Can it be?
More than five years after Congress authorized $475 billion in emergency funds known as the Troubled Asset Relief Program (TARP) to bail out everyone — from banks to insurance companies to auto makers — at the height of the financial crisis of 2008, has the government finally broken even?
And with 20 to 30% of the original TARP handouts still to be repaid, might the government actually have made a profit for the taxpayer?
In exchange for TARP bailout money, the rescued corporations were required to give the Treasury ownership stakes in their companies in the form of stock shares, bonds, and the like.
Since then, the government has collected dividends on its shares and interest on its bonds, and over time, it has been selling its ownership stakes back to the companies or to the public, often at a capital gain.
According to an announcement from the U.S. Department of the Treasury, the government has just recently broken even, recouping the full value of the TARP money it disbursed more than five years ago — and then some.
“The U.S. Department of the Treasury today announced that it expects to sell 410,000 shares of Ally Financial, Inc. common stock in a private offering at $7,375 per share,” the Treasury Department proclaimed last Thursday. “After this sale concludes, Treasury will have recovered approximately $435.8 billion on all TARP investments — including the sale of Treasury’s shares in AIG — compared to $422.2 billion disbursed.”
More than just breaking even, the government has actually made a profit of more than $13 billion from TARP so far.
But not all of the TARP money has been returned, meaning that anything returned from now on will be pure profit, thanks to years of dividends and interest payments made by the recipients.
In just Ally Financial alone, the government still owns some 37% of common stock worth approximately $4.2 billion. Since Ally has already paid back 89% of its TARP money, with just $1.9 billion to be repaid, the government will have made a profit of at least $2.3 billion from its rescue of GMAC — a gain of 13.4% of the $17.2 billion the company received.
Now, 13.4% profit over 5 years isn’t very good at all, especially when the stock market is up over 130% over that time. But when you add the benefits of having saved a rather important insurance company from collapse — plus thousands of jobs and having received any profit back at all — you kind of have to be relieved that it all worked out in the end.
But can it happen again? Has Ally Financial really learned its lesson and made the necessary adjustments to its business operations to avoid necessitating another taxpayer bailout?
You might be surprised at how well its management has done…
The GMAC-Ally Phoenix
A lot more than just the corporate name has changed at Ally Financial since the sub-prime mortgage crisis of 2008; its core activities, its debt, and its market focus have changed as well.
As noted in its latest Q3 2013 filing, the private company is making a “successful operational transformation to an independent, market-driven auto finance competitor.”
Once heavily involved in sub-prime mortgages, the company has “exited or sold 37 businesses since 2009, including mortgage origination and servicing.” It has “effectively exited the mortgage origination and servicing business,” with its new mortgage “origination pipeline currently at zero.” And its existing “mortgage assets declined from $135 billion in 2006 to less than $9 billion” at present.
So what is it focused on now? On building “a leading direct bank brand” with a strong online presence. In the process, Ally has increased its customer deposits by $25 billion since 2009 and raised its asset base to “almost $42 billion of retail deposits across 1.5 million accounts.”
It is now fully committed to “expanding its use of Ally Bank and increasing its utilization of low cost deposits to reduce high-cost unsecured debt.”
In other words, it has expanded its banking business, taking in more customer deposits, on which it pays very little interest. It then uses this cheap money to pay down its more expensive unsecured debt.
This has enabled Ally to lower its cost of money by 57 basis points year-over-year and by over 1.8% since 2009. Its net interest margin — the profit it earns from using customer deposits to lend to borrowers — has grown by 74 bps YOY.
Healthier Books
The company has lost no opportunity using this cheaper money to pay down its more expensive debts. It has been able to pay back to the government some 89% of the TARP money it received, as noted at the outset, which will save the company over $530 million in annual dividends.
The bank has also been calling its high-cost callable debt (debt which the bank can pay back at any time), calling some $5.8 billion of debt in Q3 2013 alone and giving notice on an additional $1.7 billion of callable debt, with the “remaining legacy callable debt of $2.3 billion expected to be addressed over the next two quarters.”
In so doing, the bank has lowered its liabilities by using its lower-cost customer deposits (which cost the bank only 1.27% annually) to pay back its higher-costing unsecured debt (which cost it 5.97% annually).
And the net change to its debt from Q3 of 2012 to Q3 of 2013 is pretty impressive… a reduction of overall debt by $455 million from $120.877 billion to $120.422 billion and a lower annualized cost of total debt by 0.34% from 2.72% to 2.38%.
As for its existing mortgages, with the writing-off and clearing-out of bad mortgages over the years, the bank’s 30+ days delinquency rate has fallen sharply from 3.2% in Q3 of 2012 to 2.7% in Q3 of 2013, with new write-offs dropping from 1.2% to 0.5% over the same period.
Ally has also been focusing on improving customer relations, and with great success, being named “Best Online Bank” by Money Magazine for three straight years from 2011 to 2013. It has also been recognized by the Ponemon Institute as one of the “Most Trusted Banks” for the second consecutive year.
As a net result of its cost-saving measures and paydowns of expensive debt, Ally’s core pre-tax income, excluding repositioning items, was up $60 million from Q2 to Q3 of 2013 but down $109 million YOY “driven by exiting the mortgage business.”
How to Invest in Ally Financial
Still a private company, there is no opportunity for the average investor to purchase shares of Ally Financial. “The common stock has not been registered under the Securities Act of 1933,” the company explains at its website. As such, “the common stock will be sold only to qualified institutional buyers as defined in Rule 144A under the Securities Act.”
But the bank does offer its high-interest fund Ally Financial Inc. Fixed Rate/Floating Rate Preferred Series A (NYSE: ALLY.PB). On my trader’s workstation, the ticker is “ALLY PRB.”
According to Dividend.com, the fund has been paying a steady 50.7812 cents per share every quarter on months 2, 5, 8, and 11, currently representing a 7.44% annual yield over the latest $27.31 share price.
Since it can be purchased on 50% margin, investors can easily double that yield to 14.88% per year — a very tidy sum indeed. Just understand that if you do buy on maximum margin, you would be subject to a margin call if the stock falls 50%.
Yet a look at the fund’s graph below shows it to be much more stable than that. Its 52-week range has been from $25.42 to $27.42, representing a volatility of $2, or some 7.3% of its current price. Its severest plunge to-date was back in mid-2011, when it fell from $26.50 to $16.20, or some 38.87%.
So buying it on 50% margin should be a pretty safe bet — although one should always have the needed reserves available to answer any margin call at a moment’s notice.
Source: BigCharts.com
Until next time,
Joseph Cafariello for Wealth Daily
