NEW YORK —Ally Financial contributed $750 million to cover legal claims on soured loans tied to its bankrupt mortgage unit — even though the firm calls them meritless — “to avoid the noise,” according to its leader.
The payment to Residential Capital as part of the bankruptcy plan insulated Detroit-based Ally from the costs of drawn-out litigation and damage to its bond prices, chief executive Michael Carpenter said Tuesday during a conference call with analysts. Viewed that way, the payment was a “good economic trade” that puts the matter to rest, he said.
“That doesn’t mean a lot of lawyers can’t drive you nuts, create big headlines and make a lot of money,” Carpenter said.
ResCap sought court protection Monday after losses piled up on subprime and Alt-A mortgages bundled into bonds during the credit crisis. Carpenter is counting on the Chapter 11 reorganization to separate his firm from ResCap so he can pursue plans for an Ally turnaround — including repayment of the $17.2 billion U.S. bailout — without the threat of more damage from mortgages.
In addition to the cost of defaults, U.S. lenders have been plagued by demands for refunds from investors who bought the loans after they found defects such as false data about borrowers and the properties. Such claims have cost the five biggest U.S. home lenders more than $72 billion in payments and legal fees since 2007, and analysts have speculated that ResCap’s creditors will pursue Ally for payment.
Ally agreed to give $750 million to ResCap to settle claims such as those brought by bondholders or other third parties, and claimants will have “absolutely no case” to seek additional funds from the parent company, Carpenter said this week.
The legal strategy probably will work, according to Laura Bartell, a bankruptcy-law professor at Wayne State University in Detroit, who said plaintiffs rarely succeed in linking a bankrupt subsidiary to its parent.
“ResCap is clearly separate, it’s independently incorporated, they have separate debt, they have a separate board of directors,” Bartell said. “This is likely to get Ally out of it — at a cost.”
Freedom from ResCap could allow Ally to move ahead with plans to repay the U.S. for the bailout that left taxpayers with a 74 percent stake.
Those plans so far include seeking buyers for more than $30 billion of assets in Canada, Mexico, Europe and South America. The company has paid the U.S. $5.5 billion, Ally said in a statement.
Ally also may consider buying back the U.S. stake and making acquisitions, Carpenter said Tuesday.
The core auto-lending business won’t be sold, and an initial public offering — which was put on hold until ResCap’s status was resolved — may be revived, he said.
