GMAC has no Ally in the FDIC

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A Full Moon occurs when the Sun and Moon are in opposition to one another, and the November 2 Full Moon in Taurus shines the spotlight on banking and lending practices. A front page story in The Wall Street Journal highlights the conflict between GMAC’s Ally Bank and the FDIC.

The Federal Reserve granted GMAC emergency approval on Christmas Eve to become a bank holding company in order to receive $5 billion from the TARP. The Fed became the primary regulator of GMAC while the FDIC supervised Ally Bank, GMAC’s new state-chartered commercial bank. On May 21, 2009 the Treasury injected an additional $7.5 billion capital and guaranteed up to $7.4 billion of GMAC debt while the FDIC agreed to guarantee up to $7.4 billion in bank debt, increasing the government’s stake in GMAC to 35.4%.

While GMAC did not pose a systemic risk to the financial system, the government’s bailout was designed so GMAC could provide financing to consumers and auto dealers to stem further economic risk to Main St. In essence this was an industrial rather than a financial policy.

Despite their ads and commercials touting how straightforward and upfront they are compared to other banks, the advertising doesn’t mention that Ally Bank is part of GMAC unless you visit Ally’s website. These ads along with Ally paying higher savings rates got the other banks complaining to the regulators that Ally wouldn’t be in business if it wasn’t for the government’s help. (Never mind that many of the banks complaining wouldn’t be in business either.)

As an internet bank, Ally has to offer savings rates that are higher than brick and mortar banks in order to attract deposits. Even though deposits are insured to FDIC limits, the fact that GMAC was previously associated with General Motors also requires an extra incentive to get people to do business with them.

The FDIC wrote to Ally in June, telling the bank to lower its savings rates and reduce its reliance on deposits as a source of capital. Additionally, the FDIC told GMAC that it didn’t want to see Ally on Bankrate.com’s list of the top 5 rate payers. Ally’s rate on a one year CD dropped from 2.8% in late May, to 2% by September. (The national average rate during that period dropped from 1.23% to 0.95 %.) As Ally lowered savings rates, the bank saw new deposits drop from more than $1 billion a month in the second quarter to $200 to $300 million a month in the third quarter.

It’s questionable why the FDIC is pushing GMAC from using Ally deposits to fund auto loans and dealership inventories toward greater dependence on wholesale funding. Given the difficulties that investment banks Bear Stearns and Lehman Brothers faced by being almost entirely dependent on wholesale funding, GMAC does not have a promising future by following suit. Just as GMAC became a bank holding company its ability to act like a traditional bank is being severely restrained.

The FDIC’s zest to protect its exposure to Ally Bank deposits is creating greater risk for GMAC as a whole. What we have here is a classic conflict between industrial policy and the need for safety from financial risk. The government must decide whether GMAC’s role as a conduit to consumer finance is important enough for the FDIC to incur greater risk, or be willing to let GMAC go the route of other companies that based their business on wholesale funding.

Taurus is ruled by Venus which is the principle of attraction. Banks have to attract customers to make deposits so they can use those deposits to lend money out. Debt is ruled by Scorpio and Pluto, which is a more expensive method of raising capital. Scorpio and Pluto rule bankruptcy. It’s no secret where CIT ended up when they were not allowed to take deposits and act as a traditional bank.

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