Treasury needs exit plan for Ally Financial: Watchdog

New York, Feb 9 : The U.S. Treasury needs to develop a concrete plan for exiting its 74 percent stake in auto lender Ally Financial Inc, the second-largest remaining recipient of federal bailout dollars, an internal watchdog said in a report released.

The agency, however, must exercise "great care and coordination" with the U.S. Federal Reserve in planning its exit to make sure Ally maintains a viable presence as a lender to the U.S. auto industry, said the watchdog, the special inspector general for the U.S. government's bailout program.

Starting in 2008, the government pumped $17.2 billion into the Detroit-based lender, then known as GMAC, to keep financing available to the auto industry, which was receiving its own bailout. Unlike General Motors (GM) and Chrysler (FIA.M), however, the Treasury didn't require GMAC to produce a plan for dealing with its liabilities, particularly toxic subprime mortgage loans that were piling up losses.

"Treasury missed an opportunity to address GMAC's mortgage issues, thereby better protecting the taxpayers' investment and promoting GMAC's financial stability," the report said.

In March 2011, Ally, the one-time in-house lending unit for GM, filed for an initial public stock offering that would have allowed the Treasury to sell some of its stock, but the plan was later shelved. In May, Ally's Residential Capital mortgage unit filed for bankruptcy, and the lender launched a plan to sell international operations to speed up taxpayer repayment.

Ally still owes taxpayers $14.6 billion, according to the inspector general.

In a letter responding to the report, Timothy Massad, assistant Treasury secretary for financial stability, defended the agency's actions during the financial crisis and said it does have a strategy for exiting its Ally investment. After the ResCap bankruptcy is completed and the international sales are completed, Treasury can either sell its stock or sell more Ally assets, Massad wrote.

In an interview, Special Inspector General Christy Romero said Treasury's plan is not concrete enough.

"What Treasury has talked to us about is options," Romero said. "Those are options that exist anytime Treasury has an investment. That is not an exit plan."

Ally is the largest recipient of Troubled Asset Relief Program bailout dollars without a clear path for repaying the Treasury.

The Treasury has said that so far it has recovered 93 percent of the $418 billion disbursed through TARP. Last month, the agency said it plans to sell its remaining stock in GM, its largest remaining investment, over the next year or so. In the same month, it sold its final shares of insurer American International Group Inc (AIG).

Ally's exit is complicated by the fact that it has failed Federal Reserve stress tests that determine if large banks would maintain sufficient capital under severe economic scenarios. The next round of stress tests will be made public in March.

"Treasury has to exercise great care to exit Ally out of TARP in a way that promotes financial stability not just in Ally but in the auto industry," Romero said.

In a report released, the inspector general found Treasury failed to curb executive pay at companies rescued with taxpayer funds, including Ally.

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