Smart SpendingSmart Spending

Bank: We're defaulting, but don't you dare

Ally Financial is shedding its risky mortgages in bankruptcy court, and it doesn't want its mortgage customers to get any funny ideas.

By MSN Money Partner Jun 8, 2012 12:24PM

This post comes from Al Lewis at partner site MarketWatch.

MarketWatch on MSN MoneyThomas Marano, chief executive officer of Residential Capital, wrote me a letter.

"Dear Homeowner," it begins. (That's me, homeowner.) 

As you may have read or heard, Residential Capital LLC recently announced that it and its subsidiaries, including GMAC Mortgage, are restructuring under Chapter 11 . . . The restructuring . . . does not change your obligations as a mortgage borrower . . . You must continue to make your scheduled mortgage payments on time and in full.

I can only guess why he sent me this letter. Maybe he's afraid I'm going to do what he's doing.

Image: House keys (© Comstock Select/Corbis)ResCap is a subsidiary of Ally Financial, which was founded in Detroit as General Motors Acceptance Corp., or GMAC, in 1919. It nearly collapsed in the 2008 financial crisis after it had made a bold expansion into "liar loans" and other subprime mortgage products.

Additionally, the U.S. auto industry it serviced was near death.

To keep GMAC alive, the Federal Reserve allowed it to become a bank holding company -- giving it the ability to borrow from the Fed at nearly 0%. The U.S. government, beginning with the Bush administration, also gave it a $17.2 billion bailout, of which it still owes nearly $12 billion. (Post continues below.)

The bailout for GMAC was also a bailout for private-equity giant Cerberus Capital Management, which acquired 51% of the company from General Motors Corp. in 2006. It was also a bailout for General Motors, which required another bailout on top of that.

GMAC was apparently so embarrassed as it became a ward of a state that it began re-branding itself as Ally. GMAC Bank became Ally Bank in 2009, and then its parent company became Ally Financial in 2010.

In a stroke of marketing genius, Ally began running a series of commercials to distract consumers from its extraordinary bailout. The ads suggested that the other banks were the cheaters, taking advantage of customers in ways that are amply apparent, even to children. A slick-talking banker conned children out of toys using treacherous contract language, and then a voiceover declared: "Even kids know it's wrong to hide behind fine print. Why don't banks?" (Watch the ad.)

Today, Ally is 74% owned by the taxpayers. And it has suffered the same problems every major mortgage lender has faced, from allegations that it fraudulently foreclosed on homes to lawsuits from investors who claimed it misrepresented the quality of its mortgage pools.

Last year, Ally attempted an initial public stock offering to help pay back the taxpayers, but the IPO was withdrawn because of market conditions, and, of course, Ally's legacy mortgage issues.

Now, Ally has come up with a plan to launder its bad mortgages and related liabilities by taking a subsidiary through the bankruptcy cycle. This is a novel way for a commercial bank to shed bad loans, but I suppose Ally has to do something after failing a financial "stress test" from the Fed in March.

If only I could restructure my finances the way Marano is restructuring his.

The property I mortgaged through GMAC is a rental house, and it would be immensely more profitable if I did not have those pesky monthly payments. If only I could form a subsidiary to hold my GMAC mortgage and then have that subsidiary file bankruptcy.

Of course, as Marano wrote to me, I'd have to write to my tenant, so that he didn't get the wrong idea:

Dear Renter: I am restructuring my GMAC mortgage. My unusual financial shell game does not change your obligations as a tenant. You must continue to make your rent payments on time and in full. Yes, I know. GMAC is not making its payments. And I am not making my payments. So you must be asking why you should be making your payments? Well, to borrow a line from an Ally commercial, "It's just the right thing to do."

Hey, even kids know a bad example when they see one. Why don't banks?

More from MSN Money:
Jun 8, 2012 6:57PM

For the love of all that is right, please stop with the REPUB/DEM finger pointing!! WE THE PEOPLE have let our government overrun this country. Both left and right are to blame and neither should be talking unless its to apologize to America and her citizens!! Throw them ALL out and start fresh next year.

Jun 8, 2012 5:26PM
"When the people fear their government, there is tyranny; when the government fears the people, there is liberty."  -Thomas Jefferson
Jun 8, 2012 3:44PM
According to the Supreme Court Corporations are people too. So why can we not have Equal Protection Under the Law.
Jun 8, 2012 6:50PM
Who cares if it was Bush or Obama.  It is just not right.
Jun 8, 2012 3:54PM
Its funny....all these bank or financial institutions screw something up..and the govnt bails them out and with taxpayers money.....but when one person makes mistakes..maybe through no fault of their own...wheres their bailout ?  something to REALLLY think about.
Jun 8, 2012 4:18PM
That's the only kind of "socialism" going on in this country.  The banks and megacorporations get to socialize their losses and privatize their gains.  The rest of us get the opposite.
Jun 8, 2012 9:09PM

Great Article!!!  The way we have allowed these banks to deceive the American public, and  allowed our government to hand out my money to bail these crooks out of their self made mess is criminal!


Not one of these sleaze bags has gone to jail for the illegal practices and that's because the people responsible for holding them accountable are crooks themselves.


What a complete joke our banking system, the financial system, Wall Street, and our so called leaders have become.  How the American public sits by and allows this to continue is mind boggeling!!  



Jun 8, 2012 4:46PM

If Ally is 74% owned by taxpayers, then why should we keep paying our mortgage? That just means that, every month, we are contributing money to our faltering/failing company, which no executive anywhere would continue to do. So I say, we do the same as stockholders do everyday... pull our money out (stop making payments) and invest in something else.

Sounds stupid, doesn't it? But that's exactly what is being done to us, only, the politicians and corporate execs don't get punished/penalized for it.

Jun 8, 2012 4:59PM
If we own Ally at 74% then I think we should all go in and clean house. Start at the top and work our way down to the lower level. Cut out all the spending and bounces give the big wigs the same pay as we all would get and i bet we could make a profit in no time. Let work the the home owners who are having hard times and work with the ones who are not. If we work together the books would be balanced in the end. O no we can't do that it might be to fair and the big wigs would not have the millions that they think they deserve.
Jun 8, 2012 4:13PM
Since this "bank" is what, 74% owned by the taxpayers, how about every taxpayer owing payments to them pay only 26% until they pay back the money they borrowed. Seems fair that you should not have to struggle to repay yourself until the entity accepting your payment is able to do so responsibly.
Jun 11, 2012 10:18AM
So let me get this right!
   Banks can screw up, make a mistake, get in over there heads and then ask for a bailout and/or fill chapter 11 to get time to fix there mistake But, people who screw up, make a mistake, get in over there heads are crucified and left for dead. That sucks, because the banks are the ones telling the people what they can do.
Jun 8, 2012 4:33PM
Why don't they publish how much in bonuses they gave their senior management. If they kept their hands out of the pot they wouldn't be in trouble.
Jun 11, 2012 8:01AM
The three words politicians fear most are "WE THE PEOPLE".   Two words they fear even more that those are "TERM LIMITS".    It's time we took our economy and our Nation back from these people.
Jun 8, 2012 4:29PM

it's all BS people....we are and have been completely taken advantage of as usual in this country...what erks me the most is that the little guy(me & just about everyone else) is just gonna have to take it without vaseline.....fair...not even close!!!!


Jun 9, 2012 7:48AM
During the Carter term, Paul Volcker was Secretary of the Treasury. In order to stop the Tsunami of inflation bad bank lending had caused, he hiked the Bank Rate to exceed 20% in 1980-81. Because banks held credit in in-house portfolios, they were forced to collect on the wreckage instead of whine and be bailed. Inflation was taken fully out of the picture while reckless bankers ended up footing the bill for their own folly. This was the same Paul Volcker that just wrote the Volcker Rule that Obama is trying to get the Congress to enact. It HELPS us all. Bankers are fighting it. Guess why?
Jun 10, 2012 1:25PM
Banks do not have a "moral obligation", but according to many here, the little people do.
So, it's okay for banks to behave recklessly, AND get tax payer bailouts when their risky actions put them in danger (they are of course, too big to fail)....but it's not okay if you lose your job to stop paying your mortgage.....just pull yourself up by your bootstraps, foreclose and lose any investment you've made (you are of course, of little consequence to fail). Your credit rating will drop. The bank will profit from your loss. And you, as a tax payer will be held accountable for future bank risks.

If you don't fight to save your home, no one is going to rescue you if you don't at least try. Do your homework.

Jun 9, 2012 11:24AM

"I can only guess why he sent me this letter. Maybe he's afraid I'm going to do what he's doing."


More along the lines of just smirking is my guess. He knows you can't do what he's doing.


Of course, if you could you might well "do what he's doing." That's why the people who make the rules exclude their use by - how did Leona Helmsley put it? Ah, yes - "the little people."

Jun 11, 2012 12:09PM
Banks are in the business of slowly fleecing the people of all wealth and if you do not understand that, you are an idiot.
Jun 8, 2012 9:53PM
Troy - Well said and thought through.  Unfortunately most people probably saw how long your post was and didn't read it. As far as finger pointing that will happen every election year. However did the Republicans honestly think that we would fight an 8 year unfunded war and everything would be hunky-dory? I would think the American people would be smarter than that, but I guess not so much. Too many lobbyists are either padding wallets or giving hand-jobs under the table. We need tax revenue to balance the budget. While the average person is paying, on average 31-35% and the wealthy and corporations are paying half that at most. Someone said to me don't punish them because they are successful, so why is the average Joe being punished for not being successful? The average middle class person working are the one who made the rich, well rich. 
Jun 8, 2012 8:48PM

  The whole congress need to be replaced,anyone currently there cant run.Term limits also.

The bankers need to be strung up.Eric holder is a disgrace,he dosent even have the decency to step down.

Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.