHAEL CARPENTER, CHIEF EXECUTIVE OFFICER, GMAC 
                       FINANCIAL SERVICES

    Mr. Carpenter. Good morning Chair Warren and Panel members 
Atkins, Neiman, and McWatters.
    On behalf of GMAC and its approximately 19,000 employees, 
we are extremely grateful for the investment from the U.S. 
government in our company at a time of unprecedented 
international financial turmoil, we view repayment of that 
investment as our highest priority along with operating the 
bank with the utmost attention to safety and soundness.
    I joined GMAC as CEO in November of 2009 and have the 
perspective of serving on its Board of Directors since May of 
2009.
    The capital investment by Treasury has been critical in 
allowing GMAC to support the domestic auto industry's 
revitalization. GMAC has a unique position in the auto industry 
as one of the largest providers of credit to dealers and 
consumers, and we are able to hold that position in large part 
because of our infrastructure, our history in the business, and 
the experience of our employees.
    At the end of 2009, GMAC supplied 90.9 percent of GM dealer 
floor planning financing and 77.3 percent of Chrysler dealer 
floor planning financing in the U.S. This type of financing is 
vital for these small businesses to have inventory on their 
lots, and is not generally available from banks.
    Given the lack of liquidity from other sources during the 
financial crisis, it is fair to say that without the government 
support of GMAC, thousands of GM and Chrysler dealers would not 
have survived, and tens of thousands of their employees would 
have been thrown out of work, and many thousands of consumers 
would not have been able to buy GM or Chrysler vehicles.
    After I took over as CEO at the end of 2009, GMAC took 
substantial write-downs and reserves, primarily in our legacy 
mortgage business, in order to position GMAC for the future. 
Importantly, these restructuring actions have allowed GMAC to 
demonstrate to the capital markets that we have ``ring-fenced'' 
the risk of our mortgage business.
    These actions allow us to access the capital markets, in 
February, for the first time since 2007, raising $2.0 billion 
of unsecured debt funding.
    As we look ahead, GMAC is focused on six strategic 
objectives. First and foremost, our mission is to be the 
premier automotive finance franchise across multiple brands. 
Automotive financing is our core business and we have the 
infrastructure, talent and experience to expand this area of 
our business.
    Our second objective is to reduce our cost structure and 
ensure that GMAC is a low cost, high service competitor.
    Our third objective is to continue to improve our access to 
the capital markets in order to ultimately repay Treasury's 
investment, and our reentry to the unsecured capital markets 
this month was a critical first step.
    The fourth objective in our plan is to fully transition to 
a bank holding company model and ensure that we operate at a 
high standard of safety and soundness.
    Our fifth objective is to improve our ongoing liquidity 
position by building a stable base of deposit funding at Ally 
Bank. Previously, GMAC was a wholesale funded finance company, 
and as demonstrated by the capital markets disruption, funding 
diversity is critical to any financial firm.
    And sixth, we are focused on continuing to address the 
challenge related to our legacy mortgage business in order to 
minimize any future impact on GMAC. The actions taken at the 
end of 2009 were significant, and we are now exploring 
strategic alternatives for the mortgage business which minimize 
risk to GMAC, but continue the important role of ResCAP as the 
fifth largest mortgage servicer to three million homeowners 
with $376 billion of outstanding mortgages.
    As I have described, the support received from the U.S. 
government has been critical in allowing GMAC to play an 
important role in the rebuilding of the U.S. auto industry and 
positions the company for future success.
    GMAC has made approximately $1.0 billion in dividend 
payments on the taxpayers' investment so far and plans to repay 
the U.S. government in full over the next several years.
    Our financial plan anticipates that as the company's 
financial performance improves during 2010 and beyond, the debt 
capacity will be available at more competitive rates. More 
importantly, we and our financial advisors believe that an 
initial public offering should be possible sometime in the next 
two years, and this would allow us to return to being an 
investment grade company, reduce our overall capital intensity, 
and begin paying back the U.S. taxpayer in full.
    Finally, as requested----
    Chair Warren. Can I ask you to stop there? And, please, 
give us all of your written remarks and we'll put them in the 
record.
    Mr. Carpenter. Absolutely. Thank you.
    [The prepared statement of Mr. Carpenter follows:]

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    Chair Warren. All right. Thank you.
    Mr. Hull.

    STATEMENT OF ROBERT HULL, CHIEF FINANCIAL OFFICER, GMAC 
                       FINANCIAL SERVICES

    Mr. Hull. Sure. Good morning, Chair Warren and Panel 
members Atkins, Neiman, and McWatters.
    Thank you for the opportunity to address a few topics on 
behalf of GMAC which include the impact of the TARP investment, 
the manner in which that assistance contributed to our 
financial stability, and our ability to support the auto 
industry.
    I will also address the effects that GMAC's restructuring 
and other strategic initiatives are expected to have on our 
future financial performance. The government assistance 
provided to GMAC was critical to stabilizing the company and 
the U.S. auto industry, and we are grateful for that 
assistance.
    As a result of the U.S. Treasury's investment in GMAC, we 
strengthened our capital ratios and can continue to provide 
roughly $30 billion of wholesale financing to auto dealers and 
to service approximately $60 billion in consumer auto loans.
    Auto finance companies, like GMAC, are critical to the auto 
manufacturers' ability to sell vehicles. Automotive sales are 
dependent on the availability of dealer inventory and the 
financing available to retail consumers. In the fourth quarter 
of 2008, the lack of stability in the global capital markets 
coupled with GMAC's need to preserve capital, required us to 
largely shut off consumer auto financing. After receipt of the 
initial TARP investment in December of 2008, we were able to 
lift the restrictions and offer retail financing for consumers. 
We've now returned to more normal levels of consumer financing 
volume, and have helped stabilize the U.S. auto industry. This 
translates into roughly $6 billion of new retail auto financing 
per quarter from GMAC.
    Now, let's turn to the financing of auto dealers, some of 
the most important small businesses in the United States. By 
the second half of 2008, GMAC's ability to finance the 
inventory of GM dealers was severely constrained. Auto dealers 
finance their vehicle inventory through line of credit 
arrangements with finance companies like us, and without that 
financing, dealers can't buy cars from the manufacturers.
    Given GM and Chrysler's financial instability over the past 
year, as well as an overall contraction in lending, vehicle 
inventory, or floor plan financing, through traditional banks 
has been scarce to non-existent for them. GMAC has served in a 
unique role that worked with both auto makers to support their 
dealer networks.
    Let me now turn to GMAC's capital restructuring, if I 
might. Historically, GMAC funded itself by accessing the 
secured and unsecured capital markets in obtaining financing 
from other banks. With the mortgage crisis of the last two 
years, our mortgage sub incurred losses that reduced our 
capital levels. Weaker economic conditions and reduced consumer 
spending also had an effect that drove used car prices down. As 
a result, GMAC's financial performance was impaired, further 
reducing our capital levels. This hurt our debt rating, which 
in turn led banks and unsecured creditors to view GMAC as a 
higher-risk credit, and to decrease their unsecured lending to 
us, and therefore GM and the dealerships. The broad disruption 
in the capital markets exacerbated this situation. From 2007 
through 2009, the company was unable to access the unsecured 
market without government assistance.
    Throughout 2008, GMAC completed a number of funding 
transactions, nonetheless. We restructured $46 billion of bank 
lending commitments, we completed two very large bond exchanges 
and we sold many non-strategic businesses. Even still, GMAC's 
liquidity and capital position continued to erode.
    In the fourth quarter of 2009, our capital position 
improved thanks to substantial investments from the Treasury, 
which you know about. Along with our capital structure, our 
liquidity profile also materially improved due to $11 billion 
of net deposit growth, the issuance of $7.4 billion of debt 
through the TLGP program, and reentering the securitization 
market in 2009 with $1.8 billion of new funding aided by the 
TALF program.
    The increased liquidity and capital as well as the steady 
performance of our portfolio enabled our auto business to 
return to profitability in 2009. At the end of 2009, we 
undertook several actions to strengthen the capital position 
and to minimize the ongoing risk of the legacy mortgage 
business. Details of the capital actions are listed in my 
written testimony. At the end of 2009, GMAC's total capital 
ratio was a healthy 15.5 percent, which significantly exceeds a 
well-capitalized standard of 10 percent.
    In summary, while GMAC has experienced recent financial 
difficulty, 2009 was a transformational year for us. We made 
great strides in strengthening our $170 billion balance sheet, 
improving our capital and liquidity positions, and have 
returned in 2010 to the capital markets, as you know, without 
further government support and are now focused on profitability 
and repaying the U.S. Treasury as quickly as possible.
    Thanks again for the opportunity to speak with you and we 
welcome your questions.
    [The prepared statement of Mr. Hull follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Chair Warren. Thank you very much, Mr. Hull.
    So, what I'd like to start with is--I just want to make 
sure I understand the business model. Does GMAC cross-subsidize 
the sale of GM cars? Is that how this works? Is there a cross-
subsidization that takes place, here, between GM and GMAC?
    Mr. Carpenter. Go ahead.
    Chair Warren. Either one--Mr. Hull, Mr. Carpenter, whatever 
is easiest for the two of you.
    Mr. Hull. Sure.
    No, GMAC does not cross-subsidize the sale of cars.
    Chair Warren. So, you don't offer cheaper financing than 
anyone else does in order to support the sale of GM cars?
    Mr. Hull. Actually, we do offer that, but that's not--GM 
provides that subsidy, it's essentially a marketing expense, 
it's called subvention in the industry. So, if you see a zero 
percent rate on a car, in a dealership, GM has effectively paid 
for that rate under what would be our standard rate.
    Chair Warren. All right, so GM is offering, in effect, to 
pay a portion of the consumer's finance cost, and they offer it 
exclusively to you, or do they offer that to other financial 
institutions? Would they offer that to another bank, for 
example?
    Mr. Hull. They offer it through us, but they have the 
ability to go elsewhere with a new----
    Chair Warren. I'm sorry, ``they'' meaning the consumer?
    Mr. Hull. No, ``they'' being GM. So, GM offers that 
exclusive--that subvented financing through GMAC, but they have 
the ability to go elsewhere over the course of the next several 
years, if they want to do it.
    For example, they can offer programs, other leasing and 
retail lending programs through other players. We do have a 
first right at it, but they have the right to go elsewhere.
    Chair Warren. So, right now, your business model is that 
you have the exclusive right to sell, in effect, zero percent 
financing on GM cars and get the difference from GM.
    Mr. Hull. It is a large part of our business.
    Chair Warren. This is a large part of your business. Is the 
same true, also, with dealership financing? Or is there 
something different about the arrangement in dealership 
financing?
    Mr. Hull. It's completely different.
    Chair Warren. All right.
    Mr. Hull. So we would fund a dealership, the thirty----
    Chair Warren. In the same way that anyone else in the 
market would?
    Mr. Hull. For the most part, that's right. And the only 
difference with the dealership is that they see us as an 
integral part of the relationship with the manufacturer, 
because we know them, we've known them for 90 years and they 
know that we know how their systems work, and we're able to 
deliver to their needs and on the timeframe that they have.
    But there absolutely are commercial floor plan arrangements 
with unaligned finance companies.
    Chair Warren. So, you see yourself as having two 
advantages, then, in the marketplace, if I'm understanding this 
correctly. That is, that you have a deal with GM to get money 
from GM and offer--this is how you build up a big volume--offer 
what appears to be, to the customer, below-market financing.
    And your other part is simply that you know the dealership 
world.
    Mr. Hull. That's right.
    Chair Warren. Is that a fair----
    Mr. Carpenter. I would add to that--we are--from a systems 
point of view--integrated with the dealers and the 
manufacturers. So, to help you visualize it, if you imagine a 
dealer placing an order for an automobile from GM for a 
particular VIN number, we will finance that purchase when the 
sale is made by the dealer, we will get reimbursed. It's a 
closed loop system.
    And being part of--an integral part of--that system is both 
beneficial to the manufacturer and to the dealer and also 
reduces the credit risk of the business substantially.
    Chair Warren. Okay. So, I understand why GM would want to 
finance its dealers and why it would want to finance the sale 
of its goods; many businesses do this. What I don't understand, 
then, is what the justification is for being an independent 
bank that takes deposits that has a backup from the United 
States government. There are lots of businesses that finance 
the sale of their goods, but they're stuck with that as part of 
their internal model, internal pricing, internal profits--and 
they don't reach federally insured deposits, and they don't 
reach a backup from the United States government.
    So, why, in this case, do you function in this very 
integrated way that makes you look like simply a financing arm 
of GM and yet you get all of the benefits of being an 
independent bank?
    Mr. Carpenter. Let's break the question, I think, into two 
parts. There are many manufacturers, obviously, that provide 
financing for their products--whether it be copy machines or 
whatever it is. Some of those manufacturers have their own 
captive finance companies that are not banks, other companies 
contract with third-party vendor finance providers like GE 
Capital. And you have both models in existence.
    So, that's the answer to the first part of the question. 
You know, with regard to the second part of the question, this 
is--in my judgment--a very attractive business for a bank with 
insured deposits. And the reason that I would say that is that 
if you look at all of the asset classes that a bank could lend 
to--if you look at the history over many, many years, the risk 
characteristics of this asset class are the most favorable of 
any asset class.
    For example, the loss ratios in dealing with automobile 
dealers with the system that we have of integration, is 
somewhere around 10 to 20 basis points. And so----
    Chair Warren. I would think that it would be attractive to 
other----
    Mr. Carpenter. And so, as a credit----
    Chair Warren [continuing]. Other banks.
    Mr. Carpenter. The creditworthiness of the banking activity 
is extremely high, and the degree of comfort of using federally 
insured deposits to finance those, should be extremely high.
    Chair Warren. All right. We're over our time, so I'm going 
to let Mr. Atkins pick up.
    Mr. Atkins. Thank you very much.
    Well, let me just pick up in that vein because part of the 
justification that Treasury was using to bail out GMAC was that 
it would be so difficult for other types of banks to step 
into--especially the floor plan financing--of dealers.
    But, as we've seen, the market really likes this paper and 
it's obviously very high quality----
    Mr. Carpenter. Yes.
    Mr. Atkins. And they like it better than mortgages, I 
guess. So I guess my real question is, you all basically 
subsumed the old Chrysler Financial and integrated it into your 
system and it sounds like, without much of a hitch. And as we 
all know, system integrations typically have lots of hitches.
    And so I just want to get back to the question of why is 
there so little competition? Why do not other financial 
institutions step into this? You have high-quality paper, it 
sounds like it's not that hard to integrate into existing 
things, you have VIN numbers and other things to keep track of 
inventory, what's the deal here?
    Mr. Carpenter. It's a great question.
    Let me start by making the observation that there are 
numerous sectors in the financial services industry that banks 
do not participate in that have been the province of finance 
companies, historically. I spent 10 years at GE Capital, almost 
every business we ran was a business a bank had exited. And, so 
if you look at factoring and specialty leasing and a lot of 
different businesses, they're businesses that banks don't 
participate in, because the value of being a focused competitor 
is extremely high.
    Now, having said that, your observations about the credit 
characteristics of this asset class, the receptivity of the 
marketplace for auto paper is absolutely correct. And I think 
the barrier to entry, if you will, is not money and cost of 
money--it's infrastructure and the knowledge--it's the 
knowledge of the automobile business, how automobiles are dealt 
with in the wholesale channel, the retail channel and the 
systems that are acquired and the relationships that are 
necessary to manage that business over time represent a very 
significant barrier to entry.
    Now, is it a barrier to entry that a major bank could 
overcome over many years? Absolutely. It would cost a great 
deal of money and historically they have not shown the appetite 
to do it. So, if you look at which of these dealers actually 
get financing from banks, they fall into two categories. One is 
the local bank down the street, where the bank is taking a very 
different risk. We're a secured lender, they're taking a risk 
on the business, the character of the business person in the 
community. And the other characteristics are some of the 
largest--often public--dealerships which are of interest to the 
larger banks, just like any other major commercial credit.
    Mr. Atkins. Okay. All right. Well, thank you.
    Let me move onto, then, other aspects, because obviously we 
don't have a lot of time.
    With respect to ResCAP, you know, clearly I don't know the 
whole history of getting into that line of business, because if 
it sounds like this is a great business and Ford Motor Credit 
didn't get into that line, to use them as an example, what do 
you see as the value of ResCAP now? I mean, as far as both 
intrinsically and how does it add to the mix? Right now it's 
the great sucking sound, so----
    Mr. Carpenter. I think that's a great question, Mr. Atkins.
    The history is that General Motors decided to diversify its 
financial services business many years ago and built up this 
mortgage banking business. For GMAC, over the last several 
years, it has been what I have described, publicly, as a 
millstone around the company's neck. It has been the single-
greatest barrier to the company's access to the capital 
markets, it has been the greatest barrier on our profitability 
as an enterprise.
    So, I look at ResCAP as a problem to be solved, not as an 
opportunity. And as such, the actions that we took at the end 
of last year--and, by the way, the mortgage marketplace, in 
general, has been a minefield for many, many companies, as you 
know only too well. And so, the focus of our activities has 
been--or my activities since joining the company--has been to 
quantify the risk in ResCAP, to ring-fence that risk, and over 
time, to minimize that risk so that GMAC is freed from that 
burden, going forward.
    Chair Warren. Thank you.
    Mr. Atkins. My time is up.
    Chair Warren. Mr. Neiman.
    Mr. Neiman. Thank you. I'd like to follow-up on that line 
of questioning, because this is really critical to the 
strategic plans going forward. And you talk about exploring 
strategic alternatives for ResCAP and the mortgage business, 
and also ring-fencing the mortgage exposure. Can you go into 
that in a bit more detail, and specifically, I'd like to 
understand, has there been a decision with respect to divesting 
the mortgage business, and understanding--well, I should stop 
there. Has there been a decision to divest ResCAP?
    Mr. Carpenter. Mr. Neiman, I would say this--our focus has 
been to de-risk ResCAP as it relates to GMAC and its principal 
mission in the auto finance segment. The first step in doing 
that was to mark the mortgage assets to fair value, to put 
additional reserves in the company, and to make sure that our 
MSR, which is our Mortgage Servicing Rate asset, was fairly 
valued. And that was the agenda for--for the fourth quarter of 
last year, which puts ResCAP on a sounder footing, going 
forward.
    When we talk about exploring strategic alternatives, what 
we're trying to do for the U.S. taxpayer is maximize the value 
of that set of assets. That could mean anything from a sale of 
ResCAP in its entirety, to the sale of individual assets, some 
of which are ongoing, to the joint ventures or any other 
transaction or approach that companies typically refer to when 
they talk about pursuing strategic alternatives.
    Mr. Neiman. So, in developing your strategic plan you set 
out six areas of strategic objectives----
    Mr. Carpenter. Yes.
    Mr. Neiman [continuing]. Where are you in the process of 
developing and disclosing a strategic plan? And I'd be also 
interested in the approval process for that plan, the timing.
    Mr. Carpenter. Good question.
    We have engaged two major securities firms to help us 
analyze the numerous alternatives for this asset. And there are 
many, and the solutions are going to be complex. And so we have 
engaged two major Wall Street firms to help us through that 
process.
    They have just begun their process. My expectation is, in 
the next several months, two or three different alternatives 
will be analyzed. We will then, as the normal course, present 
those alternatives to our Board of Directors, with a 
recommendation from management as to how to proceed.
    In the meantime, we are actually already in the process of 
selling some of the mortgage assets where we think the timing 
for those asset sales is now. And the objective is to end up--
as we head towards the IPO--with not having to have a 
conversation with this panel or any other--about our mortgage 
business, going forward.
    Mr. Neiman. So, can you share with us your current thoughts 
and how you're addressing the pros and cons of being a diverse 
financial institution with a mix of assets, a very serious a 
mono-line institution which is even a captive mono-line and the 
risks that come with that?
    Mr. Carpenter. That is a great question and I would say 
this--diversity is a good thing, but some of the things that 
we're diversified with don't exactly help. And so the context I 
would give is this--there are mono-line, or narrowly based 
banks. A number of the credit card organizations are, in fact, 
banks, and they are, in fact, mono-lines.
    I think you have to look at what are the risk return 
characteristics of the balance sheet to judge whether or not 
one is comfortable with that lack of diversity. And I would 
simply make the argument--as I did a moment ago--that of all of 
the asset classes, the auto finance asset classes at both the 
dealer level and the individual consumer level--are among the 
absolute lowest risk loans that any kind of financial 
institution can make.
    And so, I would make the argument that if you are to be 
very focused in an asset class, this would be the asset class 
you would be most comfortable being focused on as a bank.
    Chair Warren. Mr. McWatters.
    Mr. McWatters. Thank you.
    And thank you, gentlemen, for appearing today.
    On a fair market value basis, is GMAC solvent?
    Mr. Carpenter. The answer is yes, but I'll let Rob give you 
the specifics.
    Mr. Hull. I think Mike's right. You know, we have tried 
to--I think so----
    Mr. McWatters. Okay.
    Mr. Hull. We have fair-valued a lot of our assets, Mr. 
McWatters, and certainly on the ResCAP side, the broad base of 
our assets. So, strictly on the basis of our accounting 
statements, we've got $20 billion of equity on our books, and 
that would imply that our assets are greater than the attendant 
liabilities. Whether you can sell them at a market-clearing 
price, that has to be tested.
    Mr. McWatters. Sure. Do you anticipate that GMAC will 
require a fourth round of taxpayer-funded bailouts?
    Mr. Carpenter. That's certainly not our expectation. Our 
actions we took at the end of the fourth quarter were quite 
far-reaching and we believed--we believe--are unlikely to 
require additional capital from the Treasury.
    Mr. McWatters. Okay.
    Do you believe the taxpayers will be paid in full or will 
there be a shortfall as the Congressional Budget Office 
anticipates?
    Mr. Carpenter. The business plan that we have developed--
which obviously is based on a series of assumptions about, 
among other things, the vitality of the capital markets--would 
lead me to the conclusion that we have a high likelihood of 
repaying the U.S. Treasury and the U.S. taxpayer, in full.
    Mr. McWatters. Why do you think there is such a material 
difference between your internal analysis and the CBO's 
analysis?
    Mr. Carpenter. I have not read the CBO's analysis--maybe 
you have, Rob?
    Mr. Hull. No.
    Mr. Carpenter. I haven't read the CBO's analysis and so I 
couldn't answer that question.
    Mr. McWatters. Okay, then when do you anticipate the $17 
billion then will be repaid in full?
    Mr. Carpenter. Well, I think the first step, as we 
mentioned a moment ago, is to access the debt capital markets. 
Because any bank or any finance company depends upon its 
ability to access the debt capital markets. We've crossed that 
bridge in the last month or so.
    The second challenge is to return the organization to a 
reasonable--a respectable level of profitability which I 
believe we're on track to do. That, in turn, will position us 
to be able to take the company public.
    Now, we're not going to be able to do a $17 billion IPO, in 
all likelihood. And therefore, the initial public offering will 
be at a more modest size than that, and that will then require 
subsequent offerings to completely exit the U.S. Treasury.
    Our financial advisors are telling us as long as we execute 
the plan that we are embarked upon, that certainly we can 
undertake the IPO in the next year or two and then repay the 
rest of the money shortly thereafter.
    Mr. McWatters. Is ResCAP fixed?
    Mr. Carpenter. That's a very absolute question, and I can't 
give you an absolute answer. I would say within the realms of 
reasonable business judgment, we have contained the foreseeable 
ResCAP risk. There are obviously a variety of scenarios in 
which ResCAP could be more problematic. For example, if we see 
a substantial double-dip in house prices, that would certainly 
put some stress on ResCAP.
    Mr. McWatters. Has ResCAP originated any loans which have 
been securitized and that are now being put back to ResCAP?
    Mr. Carpenter. The answer to that is yes.
    Mr. McWatters. Do you know the dollar amount of that?
    Mr. Carpenter. I don't have it off the top of my head, but 
we could certainly get you those numbers.
    The way this works is if a Fannie Mae or a Freddie Mac 
reaches the conclusion that they believe there was inadequate 
underwriting on loans, they have the right to put back those 
loans to us, or claim a credit from us.
    We have established--in the last two quarters--a total of 
$1.3 billion of reserves against exactly those claims on the 
ResCAP balance sheet, which we believe is an adequate reserve.
    Mr. McWatters. Okay, I'm done.
    Chair Warren. Okay.
    I'd like to ask just a little bit about the current status 
of your lending. Perhaps let's start on the consumer side. 
Could you just bring me up-to-date, Mr. Hull, a little bit on 
GMAC's lending to consumers right now? Are they lending, the 
volume, the comparison in volume--what's going on there?
    Mr. Hull. Sure. GMAC has been on a steady uptick since 
receiving funding in the fourth quarter of 2008. We did about 
$6 billion of consumer auto receivables in the fourth quarter 
and about $18 billion of volume on the mortgage side in the 
fourth quarter. And our commercial business worldwide----
    Chair Warren. I'm sorry, I just want to make sure I'm 
following--the $18 billion is new loans?
    Mr. Hull. Right.
    Chair Warren. Placed new loans?
    Mr. Hull. Right, right. So eight----
    Chair Warren. I just want to follow.
    Mr. Carpenter. But, these are all to be securitized. We 
just inventory them----
    Mr. Hull. Right.
    Mr. Carpenter [continuing]. And securitize them. We're not 
investing in mortgages.
    Chair Warren. Okay. That's what I want to know.
    Mr. Hull. Right, so on the mortgage----
    Chair Warren. Okay, so you're bringing them in, you're 
securitizing them, and moving them on out, and the same is true 
of the auto loans?
    Mr. Hull. Not necessarily.
    Chair Warren. You hold those?
    Mr. Carpenter. The auto loans are--some are securitized, 
and as Mr. Millstein was describing earlier on, those markets 
have become a little bit more friendly over time, and others 
are funded on balance sheet--both at Ally Bank and GMAC.
    Chair Warren. Okay.
    And as a proportion of GM sales--I just want to stick with 
the auto loans for a minute--as a proportion of GM sales, what 
proportion are you financing relative to three months ago, six 
months ago, a year ago, a couple of years ago--I'm just trying 
to get a----
    Mr. Hull. A year ago when credit was unavailable to us, we 
were really down to zero, by and large, close to it. We're now 
at roughly a third--on the retail auto side--of GM's volume, 
and so----
    Chair Warren. Oh, wait, I got a little lost. So, when 
financing was very hard to get for autos, you went to zero?
    Mr. Carpenter. Let me explain. When the financial crisis 
was at its worse, what happened was GMAC had limited liquidity. 
What it chose to do as a matter of policy was protect its 
ability to finance dealer inventory.
    Chair Warren. Okay.
    Mr. Carpenter. The result of that was we didn't have enough 
capacity to fund retail sales. And so our share of retail sales 
dropped to, I believe, it was 6 percent.
    Mr. Hull. Yeah.
    Mr. Carpenter. Six percent of GM's retail sales. Which, you 
know, the good news is we saved the dealers, the bad news, 
there weren't a lot of sales being financed.
    Today we represent, depending on the month, somewhere 
between 30 and 40 percent of GM sales, at retail.
    Chair Warren. And, let's just talk pre-crisis for a 
minute--2007, what was your percentage?
    Mr. Carpenter. It would have been in the mid-forties.
    Chair Warren. Mid-forties? So, you're not quite back----
    Mr. Carpenter. We're not quite back, but we're getting 
back.
    Chair Warren. And on rates? Are you competitive with 
others----
    Mr. Hull. Right.
    Chair Warren [continuing]. In what you charge?
    Mr. Hull. We're highly competitive at standard rates, we do 
our best to be as competitive as possible, given our cost of 
funding, and then of course, you have the subvented rates, 
which you and I discussed earlier.
    Chair Warren. That's right--but, in total, you would say 
it's the same, pretty much, as you could get if you went to a 
bank or you went to a credit union or some other financing 
source?
    Mr. Hull. You can always--yes.
    Mr. Carpenter. Yes.
    Mr. Hull. Yes.
    Mr. Carpenter. Within 25 basis points, usually.
    Chair Warren. And then, if we could just talk about the 
dealers for a minute. I just want to get a picture of what's 
going on.
    Mr. Carpenter. Sure.
    Mr. Hull. Sure.
    Chair Warren. With the dealers, you're still financing 
about the same proportion of dealers that you did, say, pre-
crisis in 2007?
    Mr. Hull. Similar. I mean, we're trying--and now we've 
added Chrysler to that equation and we're at, you know, similar 
penetration percentages overall with them, plus or minus.
    Chair Warren. Okay. Plus or minus, you would say it's about 
the same, and that's the one you're telling me did not go down?
    Mr. Carpenter. Correct.
    Chair Warren. During the crisis, that's the one that you 
held steady?
    Mr. Hull. Exactly.
    Chair Warren. How about the rates? The rates that you 
charge? The interest rates on these loans?
    Mr. Carpenter. Well, I think the rates that we charge to 
the dealers are, I want to say competitive, but the reality is, 
I don't think many of these dealers have a lot of alternatives.
    Chair Warren. Okay.
    Mr. Carpenter. And so, I would say relative to what I would 
call the general creditworthiness of the dealer community, 
they're actually pretty attractive.
    Chair Warren. Can you give me an idea of what the rates 
are, generally, that dealers are paying?
    Mr. Carpenter. It varies. Do you know off-hand?
    Mr. Hull. It----
    Mr. Carpenter. I was going to say somewhere around six?
    Mr. Hull. Right. That's fair.
    Mr. Carpenter. Six percent.
    Chair Warren. About six percent?
    Mr. Carpenter. Something like that.
    Chair Warren. And when you say it varies, I'm just 
curious----
    Mr. Hull. It's credit.
    Chair Warren. You make individual assessments of the 
creditworthiness of each of the dealerships?
    Mr. Carpenter. The creditworthiness of dealerships and also 
what are we financing? For example, if we finance a mortgage on 
their facility, that would obviously carry different terms and 
conditions----
    Chair Warren. Of course.
    Mr. Carpenter [continuing]. Than financing automobiles.
    Chair Warren. Okay, all right. That's very helpful. Thank 
you.
    Mr. Atkins.
    Mr. Atkins. Professor Warren wants an angle on negotiating 
your next purchase, maybe. [Laughter.]
    Mr. Carpenter. I don't think we're allowed to do that.
    Mr. Atkins. No, I just meant, figure out what the other 
side is paying.
    Just one quick question before we get on to another topic. 
Do you all have any barriers to entry, do you have any designs 
on financing Ford or Toyota or other dealers? Or is there such 
a brand loyalty that people don't do that?
    Mr. Carpenter. Well, I think that is a very good question. 
And one of the answers to your earlier diversity question is, 
if we can, in fact, diversify the mix of brands that we do 
business with, that is actually helpful. And so we would like 
to do that over time. We're in the process of talking to some 
smaller organizations currently. I think that the bank model is 
sufficiently attractive relative to the captive finance model, 
that if we can demonstrate an equivalent level of service to a 
captive that we can, over time, demonstrate a very attractive 
proposition for other manufacturers. But that's not this year's 
business, or probably next year's.
    Mr. Atkins. Have you thought about changing your name? That 
might help.
    Mr. Carpenter. We are actually in the process of changing 
our name, this year.
    Mr. Atkins. Okay.
    Mr. Carpenter. We're going to Ally Bank. We're going to 
Ally as the brand name we use.
    Obviously, if you're the Chrysler dealers, and I can 
imagine, if I were a Chrysler dealer and I'd been competing for 
40 years with the GM dealer down the street, I don't really 
like doing all of my business on GM paper.
    Mr. Atkins. Right.
    Mr. Carpenter. So, we're trying to be responsive to that.
    Mr. Atkins. Okay.
    Well, I want to turn now to politics, but with a small 
``p,'' not a big ``P'' like here in Washington, because as 
Chairman and Chief Executive, you have to deal with a Board, 
you want the board behind you. And you have to, obviously, now 
deal with a big majority shareholder who is choosing these 
board members.
    So, I'd like to understand that relationship, between you 
and Treasury. Do you talk to them daily, weekly, monthly? How 
do you deal with your board members? Do you find them--well, 
I'll leave it at that for now.
    Mr. Carpenter. Well, let me start with the Board. I joined 
the Board, as I said, in May of 2009 and in the period between 
May and taking over as CEO, we had 36 board meetings. So, this 
has been a very, very active board of directors, it's a very 
capable and knowledgeable board of directors and it has spent 
an enormous amount of time learning the business and the 
issues.
    And so, it has currently two Treasury-appointed board 
members and as Jim mentioned earlier on, there will be another 
two Treasury-appointed board members, and one other board 
member.
    So, it's a very active board, it takes its governance 
responsibilities very seriously. It takes its relationships 
with the Fed and the FDIC on safety and soundness also very 
seriously.
    With regard to our relationships with the Federal 
government, we clearly have a number of important 
relationships. We have an important relationship with the Fed, 
as a major regulator, and we have ongoing--I would say, 
probably daily dialogue, not myself, but--daily dialogue with 
them, and I have a meeting at least once a month with my 
management team, and the Fed, on a whole array of compliance-
related issues.
    We have a similar relationship with the FDIC, which is 
currently focused on Ally Bank, which is very important to us, 
and so those are relationships which are challenging. They 
challenge us, constantly, to do a better job.
    Mr. Atkins. Do your board members realize that they have a 
fiduciary duty to the shareholders as a whole? Or do you think 
that they view themselves as representing Treasury?
    Mr. Carpenter. I think the Board has a responsibility--
realizes it has--a responsibility to the shareholders and the 
stakeholders, as a whole, but we're very mindful of the fact 
that Treasury owns 56 percent of the company on a fully-diluted 
basis, much more than that.
    Mr. Atkins. I just want to make sure that these guys don't 
view themselves as government flunkies, basically----
    Mr. Carpenter. Absolutely not. Absolutely not. One of the 
things that was decided early on in the establishment of the 
Board was there was an extensive dialogue with Treasury as to 
whether or not all of the board members could, in fact, 
function as equal partners in the Board, and in fact that was 
affirmed.
    With regard to Treasury, I would say, first of all, it's 
been a very positive relationship. To be able to get the last 
round of financing done between the time I joined the company, 
on the 17th of November, and the 23rd of December, showed a 
remarkable degree of responsiveness and competence on the part 
of Treasury.
    I would describe the interactions that I've had with 
Treasury as being those you would expect of a concerned and 
committed shareholder. We have had discussions in which, you 
know, I and my team have been challenged, strongly, on many 
issues----
    Chair Warren. I think we're going to have to stop there, 
Mr. Carpenter.
    Mr. Carpenter. Thank you.
    Chair Warren. But we have the point. Thank you.
    Mr. Neiman.
    Mr. Neiman. I'd like to shift to a subset of issues around 
ResCAP in your mortgage business.
    As you know, our panel has taken a particular interest and 
emphasis on the foreclosure crisis and overseeing the 
implementation of the Treasury's HAMP Program.
    In reviewing the Treasury's most recent report, as of the 
end of January, GMAC Mortgage, Inc. has reported the highest 
percentage of delinquent loans that have been converted to 
trial modifications or permanent modifications. At 50 percent, 
it's an impressive number. Is there something that you would 
like to share with us, as to whether you're doing, employing a 
process, or resources that you think we would benefit from 
hearing, or that other servicers could----
    Mr. Carpenter. Well, thank you for the opportunity to brag 
a little bit.
    We're very proud of our track record. We actually modified, 
in total, 100,000 mortgages since becoming a bank holding 
company. We have modified 12,000, permanently modified 
mortgages under the HAMP program, which is more than any other 
mortgage servicer even though we're not by any means the 
largest, and the highest percentage of delinquencies.
    And in terms of lessons learned, Mr. Neiman, that like any 
new process, it has had its growing pains. And I think the 
thing that we did right, from day one, that has allowed us to 
be as successful as we've been, is we were very focused on 
getting the documentation----
    Mr. Neiman. Up front?
    Mr. Carpenter [continuing]. From the end customer, up 
front. And not relying on verbal commitments and saying, ``Show 
us the data and we'll give you the temporary period of time.''
    There are other things--if I had my mortgage team here, 
they'd give you three or four other ideas. I'd be happy to 
correspond with you separately.
    Mr. Neiman. Okay, that was very helpful.
    Mr. Carpenter. Give you some thoughts.
    Mr. Neiman. Okay, picking up on your remarks about lessons 
learned, we also have lessons learned in our industry of 
financial institutions who have relied on reliable sources of 
deposit funding who have had an overemphasis as bank mortgage 
companies and unfortunately, some of those lessons involving 
WAMU and IndyMac and Golden West turned out not very 
successful.
    Can you share with us any of your strategies so that--to 
the extent that you intend to stay in this business--will not 
end up with the same result?
    Mr. Carpenter. Well, I would make two observations. The 
first one is, if you look at dealer financing, it's a business 
we've been in for 90 years. In fact, we've been in the auto 
finance business for 90 years, we've only lost money in one 
year--2008. If you look at dealer financing--dealer financing 
has typically had losses of five to ten basis points. And in 
the worst year that we've seen, which is 2008--20 basis points.
    So, the losses are extraordinarily low by any standard I'm 
aware of.
    And secondly, on the automobile side, on the retail side of 
the business, I would say--and somewhat, maybe, facetiously--
the last thing a consumer wants to do is give up their 
automobile. They'll give up many other things before they give 
up their automobile, and so our track record, (a) because of 
the importance of the automobile to the customer, and (b) 
because we are financing an asset where, in the worst case, we 
can repossess it and sell it, our loss experience relative to 
other areas of consumer activity--like credit cards--is 
extraordinarily favorable.
    Mr. Neiman. So, is this dependence--though yes, you've had 
a track record of low loss rates with respect to dealer 
financing? But how do you assess the interdependence on an auto 
industry that is so fragile at this point?
    Mr. Carpenter. Well, I think, again, that's a very good 
question and I'm not sure I can give you the perfect answer. 
But I would say in this situation, obviously the dealer has a 
dependency on the manufacturer. And if any one of the 
manufacturers has a problem, the dealer has a problem.
    We have the benefit of having a loan against an asset, we 
know exactly where it is, we know what the VIN number is, and 
we have the ability to go in and drive it off the lot. And that 
gives us an awful lot of protection, even in the worst of 
scenarios.
    Mr. Neiman. Thank you.
    Mr. Carpenter. Thank you.
    Mr. Neiman. My time is expired.
    Chair Warren. Thank you.
    Mr. McWatters.
    Mr. McWatters. Thank you.
    Would you please briefly describe how the $17 billion of 
taxpayer funds have been used by your company? In other words, 
what were the uses of those funds?
    Mr. Carpenter. I'm going to have to defer that to Rob, 
because I wasn't there through the whole period.
    Mr. Hull. Sure, and it's a fair question.
    And so the in-flows and out-flows, obviously, are fairly 
complex in a $170 billion business, but suffice it to say, when 
we do an origination in a quarter, like the $6 billion of auto 
or the $18 billion of mortgage--admittedly, we originate 
mortgages and then we simply re-sell them when they mature to 
the agencies--on the auto side, we may largely sell them into 
flow agreements, we may hold some of them in the bank, but 
largely we may also securitize those, like we did in two 
transactions in the back end of 2009.
    So, those funds, in the traunches they came in at, were 
used to create capital, so we could borrow, so we could go to 
the markets and get more liquidity to give it to that kind of 
origination. So, strictly speaking, it has gone to the 
originations for autos and mortgages over the course of time. 
Again, mortgages will turn very quickly and we'll get that cash 
back.
    Mr. McWatters. Okay, thank you.
    What specific risk management in internal control policies 
and procedures have you adopted to ensure that there will not 
be the need for another bailout?
    Mr. Carpenter. We have significant internal risk controls, 
which are in compliance with bank holding company, Fed, FDIC 
regulations. They, as you know, examine us constantly for our 
adherence on compliance and risk management. We have, at the 
board level, a Risk Compliance Committee that meets every month 
and which management reports to, we have very significant 
policies in terms of risk limits, whether it be on securities, 
or whether it be on loans. We have credit policies in place, 
all of which are well-defined, all of which are monitored 
closely by the management chain, all of which are regularly 
audited by our own auditors, all of which is regularly audited 
by the Fed and the FDIC examiners. So, we have extremely 
comprehensive risk management procedures.
    Mr. McWatters. Okay, thank you.
    Has GMAC sold any mortgage-backed securities to either the 
Fed or to Treasury?
    Mr. Hull. Not to my knowledge.
    Mr. McWatters. Great.
    As a segue to our next panel, Mr. Whalen--I was reading his 
remarks--gave Ally Bank an F rating and an overall negative 
rating for GMAC. I think it's only fair that you have a chance 
to comment.
    Mr. Carpenter. I haven't read his remarks, and I have no 
idea on what basis he would reach that conclusion. All I can 
tell you is Ally Bank is one of the best capitalized banks 
around, it has a very successful consumer-driven marketing 
strategy that's internet based, and I think is a bright spot.
    Mr. McWatters. Okay.
    Does your auto finance business earn a rate of return unto 
itself sufficient to attract third-party capital? Private 
sector capital?
    Mr. Carpenter. Yes, it does. It's consistently, as I said, 
been profitable, except in 2008. With the right kind of capital 
structure, long-term on a return on equity basis or any other 
measure you'd like to use, it's an attractive business.
    Mr. McWatters. I know this was before your time but why was 
there the need for ResCAP?
    Mr. Carpenter. That is before my time. General Motors, at 
some point, decided to diversify its financial services 
activities into the mortgage business and you'd have to ask 
them why they did it at the time.
    Mr. McWatters. Okay, fair enough.
    I'm done.
    Chair Warren. Thank you very much.
    Thank you, Mr. Carpenter. Thank you, Mr. Hull. We 
appreciate your being here, very much.
    And I'd like to call the next panel.
    Mr. Carpenter. Thank you, Chair Warren and the panel.
    Chair Warren. Thank you. Thank you for coming.
    Mr. Whalen, Senior Vice President and Managing Director of 
Institutional Risk Analytics and Mr. Ward is an analyst with--
is it Soleil?
    Mr. Ward. Soleil.
    Chair Warren. Soleil, ah.
    Mr. Ward. Yes.
    Chair Warren. Soleil-Ward Transportation Research.
    Thank you both for being here today, I ask you for your 
opening remarks, and as I have with earlier witnesses, please 
hold them to five minutes. We will put your entire written 
statement in the record.
    Mr. Whalen, how about if we start with you?

  STATEMENT OF CHRISTOPHER WHALEN, SENIOR VICE PRESIDENT AND 
        MANAGING DIRECTOR, INSTITUTIONAL RISK ANALYTICS

    Mr. Whalen. Thank you, Madam Chairman, members of the 
panel. I'm going to take advantage of the fact that I get to go 
last and make some observations on what I've heard this morning 
since you have my written comments.
    First, we have the fascinating dichotomy of, on the one 
hand, a captive financing vehicle, and on the other hand a bank 
holding company. I worked at the Federal Reserve bank in New 
York in the bank supervision area, and I'm very familiar with 
the criteria for approval under Section 12 and Reg Y for bank 
holding companies.
    The thing that troubles me is that, in effect, if you want 
to look at the big picture, we're essentially using FDIC 
deposits as a replacement for commercial paper. That's really 
what's going on, here.
    And going back to some of the earlier comments about 
approval process credit standards for consumer sales of 
automobiles, what I think you have to appreciate is that the 
captives take the sales that the banks won't--regardless of the 
price of the loan. The reality is, when the salesman puts the 
customer's Social Security number, the vehicle, the terms of 
the lease of the lease of the loan into the computer, it says 
yes or no.
    So, for example, when I take a lease from Volvo, as I'm 
getting ready to do right now, I end up with Ford Motor Credit. 
Because neither the Volvo captive nor the banks will take me 
since I own my own business. And that is the route that the 
salesman ultimately takes with me--it's a more expensive loan 
for me and there is, indeed, a much higher risk premium today 
then there was a couple of years ago--I hear this constantly 
from people in the channel who I speak to.
    The second issue goes back to the first panel and choices 
in how we did things. To me--and indeed I think this was borne 
out by the comments by GMAC management--not cleaning up GMAC 
has, indeed, left a millstone around their neck. And while I 
hope and expect that the reserve that they've taken for the 
repurchase for the defaulted loans is going to be adequate, as 
they just testified, I'm not optimistic on that front.
    I think both ResCAP and the other originators of private 
label securitizations--and remember what we're talking about in 
the past is paper that GMAC didn't necessarily sell to Fannie 
or Freddie. They oftentimes were going into the pure private 
label market. And I think the loss rates there are going to be 
quite high. And I would be really surprised if ResCAP did not 
continue to be a source of funding need in terms of credit 
losses from securitizations going forward for a number of 
years.
    You won't necessarily see it immediately, because 
litigation, the process of foreclosure--all of these things 
take a lot of time. But I will tell you that that--that 
lingering question, that unliquidated claim is going to prevent 
them from offering shares to the public, in my opinion.
    I've worked as an investment banker on IPOs as well as 
restructurings and I can tell you right now that there is no 
way on God's green earth that any rational investor is going to 
want to take a flier on what's going on with the mortgage side 
of this business at GMAC until they're pretty sure of that that 
outcome is going to be.
    So, I think that question mark is going to preclude an 
initial public offering as an exit strategy until such time as 
we absolutely know what's going on with ResCAP.
    Finally, let me say, I think that, you know, while I have 
great love and admiration for my friends in the Federal Reserve 
system, the decision to make GMAC a bank holding company was a 
very tortured one. And I am not privy to what they talked about 
with Treasury and the other parties, but I can just say, 
speaking as a bank analyst who's a principal of a company that 
rates every bank in the United States and does so from a 
consumer perspective--my ratings are a lot tougher than Moody's 
and S&P, because ultimately there's a woman in a bathrobe with 
bunny slippers who subscribes to Value Line who came to our 
office once who wanted to know where to put $7 million of her 
money that was sitting in a credit union.
    So, when I give her an A or an F for a given bank, I've got 
to be pretty sure that's she's going to be okay, even if she's 
above the insured limit.
    I think the Fed has created a terrible problem, here. 
Because on the one hand, they have to regulate this entity as 
though it were, in fact, a bank holding company, but indeed 
it's a mono-line that has two-thirds of its liabilities in non-
core funding, funding that could walk out the door tomorrow 
because Ally has put in place those terms, the customers can 
leave without penalty.
    So, I think going forward, the panel should really focus on 
what business is this company in, what business is it going to 
be in prospectively, and how stable is that business? And I 
will be happy to answer questions.
    [The prepared statement of Mr. Whalen follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Chair Warren. Thank you, Mr. Whalen.
    Mr. Ward.

STATEMENT OF MICHAEL WARD, ANALYST, SOLEIL-WARD TRANSPORTATION 
                            RESEARCH

    Mr. Ward. Thank you, Chair Warren and members of the panel, 
I appreciate being here today and given the opportunity to 
speak with you.
    My name is Michael Ward, I'm an equity analyst, I have 
followed the auto industry for about 30 years, I currently 
publish research on Ford, as well as auto suppliers and some of 
the dealers.
    My comments will be limited to the competitive implications 
of an integrated GMAC and General Motors and valuation in the 
equity markets or an exit strategy for an integrated GM and 
GMAC.
    It is my opinion that GM and GMAC will need to be 
reintegrated in order to provide the maximum value to current 
GM and GMAC stakeholders. My opinion is really based on four 
variables.
    First, competitive position. I think when you look at an 
integrated approach, in our view it is the most efficient tool 
to address several variables in the marketplace, specifically 
pricing. Most consumers do make purchase decisions based on a 
monthly payment. GM is currently at a disadvantage, in my view, 
relative to its primary competitors that have captive finance 
companies because of the cost--their relative cost--at General 
Motors, to subvent a loan.
    The second point under that competitive position would be a 
marketing tool. Marketing incentives are a big part of the 
competitive landscape in the vehicle sales market. A captive 
finance company provides the flexibility to offer reduced 
rates, as we've heard, as well as lease payments or other 
options that are attractive to consumers. Competitive response 
falls right in that same category--GM has lost market share in 
the U.S. market, its biggest market for the last 10 years. The 
market is going to get increasingly competitive over the next 
10 years, not less competitive, and GM needs every advantage it 
can get.
    Its bankruptcy process has slowed some of its new product 
development and it's going to be at a significant disadvantage 
to both Ford and Toyota, its two principal competitors.
    And lastly, which was not talked about much today, is 
customer loyalty. In our view, vehicles financed through a 
captive sub do not enhance the complete ownership experience.
    The second point relative to dealers, an in-house source of 
financing for dealers definitely provides a more consistent 
auto flow--it wouldn't be at a 90 percent level if that wasn't 
the case. One thing that was not mentioned is that most vehicle 
manufacturers do provide what they call ``floorplan 
assistance''--if a vehicle is sold quickly enough, the dealer 
does get, in essence, a kickback, a repayment for some of those 
interest costs.
    In addition, as you go forward, two big variables that are 
going to have to be monitored--the industry, because of the 
correction it's had--there is now about a one-third reduction 
in dealer inventory. GM alone has taken about 700,000 units out 
of dealer inventory, and remember, those are vehicles that were 
being financed and paid for, and that's close to $20 billion of 
less capital needed in the floorplan loan side of it.
    As you go forward, also, dealers are going to have to 
invest in their stores. Historically, they have relied on the 
vehicle manufacturers or the captive finance subs to provide 
some of that financing. As you look into more efficient type 
vehicles, electric vehicles and other things it's going to 
require some investment.
    The third variable that I would look at is the source of 
income and financial flexibility. If you look at just GMAC, the 
automotive financing portion of GMAC, between 2002 and 2007, it 
contributed $8 billion in after-tax earnings to GM. In a highly 
cyclical industry like the auto industry, a stable stream of 
earnings is very vital as far as when you're looking at 
valuations, comparing it to other vehicle manufacturers.
    Source of cash--if you look at Ford Motor Credit, as an 
example, Ford Motor Credit provides a stream of dividends to 
Ford Motor Company. One of the reasons that has helped Ford 
survive some of the downturn that we've seen, is they were able 
to tap Ford Motor Credit for financing and get rid of some of 
their debt, as well as cash to run their auto business. And 
then lastly, it does provide a source of financial flexibility 
for the vehicle manufacturers as they are able to offset some 
of their tax liabilities.
    Lastly, on valuation, I think when you look at the vehicle 
manufacturers, the two most common metrics people use to value 
equities are on an EBIT (Earnings Before Interest and Taxes) to 
EBITDA (Earnings Before Interest, Taxes, Depreciation and 
Amortization) basis--Enterprise Value to EBITDA multiple--and 
on a PE (price/earnings ratio) basis. GM, when you have--if you 
have--if you do not have a captive finance subsidiary, they're 
going to be at a discount to their peer group, specifically 
Ford. Right now, Ford is trading at about five times expected 
2011 earning on an EBIT to EBITDA basis, and it's trading at 
about eight times expected 2011 earnings on an earnings-per-
share, or a PE basis.
    The ownership of Ford Motor Credit definitely contributes--
or will contribute--to Ford's premium multiple relative to GM. 
If GM was a publicly traded stock today, I would expect Ford to 
command at least a 20 percent premium to General Motors, and 
the lack of a captive finance sub would probably account for 
about half of that.
    Thank you very much and I'd be happy to try to answer any 
questions.
    Chair Warren. Thank you, Mr. Ward. Thank you, Mr. Whalen.
    I'm trying to thread through a story about why it is that 
GMAC got the kind of rescue that it got. And at least one of 
the stories that Treasury tells around this is that they made 
the decision to invest in the auto industry, this started 
during the Bush Administration, and was carried on, then, 
during the Obama Administration, in large part because of jobs 
and other systemic implications. And we've written about that 
in the past, we very well may write about it again in the 
future. But that's, at least, a version of what's happening.
    So, GMAC, the story goes, is essential because with GMAC 
you can't save Chrysler and GM. Indeed, I think you probably 
heard Mr. Bloom sit here and say, ``We couldn't even take the 
risk of running GMAC through bankruptcy, because GMAC was 
absolutely essential to the survival of GM and Chrysler, and 
without it, they would have failed.''
    Now, so I just want to press on that part of the thread, 
particularly because you've addressed it partly in your written 
remarks and because it's part of the story, here. In Panel 
discussions with the former GMAC CEO Al de Molina, he said, 
``No one, either by itself, or together, could have done it.'' 
And here, what he's talking about is replacing GMAC's floorplan 
financing of GM dealers, at the time. There was a concentration 
of risk that no one would take on, I don't know anyone who 
opposes that view.
    And, in fact, as you heard, what GMAC did is it continued 
to finance the dealerships, even when it meant they wouldn't 
finance sales. In fact, as I understand it, during the crisis, 
GM auto dealership financing went up to 85 percent, was through 
GMAC.
    So, that's really the question--how important was GMAC 
financing to the survival of GM and ultimately to Chrysler? But 
it's GM that we're really talking about here.
    Mr. Whalen.
    Mr. Whalen. Well, for the reasons already stated, obviously 
it's important. But I think it's also important to realize that 
the spin-off of GMAC from GM was done for entirely different 
reasons. Which was, to get the mortgage business which, at the 
time, was seen as attractive, away from the dying auto business 
at GM.
    So, you know, and my colleague Mr. Ward has addressed this. 
Now we have a situation where the mortgage business is killing 
the former captive, and we have constructed yet a new rationale 
for bailing it out.
    As I said in my statement, I think there's two drivers 
here. One is the political relationship between the Democratic 
Party and the United Auto Workers----
    Chair Warren. So, let me--to start though, this started 
during the Bush Administration, this didn't start during the 
Obama Administration.
    Mr. Whalen. No, that's true. But the United Auto Workers 
have friends in many places. And even though, in economic 
terms, it would probably be beneficial to the industry as a 
whole to get rid of at least one competitor in North America, 
the political class does not want to do this. And this is a 
global problem, it's not just in the U.S. that you see this.
    Chair Warren. So, if you'll permit me, though, I do want to 
focus in, I just want to make sure we're all on the same page, 
here. Without GMAC, GM was unlikely to survive? At the moment 
when we funded it? Good arguments about why it never should 
have been spun off to begin with, but I just want to make sure 
we're on the same place on this.
    Mr. Whalen. I think that's a fair statement.
    Chair Warren. Fair statement.
    Mr. Ward.
    Mr. Ward. I think one of the things that needs to be 
pointed out is, every unit produced is to a dealer order. GM 
records revenue when a car is shipped to a dealer or 
production. The dealers are the customer for General Motors. 
They have no financing.
    Chair Warren. I have come to learn that.
    Mr. Ward. It's gone. I mean, if they didn't rescue GMAC--if 
GMAC did not exist, GM would have been Chapter 7.
    Chair Warren. Okay.
    Mr. Ward. They would have disappeared.
    Chair Warren. All right.
    Now, let me see if I can just--I just want to understand 
the rest of the pieces of the financing. You've raised the 
question, Mr. Whalen, about if GM had failed, what other--
actually, let me ask about securitizations, since I've got 
limited time, let me just go to the securitization question.
    You raised the point in your testimony there was no 
compelling financial or business reason to rescue GMAC, there 
were private alternatives available to GM and Chrysler in the 
marketplace for floor plan lending, and the securitization of 
auto loans was never really in doubt.
    In fact, however, it seems that auto securitizations 
collapsed from $21 billion from the second quarter of 2008 to 
less than $3 billion in the second half of 2008. That doesn't 
seem to be an immediate recovery. So, I don't think I'm quite 
understanding your point, here, and I just want to make sure I 
get it on the role of securitization.
    Mr. Whalen. Well, let me put it to you this way. Unlike all 
of the other asset classes in the securitization world, 
particularly mortgage securitizations, auto paper--because it 
is very short in maturity, very simple deals, and also because 
it does have a very significant following among institutional 
investors, basically fixed itself, and Ford is the example.
    Chair Warren. Well, but wait a minute----
    Mr. Whalen. Now, sales dropped off.
    Chair Warren [continuing]. Going from $21 billion to $3 
billion doesn't look like it fixed itself and that it only 
started coming back once TALF was in place, a TARP program.
    Mr. Whalen. Yes. But if you look at it today, especially if 
you focus on--well, let me put it to you this way. Part of the 
attraction for investors is obviously the collateral behind the 
financing. But the real practical attraction is the ability of 
the issuer to perform on the reps and warranties made in the 
securities offering. That is to say, the ability to buy back 
bad loans, or substitute bad loans.
    So, obviously, when GMAC got into trouble, Wall Street 
shrank back, they wanted no part of it. The banks ran from this 
market, too, as I'm sure Mr. Ward would confirm--they wanted no 
part of it.
    So, what was left were the viable auto finance companies 
that were willing to continue doing business at the low levels 
of sales that we saw during that period.
    So, I haven't gone through those numbers that you're 
referring to in detail, and I don't quibble with your 
characterization, but what I am saying is this is an example of 
an asset class that is successful, as opposed to private label 
mortgage securitizations which, I don't know if they will ever 
come back.
    Chair Warren. But it did have a substantial period where 
they were in real trouble.
    Mr. Whalen. Yes, it did.
    Chair Warren. Okay.
    Mr. Atkins.
    Mr. Atkins. Thank you. So, let me just pick up on that. 
We've heard that GMAC is going to try to reinvent itself, 
change its name and perhaps appeal to other parties, obviously 
they need to make the Chrysler guys feel like they're welcome 
under a former GMAC label. So, now GMAC has government backing 
and it also has Ally Bank as a thing to support its activities 
in this market.
    So, is GMAC getting to be more like a GSE in its current 
form? You know, like Fannie Mae, Freddie Mac, with this 
implicit government backing? Is that arguable? Is it getting 
better types of financing possibilities in the marketplace 
because of this backing? Or, what's the effect on competitors?
    Mr. Whalen. I think, obviously, both GM, Chrysler, and GMAC 
today are government-sponsored entities, by definition. 
However, because of the unresolved issues at GMAC, obviously 
their spreads have not improved to the point where they're 
comparable to the other GSEs. If they were, and if the 
marketplace didn't have any fear that a restructuring might 
still take place, then I think the spreads would be narrower.
    In fact, going back to the last conference call where GMAC 
management discussed strategic alternatives, and going back to 
one of your earlier questions, analysts are still asking them 
if there's not, in fact, a potential bankruptcy for ResCAP.
    The problem we have, though, is that now that we are a bank 
holding company--and by we, I'm talking about GMAC--you can't 
do that. Because when the affiliate of a bank holding company 
defaults, the whole group defaults. And that's the cul-de-sac 
that we, meaning Treasury and the Fed, have, essentially, 
driven into now.
    So, the decision to make this finance company a bank 
holding company has actually limited the Treasury's 
flexibility, and therefore they come back to us and say, ``Oh 
me, oh my, we didn't have any choice.''
    Mr. Atkins. Thank you.
    Mr. Ward. I'm not as familiar with that side of the market. 
The one thing I can point to is that, as you look at the auto 
industry, as far as the retail consumer, and the fact that it 
is perceived that GM is backed by the government or owned by 
the government--it has hurt General Motors in the marketplace 
and Chrysler in the marketplace. And to the extent that GMAC is 
considered to be backed along those lines, they will lose 
interest from dealers. Because a big part of owning a franchise 
is what else is behind it, including the dealer financing and 
other variables.
    Mr. Atkins. And, Mr. Whalen, you've made a point, too, that 
internet banking has yet to really prove its mettle in the 
marketplace and I was wondering what your view is with respect 
to Ally Bank as being a key part of this package of 
revitalization?
    Mr. Whalen. Well, as management has articulated their 
vision for the future, they seem to be focused on a broad 
consumer banking franchise--not just auto sales--because I, 
personally, don't think a mono-line is viable, as a bank 
holding company. I think you have to make mortgage loans, you 
have to make other types of loans.
    But the trouble comes, and I can point you to a number of 
peers in the FDIC universe, that when you don't have brick and 
mortar branches, you have to go out and acquire and retain 
customers using advertising of various types, which can be 
quite expensive. And the example I used in my testimony was ING 
Direct, which is a reasonably well-run bank, but they bid up 
for deposits, because the home office wanted them to be big.
    In this case, we have a bank holding company that has to 
bid up for deposits because it's a functional replacement for 
commercial paper.
    So, we're again stuck in the very difficult business model, 
a business model comprised of choices where we don't have 
funding flexibility yet--hopefully that will come--and yet 
we're still being driven to finance sales as though we were a 
captive. And that, I think, is an issue that is really 
insoluble at the end of the day.
    I couldn't--let me put it to you this way--I have friends 
in the banking business who say it's possible to have a 
profitable internet bank, but I don't have one to show you 
right now.
    Mr. Atkins. Well, okay.
    I'll pass the--I just have a few more seconds.
    Chair Warren. All right.
    Superintendent Neiman.
    Mr. Neiman. I'd like to follow-up with you on this issue of 
strategic plans going forward, and your very interesting 
comment that a mono-line bank is not a viable business model.
    Recognizing your comments about the business of ResCAP, 
what are your views as to whether GMAC should divest itself of 
those non-core businesses? Would it strengthen the institution, 
or would it just increase the risks to the taxpayers by 
increasing the interdependency and concentration of its 
affiliation with GM?
    Mr. Whalen. Well, if you were to sell it, if you could, I 
think it would end up costing you money. In other words, you 
would give the entity to someone else, but you would have to 
make reps and warranties regarding any future claims that would 
be fairly onerous. I certainly wouldn't buy the company in its 
current state. Even if they write down the on-balance sheet 
mortgage exposures to zero, you still have the legacy off-
balance sheet securitization exposures which the management 
team alluded to and if you take a reasonable fraction of that 
20, 25 percent default rate as being potentially kicked back to 
them in terms of demands for repurchase, that's going to be a 
pretty good size number.
    The other thing I would comment on that, it just occurred 
to me because of your question, is this whole issue of 
modification--modification is not a panacea. The re-default 
rate on modifications is quite high. And I look at modification 
with respect to all of the banks that I cover right now as 
essentially a place to hide losses. As soon as a bank says, 
``Oh, well, this loan is being modified,'' they don't report 
losses on it anymore. And there is a backlog of losses in the 
banking industry that's probably as much as a third to forty 
percent of the current charge-off rate that you can see 
reported in the FDIC's Quarterly Banking Profile that just came 
out this week.
    So, as you go forward, keep in the back of your minds that 
there are a lot of hidden liabilities in this company. And 
management's trying to deal with them in good order, They have 
indicated they have a reserve established, but that reserve may 
be woefully inadequate if we don't see a really strong uptick 
in real estate prices in this country.
    Mr. Neiman. So, you would expect to see and possibly 
support a continuation of that non-core business in the 
mortgage business?
    Mr. Whalen. It looks like that's what they're doing. 
They're originating what we call conforming paper that they can 
sell to Fannie and Freddie, which is not an unreasonable 
process. But if those loans go bad, as you've seen in the 
newspaper recently with respect to the Federal Home Loan Banks, 
they will come back and ask the issuer to substitute or 
repurchase the defaulted loan, and that can get to be quite 
expensive.
    Mr. Neiman. But, in terms of a business model going 
forward, and growing that business, is that where their focus 
should be to be a viable institution? Or expanding into other 
consumer and finance business lines?
    Mr. Whalen. Well, going back to Mr. Ward's comment, I don't 
think a mono-line auto business is viable as a stand-alone, and 
I certainly don't think it would make a very attractive IPO.
    Remember, the earlier witness alluded to the credit card 
mono-lines--they've all been bought.
    Mr. Neiman. Right.
    Mr. Whalen. The only one left is Capital One and they 
backed into a couple of retail regional banks so that they 
wouldn't get bought, essentially. It's a company I cover, and I 
like very much, but they had to diversify, as well. Just being 
a credit card company was not sufficient.
    Mr. Neiman. Mr. Ward, you made reference to--I think it was 
picking up on some of the question I asked to the Treasury 
panel, as to whether they were exploring a combining of GM and 
GMAC, integrating GMAC back into GM. You seem very supportive 
of that approach?
    Mr. Ward. I think it's the only way to get full value back 
to us, to the taxpayers. General Motors is going to come at a 
substantial discount to Ford, and if you just put numbers down 
on paper on a EBIT to EBITDA basis, three times EBIT to EBITDA 
doesn't get you a heck of a lot. Or, you know, six to eight 
times on a PE basis--it would take decades for the Treasury to 
get some of their investment back by selling out the stock. If 
you enhance it by putting the captive sub back into it, it does 
stand on much better footing relative to both Ford and Toyota, 
their two principal competitors.
    There was a question earlier, when somebody asked, why did 
they get into the ResCAP business and other things.
    Mr. Neiman. Right.
    Mr. Ward. Throughout the 1990s, it was the goal of the 
vehicle manufacturers, when they were flush with cash--and it 
wasn't just General Motors--to diversify their financial 
services operations. It was one of the few areas that was large 
enough to make an impact on the automotive business because of 
the size and scope. And so they did make a lot of investments. 
Ford had several, but they divested of them. GM just held on 
too long.
    Mr. Neiman. What are your assessments of what the strategic 
plan will look like when it comes out of GMAC?
    Mr. Ward. I'm hopeful, as an auto analyst, that GMAC is 
reintegrated with General Motors.
    Mr. Neiman. Okay, thank you.
    Chair Warren. Very interesting, thank you.
    Mr. McWatters.
    Mr. McWatters. Thank you.
    Mr. Whalen, your current rating for Ally Bank is an F and 
GMAC is negative. Would you comment on that, and also comment 
on what these institutions need to do to change an F to a B or 
maybe a C? And a negative to something less than negative? And 
Mr. Ward, if you could comment on his thoughts?
    Mr. Whalen. Well, the F rating for Ally Bank is driven 
primarily from the losses they've been reporting on the income 
line. In other words, provisions for future credit losses. You 
take income, you put it in a reserve account, therefore the 
bank is losing money.
    We included the history of their ratings going back a few 
years at the back of my testimony, and you can see, when the 
bank started reporting losses, they went from a C in one 
quarter, to an F.
    We have, as I mentioned before, a fairly draconian letter 
rating system for banks, because we have 25,000 retail 
customers who use our ratings as an asset allocation tool. And 
there are banks--we currently rank about 4,000 banks F out of 
8,100 or so FDIC-Insured institutions. Half of those have many 
factors that drove them to that, most of them, about half, are 
just return on equity stories. In other words, for half of the 
banks we currently rate F, it's provision for credit losses 
that is driving the rating.
    Now, you'll notice that the score for Ally is also very 
high because of their restructuring in the fourth quarter. They 
don't have a horrible charge-off rate on a normalized basis if 
you go back a few quarters, but they really took a bath in the 
fourth quarter. Ally Bank wrote down a lot of assets, moved 
them to ResCAP, because they want to isolate the bank from the 
bad things that are going on at ResCAP.
    In general, I want to see an end to operating losses. And 
I'm going to keep a negative outlook on the company as a whole 
until I'm sure of what's going on in ResCAP. Because at the end 
of the day, all of the good work that I know that these people 
are doing to turn their company around is for naught, if we 
still have a functional equivalent of Chernobyl in ResCAP 
bubbling way off in the corner. And that's what ResCAP is. You 
can't sell these businesses, you can't do much of anything with 
them except put them into bankruptcy.
    And that's why I alluded to the difference between 
Washington Mutual and Bear Stearns with respect to JP Morgan. 
Study those two cases. In the case of Washington Mutual, all of 
the unliquidated claims are sitting in bankruptcy court, there 
is no litigation regarding those securitizations.
    On the other hand, with Bear Stearns, because it wasn't 
restructured, you are going to see a long period of JP Morgan 
dealing with that pain.
    Mr. Ward. I'm not really familiar with the banks and how 
they rate themselves, but he seems like he's got a pretty 
disciplined strategy, with his ratings, so I'm siding with him. 
[Laughter.]
    Mr. McWatters. Okay. Fair enough, fair enough.
    Mr. Whalen, on page 10 of your paper, you state that 
converting GMAC into a bank holding company was a bad public 
policy choice and an equally bad financial decision, why is 
that?
    Mr. Whalen. Well, you took a company that was insolvent and 
you pushed through the regulatory process at the Fed, 
disregarding, in my opinion, the capital and managerial 
criteria in Reg Y and the Bank Holding Company Act, and then 
after the fact, Treasury put capital into an unrestructured 
entity and tried, essentially, to buy time. I would 
characterize all of the TARP investments, to date, as buying 
time.
    But, you know, we have a saying in the analytics business, 
``When you're in a hole, stop digging.'' And, I think 
ultimately, even today it would be beneficial to General 
Motors, if that's our real objective, turning that company 
around, if the Fed and the Treasury would put their heads 
together, put GMAC into bankruptcy and do it on an expedited 
basis, and then as Mr. Ward said, let GM buy it. I think that 
would be a happy ending. You could get the acquiescence of the 
FDIC not to seize the bank, and we would all live happily ever 
after.
    Mr. McWatters. Thank you.
    On page 15 of your paper, you talk about the putback rights 
with respect to defaulted subprime loans. I asked the question 
to management, there doesn't seem to be a lot of concern here, 
it seems to be that they've reserved for it and it's not as 
much of a problem. But, I gather you think it may be because 
you've underlined it in your paper?
    Mr. Whalen. Well, when you're dealing with public 
disclosure of public companies--and GMAC still does have 
disclosure responsibilities under the Securities Act of 1934--
you always tell investors everything you have to tell them this 
quarter. And I deal with this with all of the banks I cover. 
They tell you just enough. And they're not doing this because 
they're evil or duplicitous, they're doing this because there's 
a fine balance between public disclosure and your duty to the 
corporation. Boards of directors, by the way, don't have a duty 
to shareholders, they have a duty to the corporation. And so 
they try and balance the two, priorities of disclosure and 
investor relations.
    And I'm sure based on what they know today, they think that 
reserve is adequate, but I would tell you, I think they're 
going to need more.
    Mr. McWatters. Okay, thank you.
    Chair Warren. Okay, good.
    We're just going to ask a couple of very quick questions, I 
think try to move this through as quickly as we can. I just 
want to make sure I'm following this.
    What I'm hearing is that your first option is, sell off the 
non-auto assets--for whatever it's going to take to sell them 
off--and then collapse GMAC back into GM. That would be option 
one. Option two is take it through bankruptcy and, in effect, 
try to accomplish the same end, to get the auto finance part 
back into GM. Not only because GMAC doesn't make any sense, but 
as a way to strengthen GM and get the non-auto part back out 
into wherever you can it, to whomever you can sell it to. Is 
that the view of both of you, here? Mr. Ward.
    Mr. Ward. It's certainly my perspective. I'm not sure what 
happens with the other aspects of GMAC, but as it relates to 
the auto business, yes. I think the proper home would be 
within--to have GM and GMAC integrated.
    Chair Warren. All right, and at the risk of stating the 
obvious, just because I want to be sure I'm clear on this, you 
believe that's the best thing we could do for GM before trying 
to save GM?
    Mr. Ward. Yes, in two respects--from a competitive 
standpoint, as they compete with Ford and Toyota specifically--
and then secondly, as a valuation. At some point, they've got 
to come back to the capital markets and the discount will be 
greater if GMAC is not part of General Motors.
    Chair Warren. Right. And I'm going to presume, Mr. Whalen, 
that you would add to those two points, it also takes away from 
the risk associated right now with ResCAP, if it can be done, 
either through bankruptcy or through a sale, where someone else 
picks up that----
    Mr. Whalen. That's the rub----
    Chair Warren [continuing]. That unhappy----
    Mr. Whalen [continuing]. Speaking as an investment banker, 
if I were representing GM, I would not let them buy it back 
unless I had an ironclad understanding with respect to the 
other liabilities.
    And it raises the point again--but let me say this, too, 
Madam Chair. I've always believed that people misunderstood 
TARP. We should not be dancing in the street because banks have 
repaid their TARP funds. If it had been up to me, I would have 
told the banks, all of them including GMAC, ``Take the TARP 
money, charge it off. Take your worst loans, charge it off, 
don't give me the money back.'' Because if the point is 
reviving the U.S. economy and reviving lending, which is 
shrinking at an 8, 10 percent annual rate right now if you look 
at the latest FDIC data, then we haven't achieved anything. We 
should have told every one of these institutions, ``Just charge 
it off.'' Because the benefit to the economy, we would have 
gotten enormous leverage from that.
    And instead, we're sitting here, counting these pennies 
while our financial system is still shrinking. So, you know, 
that's my perspective on it.
    Chair Warren. Okay.
    Thank you, Mr. Whalen. Thank you, Mr. Ward.
    Mr. Atkins.
    Mr. Atkins. Okay, thank you. I have just a couple of 
questions. One, I tried to explore in the earlier panel about 
the coming financing crunch that GMAC's going to be having. 
They have--over the next three years--about $60 billion of debt 
that's going to be coming due and they just did a 144A offering 
for $2 billion at 8.3 percent for five-year notes.
    And so my question for you is what's the appetite in the 
industry considering--or in the markets--considering all of the 
things that the company's done to try to fix this balance sheet 
for that sort of capital, and what do you view as the 
likelihood of more TARP funds being thrown at the firm?
    Mr. Whalen. Well, as I said before, as a freestanding 
entity, I don't know that I would be a buyer of that paper. The 
spreads would have to be quite high; it would be junk 
financing----
    Mr. Atkins. Does 8.3 percent account for that, or not?
    Mr. Whalen. I don't know, I would defer to Mr. Ward on that 
in terms of industry financing spreads but remember, if you're 
an investor and you're staring at ResCAP because you're buying 
debt from the parent, life has got a big question mark on it.
    Mr. Ward. Those financing rates sound right. I think the--
from the automotive perspective, historically the automotive 
paper has been good paper.
    One of the things that did happen, I think the two biggest 
players in that market were Bear Stearns and Lehman, and not 
only did you have the disruption in the market, but the two 
biggest players in that market--the securitization market--
disappeared, essentially.
    So, you are starting to see some life in the securitization 
market, freestanding, away from TALF. And so I think as the 
cycle returns, particularly in North America, and profitability 
starts to come back for the industry, I think the worst is 
over, I would expect the appetite to improve.
    Mr. Atkins. Okay, and of course TALF ends next month----
    Mr. Ward. That's right.
    Mr. Atkins. Unless the Fed extends it.
    And then one last question--we spoke with earlier panels 
about how easy or difficult it is for competitors to come in, 
of course, as Professor Warren was asking, that was one of the 
rationales, of course, to bail out GMAC. What is your view with 
respect to the ability of other companies to pick up in here? 
Is it, in fact, a very siloed type of thing, or are there 
structural problems to this market?
    Mr. Whalen. Well, as has already been alluded to, 
manufacturers typically provide financing for their sales. And 
this is common for most industries, and that's how you should 
look at this. When a bank comes in to provide financing for 
auto dealers--and this was heard from management, it was over 
half, someone was providing financing for those other sales--
they're picking off the better customers, by definition. 
They're not there to get the worst customers.
    So, the captive is financing the rest, and that's how they 
get the volumes. And they take that risk, but having said all 
of that, auto paper is still a very good risk. I agree with 
what the CEO of GMAC had to say about that.
    Chair Warren. Good.
    Thank you, Mr. Whalen, I appreciate that.
    Superintendent Neiman.
    Mr. Neiman. So, I just want to clarify, you know, really 
understand your assessment of the risks of remaining a--not 
only a mono-line, but one interdependent with GM. And how 
critical a risk is that if this institution remains with that 
level of interdependence?
    Mr. Whalen. Well, I think it's the only way these 
businesses work, is as captives. You know, this is basically a 
bank holding company looking for a business model right now. 
And I'm very sympathetic to the people involved, I know they're 
doing their best, but the truth of the matter is when the 
private equity boys took this company out of GM, they were 
engaged in a little bit of arbitrage, and now we are paying the 
price for that.
    I think the only rational decision, if you really want to 
help GM, is to put this thing through a restructuring, sell the 
auto business back to them and leave the rest of it in 
bankruptcy court for the Trustee to deal with.
    You know, everybody always screams and yells about Lehman 
Brothers, but in fact, Harvey Miller and the good people in the 
Southern District of New York did a brilliant job on that 
bankruptcy. It's a case study in how you deal with a complex 
financial institution. And I think we ought to take their 
example. The only thing we lack is courage.
    Mr. Neiman. We asked Treasury, is it possible, are there 
any plans to encourage other competitors in this market--we 
hear the reasons as to why other banks are not in this 
business--because of expertise, and systems and knowledge 
base--is that the reason they're not in this business?
    Mr. Whalen. Well, they've had hard lessons. GE, throughout 
the 1980s, basically provided financing for Chrysler. They got 
stung hard on leasing and some of the other losses, so I think, 
you know, the banks are certainly aware of the size of the 
market and the appetite, but I think the ease of the flow going 
from the dealer order, financing the product, going through the 
customers--it's just one integrated package. You don't have to 
go out to market to sell it. It comes with the business, it's a 
revenue engine, and it continues.
    And so, I think they're well aware of what the market is 
like out there, they just have decided to stay away. They can't 
compete, they haven't been offered the subvention that the 
captive financing companies get, and so as a result, they can't 
compete with them.
    Mr. Neiman. Thank you.
    Chair Warren. Mr. McWatters?
    Mr. McWatters. I'm done.
    Chair Warren. All right, good.
    I just wanted to say thank you, Mr. Ward and thank you, Mr. 
Whalen, and express a little bit of frustration. We had asked 
Treasury to stay so that we might ask some questions at the 
conclusion of your testimony. They elected not to, and I'm 
sorry for that. I would like to have had them make some remarks 
in this context.
    But I can assure you we will ask the questions based on 
your testimony as we go forward in our conversations with 
Treasury and with GMAC.
    Thank you very much for being here today.
    Mr. Whalen. Thank you very much.
    Chair Warren. Thank you.
    The record will be held open for additional questions. 
Thank you all. And this hearing is adjourned.
    [Whereupon, at 12:46 p.m., the panel was adjourned.]
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