Former GMAC Bank under attack

    Ally, the renamed lending arm of GMAC, has benefited from the federal bailout of GMAC. Now a bank lobbying group wants to make Ally pay for 'risky' behavior.

    By Colin Barr

    Though its name connotes friendliness, Ally Bank -- the lending unit of troubled financial services giant GMAC -- has found at least one powerful foe in Washington.

    The American Bankers Association, the chief lobbyist for U.S. banks, has asked regulators to crack down on Ally's use of above-market interest rates to attract deposits.

    Though savers clearly like those rates, the ABA contends Ally's deposit-gathering practices are "risky" and "completely inappropriate." It points to the bank's size, the depleted state of the federal insurance deposit fund and the massive federal investment in recent months at GMAC.

    "This aggressive deposit strategy is particularly egregious when it is used by a troubled bank in which the government holds a controlling interest," said ABA president and CEO Edward Yingling in a May 27 letter to Federal Deposit Insurance Corp. chief Sheila Bair. "Such a bank is significantly shielded from investor and market influences that might otherwise act as a brake on risky financial strategies."

    GMAC -- the primary lender to customers of bankrupt U.S. carmakers General Motors (GMGMQ) and Chrysler -- has received more than $20 billion in federal aid, counting capital injections under Treasury's Troubled Asset Relief Program and borrowing capacity under a federal debt guarantee program.

    Wayne Abernathy, a spokesman for the ABA, said the group wrote the FDIC to make sure that "regulators are ready to enforce discipline" in a case where the government's big stake insulates management from the risk of investor flight.

    But Ally Bank's management -- led by former Bank of America financial chief Al de Molina -- rejects the ABA's argument, saying market discipline is exactly what the banks don't like.

    "While I find it highly inappropriate that the American Bankers Association would attempt to restrain competition in the banking industry, I am not surprised," de Molina wrote Monday in a scathing response to the ABA. He said Ally is "committed to offering our customers value through products, services and competitive rates."

    Ally was known as GMAC Bank until it renamed itself May 15, promising to limit fees in a bid to "make money with customers, not off customers."

    Ally's Web site advertises an annual percentage yield of 2.8% on a one-year certificate of deposit -- the top rate in a recent nationwide survey by Bankrate.com. Those rates have drawn in a flood of deposits that Ally can use to support GMAC's auto and home lending businesses.

    GMAC said last month that Ally Bank added $2.4 billion of deposits in the first quarter, giving it $22.5 billion in total deposits -- including $15.1 billion in CDs.

    Despite its funding success, Ally Bank is in less than pristine shape. The bank lost $133 million in the quarter ended March 31, as its provision for loan losses surged more than sixfold to $280 million.

    At the same time, its parent's two main businesses -- lending for cars and houses -- have been in free fall. GMAC's first-quarter car loan volume plunged 74% from a year ago to $3.4 billion, while mortgage loans slid 24% to $13.2 billion in spite of a recent refinancing boom. A spokeswoman said car lending has been "ramping up" in the second quarter, which ends this month.

    The ABA's comments come at a time of some anxiety over the state of the banking industry, which swung to a loss last year for the first time since 1990, and the FDIC deposit insurance fund. The FDIC said last week it expects to spend $70 billion over five years cleaning up after bank failures.

    Regardless of what anyone might think about Ally's practices, regulators have limited recourse in dealing with banks in good standing that are deemed well-capitalized -- as Ally is.

    FDIC spokesman Andrew Gray said the agency doesn't comment on open and operating institutions as a matter of course. He noted that the agency acted last week to restrict the amount of interest banks that are deemed less than well capitalized can pay to their customers.

    The ABA, pointing to GMAC's financial troubles, says it believes those rules should be applied to Ally Bank.

    GMAC only applied to become a bank holding company late last year in order to be eligible for federal bailout programs. Regulators announced last month that GMAC was required to raise $11.5 billion in new capital as part of the stress tests conducted on the nation's largest 19 banks.

    But Ally's de Molina contended that what the banks really object to is competition. He notes that Ally Bank's Tier 1 capitalization leverage ratio -- a measure regulators favor -- is nearly triple the well-capitalized minimum.

    "You might want to assist your members in figuring out how they are going to compete in the new market place," he wrote in his letter, "rather than ask regulators to direct Ally Bank to pay its depositors less competitive rates."