Ally Bank 2012 Annual Report Download - page 19

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Our allowance for loan losses may not be adequate to cover actual losses, and we may be required to materially increase our allowance,
which may adversely affect our capital, financial condition, and results of operations.
We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expenses, which
represents management’s best estimate of probable credit losses that have been incurred within the existing portfolio of loans, all as described
in Note 1 to the Consolidated Financial Statements. The allowance, in the judgment of management, is established to reserve for estimated
loan losses and risks inherent in the loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently
involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using existing qualitative and
quantitative information, all of which may undergo material changes. Changes in economic conditions affecting borrowers, accounting rules
and related guidance, new information regarding existing loans, identification of additional problem loans, and other factors, both within and
outside of our control, may require an increase in the allowance for loan losses.
Bank regulatory agencies periodically review our allowance for loan losses, as well as our methodology for calculating our allowance for
loan losses and may require an increase in the provision for loan losses or the recognition of additional loan charge-offs, based on judgments
different than those of management. An increase in the allowance for loan losses results in a decrease in net income and capital and may have
a material adverse effect on our capital, financial condition and results of operations.
The previously contemplated plan and settlement related to the ResCap bankruptcy has been allowed to lapse by ResCap, and as a
result, there is substantial uncertainty related to resolution of the bankruptcy and substantial claims could be brought against us.
On May 14, 2012 (the Petition Date), Residential Capital, LLC (ResCap) and certain of its wholly owned direct and indirect subsidiaries
(collectively, the Debtors) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of New York (the Bankruptcy Court). In connection with the filings in May, Ally Financial Inc. and its direct and
indirect subsidiaries and affiliates (excluding the Debtors) (collectively, AFI) had reached an agreement with the Debtors and certain creditor
constituencies on a prearranged Chapter 11 plan (the Plan). The Plan included a proposed settlement (the Settlement) between AFI and the
Debtors, which included, among other things, an obligation of AFI to make a $750 million cash contribution to the Debtor's estate, and a
release of all existing or potential causes of action between AFI and the Debtors, as well as a release of all existing or potential ResCap-
related causes of action against AFI held by third parties.
The Settlement contemplated certain milestone requirements that the Debtors failed to satisfy, including the Bankruptcy Court's
confirmation of the Plan on or before October 31, 2012. While the failure to meet this October 31 milestone would have resulted in the
Settlement's automatic termination, AFI and the Debtors agreed to monthly temporary waivers of this automatic termination through February
28, 2013. This waiver was not extended beyond this date, and therefore the Settlement has terminated.
As of the Petition Date, institutional investors in residential mortgage-backed securities (RMBS Investors) issued by ResCap's affiliates
and holding more than 25 percent of at least one class in each of 290 securitizations agreed to settle alleged representation and warranty
claims against the Debtors' estates in exchange for a total $8.7 billion allowed claim in the Debtors' bankruptcy cases, subject to the
applicable securitization trustees' acceptance of the terms of the settlements (the RMBS Settlements). The RMBS Investors also signed
separate plan support agreements (PSAs) with the Debtors and AFI in support of the Plan at the time of entering into the RMBS Settlements.
To date, RMBS Investors holding more than 25 percent of at least one class in each of 336 securitizations have agreed to the RMBS
Settlements. These 336 securitizations have an aggregate original principal balance of approximately $189 billion (out of a total of 392
outstanding securitizations with an original principal balance of $221 billion). The RMBS Settlements are subject to Bankruptcy Court
approval, and the Bankruptcy Court has scheduled a hearing to consider such approval in late May 2013. The PSAs are not part of this
scheduled Bankruptcy Court hearing. A number of creditors have raised objections to the RMBS Settlements, but the trustees representing the
336 securitization trusts and AFI have filed statements in support of the Debtors' motion to approve the RMBS Settlements. Separately, the
Debtors have failed to meet several Plan milestones in their bankruptcy cases, each of which has given the RMBS Investors the right to
terminate the PSAs upon three business days advance written notice to the Debtors and AFI. The RMBS Investors have not given the Debtors
and AFI such a notice to date, but have the right to do so at any time. If the RMBS Settlements were not approved or the RMBS Investors
were to decide not to support any proposed plan, it could adversely impact the likelihood that any plan is approved by the Bankruptcy Court.
AFI continues to support the RMBS Settlements at this time.
On June 4, 2012, Berkshire Hathaway Inc. filed a motion in the Bankruptcy Court for the appointment of an independent examiner to
investigate, among other things, certain of the Debtors' transactions with AFI occurring prior to the Petition Date, any claims the Debtors may
hold against AFI's officers and directors, and any claims the Debtors proposed to release under the Plan. On June 20, 2012, the Bankruptcy
Court approved the appointment of an examiner and, subsequently, the United States Trustee for the Southern District of New York appointed
former bankruptcy judge Arthur J. Gonzalez, Esq. as the examiner (the Examiner). On July 27, 2012, the Bankruptcy Court entered an order
approving the scope of the Examiner's investigation. The investigation includes, among other things: (a) all material pre-petition transactions
between or among the Debtors and AFI, Cerberus Capital Management, L.P. and its subsidiaries and affiliates, and/or Ally Bank; (b) certain
post-petition negotiations and transactions with the Debtors, including with respect to plan sponsor, plan support, and settlement agreements,
the debtor-in-possession financing with AFI, the stalking horse asset purchase agreement with AFI, and the servicing agreement with Ally
Bank; (c) all state and federal law claims or causes of action the Debtors proposed to release as part of the Plan; and (d) the release of all
existing or potential ResCap-related causes of action against AFI held by third parties. In the Examiner's original work plan, the Examiner
estimated that his investigation and related report would be completed six months from approximately August 6, 2012. However, on February
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Ally Financial Inc. • Form 10-K