Laudani: Taking Ally Financial for a Test Drive

Underwriters priced the shares of Ally Financial (ALLY) Wednesday at $25, which was at the low end of the $25 to $28 range. Will investors drive away with profits or will they end up in a wreck on the side of the road?

Ally Financial was originally founded in 1919 as GMAC, or General Motors (GM) Acceptance Corporation. It is one of the largest providers of automotive financing and the 19th-largest bank holding company in the U.S. The company hit a pothole during the global financial crisis 2008. In order to accept a bailout from the Federal Reserve Troubled Asset Relief Program (TARP), GMAC was forced to transform into a bank-holding company and agree to be regulated as a bank.

The company changed its name to Ally. All told, the Fed dumped $17.2 billion into the company in return for 74% ownership. Cerberus Capital invested $366 million for 9%. The GM Trust (10%) and a few other investors (8%) own the remaining pieces.

From 1985 to 2005, GMAC aggressively expanded into subprime mortgages. By 2006, GMAC was the nation's 10th-largest mortgage producer, originating nearly $162 billion in loans. The company was hit with a double-whammy. As the economy turned down, the auto-financing business went south and the subprime-mortgage business turned toxic. It was like a tsunami of bad debt.

At the time, the bailout was subject to blistering criticism by both ends of political spectrum. Critics wondered why the taxpayers were bailing out one of the nation's largest subprime mortgage lenders. At the time of the offering, Ally has already repaid about $15.3 billion of the $17 billion the company received in the bailout.

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