Ally Bank 2011 Annual Report Download - page 131

Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10−K
1. Description of Business, Basis of Presentation, and Significant Accounting Policies
Ally Financial Inc. (formerly GMAC Inc. and referred to herein as Ally, we, our, or us) is a leading, independent, globally diversified, financial
services firm with $184 billion in assets and operations in 32 countries. Founded in 1919, we are a leading automotive financial services company with over
90 years experience providing a broad array of financial products and services to automotive dealers and their customers. We are also one of the largest
residential mortgage companies in the United States. We became a bank holding company on December 24, 2008, under the Bank Holding Company Act of
1956, as amended. Our banking subsidiary, Ally Bank, is an indirect wholly owned subsidiary of Ally Financial Inc. and a leading franchise in the growing
direct (online and telephonic) banking market, with $39.6 billion of deposits at December 31, 2011.
Residential Capital, LLC
Residential Capital, LLC (ResCap), one of our mortgage subsidiaries continues to be negatively impacted by the events and conditions in the mortgage
banking industry and the broader economy that began in 2007. Market deterioration has led to fewer sources of, and significantly reduced levels of, liquidity
available to finance ResCap's operations. ResCap is highly leveraged relative to its cash flow and has recognized credit and valuation losses and other
charges resulting in a significant deterioration in capital. In the future, ResCap may also continue to be negatively impacted by exposure to representation
and warranty obligations, adverse outcomes with respect to current or future litigation, fines, penalties, or settlements related to our mortgage−related
activities, and additional expenses to address regulatory requirements. During the fourth quarter of 2011, ResCap recorded a charge of $212 million for
penalties imposed by certain of our regulators and other governmental agencies in connection with mortgage foreclosure−related matters. Refer to Note 31
for additional information. ResCap is required to maintain consolidated tangible net worth, as defined, of $250 million at the end of each month, under the
terms of certain of its credit facilities. For this purpose, consolidated tangible net worth is defined as ResCap's consolidated equity excluding intangible
assets. As a result of the fourth quarter charge, ResCap's consolidated tangible net worth was $92 million at December 31, 2011, and was therefore
temporarily reduced to below $250 million. This was, however, immediately remediated by Ally through a capital contribution of $197 million, which was
provided through forgiveness of intercompany debt during January 2012. Notwithstanding the immediate cure, the temporary reduction in tangible net
worth resulted in a covenant breach in certain of ResCap's credit facilities as of December 31, 2011. ResCap has obtained waivers from all applicable
lenders with respect to this covenant breach and an acknowledgment letter from a Government−sponsored Enterprise indicating they would take no
immediate action as a result of the breach. In the future Ally may choose not to remediate any further breaches of covenants.
ResCap seeks to manage its liquidity and capital positions and explores initiatives to address its debt covenant compliance and liquidity needs
including debt maturing in the next twelve months and other risks and uncertainties. ResCap's initiatives could include, but are not limited to, the following:
continuing to work with key credit providers to optimize all available liquidity options; possible further reductions in assets and other restructuring
activities; focusing production on conforming and government−insured residential mortgage loans; and continued exploration of opportunities for funding
and capital support from Ally and its affiliates. The outcomes of most of these initiatives are to a great extent outside of ResCap's control resulting in
increased uncertainty as to their successful execution.
During 2009 and 2010, we performed a strategic review of our mortgage business. As a result of this, we effectively exited the European mortgage
market through the sale of our U.K. and continental Europe operations. We also completed the sale of certain higher−risk legacy mortgage assets and settled
representation and warranty claims with certain counterparties. The ongoing focus of our Mortgage Origination and Servicing operations will be
predominately the origination and sale of conforming and government−insured residential mortgages and mortgage servicing.
In the future, Ally or ResCap may take additional actions with respect to ResCap as each party deems appropriate. These actions may include Ally
providing or declining to provide additional liquidity and capital support for ResCap; refinancing or restructuring some or all of ResCap's existing debt; the
purchase or sale of ResCap debt securities in the public or private markets for cash or other consideration; entering into derivative or other hedging or
similar transactions with respect to ResCap or its debt securities; Ally purchasing assets from ResCap; or undertaking corporate transactions such as a tender
offer or exchange offer for some or all of ResCap's outstanding debt securities, asset sales, or other business reorganization or similar action with respect to
all or part of ResCap and/or its affiliates. In this context, Ally and ResCap each typically consider a number of factors to the extent applicable and
appropriate including, without limitation, its financial condition, results of operations, and prospects; ResCap's ability to obtain third−party financing; tax
considerations; the current and anticipated future trading price levels of ResCap's debt instruments; conditions in the mortgage banking industry and general
economic conditions; other investment and business opportunities available to Ally and/or ResCap; and any nonpublic information that ResCap may possess
or that Ally receives from ResCap.
ResCap remains heavily dependent on Ally and its affiliates for funding and capital support, and there can be no assurance that Ally or its affiliates
will continue such actions or that Ally will choose to execute any further strategic transactions with respect to ResCap or that any transactions undertaken
will be successful. Consequently, there remains substantial doubt about ResCap's ability to continue as a going concern. Should Ally no longer continue to
support the capital or liquidity needs of ResCap or should ResCap be unable to successfully execute other initiatives, it would have a material adverse effect
on ResCap's business, results of operations, and financial position.
Ally has extensive financing and hedging arrangements with ResCap that could be at risk of nonpayment if ResCap were to file for bankruptcy. At
December 31, 2011, we had $2.6 billion in funding arrangements with ResCap. This amount included $1.0 billion of senior secured credit facilities, which
were fully drawn at December 31, 2011. This amount further included a $1.6 billion line of credit consisting of $1.1 billion in secured capacity, of which
$235 million was drawn, and $500 million of unsecured capacity. The unsecured portion is only
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