Ally Financial will move one step closer toward independence from government ownership next month when two of its three remaining board members nominated by the U.S. Treasury step down from the board.
That will be down from a high of four board members nominated by Treasury out of 11, which effectively amounted to control of Ally Financial.
The latest change takes effect with Ally’s annual shareholder meeting July 17. It’s more than symbolic. There’s an important practical benefit for Ally and its dealerships -- a lower cost of funds -- after Ally finally gets completely free of government ownership.
The timing on that is uncertain, but Ally hopes to reduce the government’s stake to zero by the end of this year. Once that happens, the lower cost of funds should start to phase in.
The drop in Treasury-nominated board members reflects the government’s shrinking share of Ally Financial -- currently just 16 percent. That’s down from the government’s 37 percent ownership prior to Ally’s initial public offering in April and from its 63 percent ownership in January.
It’s a point of pride for Ally to shed government ownership and repay taxpayers. But government ownership also means Ally must meet more, not less, government regulation than other banks, according to Ally CEO Michael Carpenter.
Ally says it isn’t allowed to use bank deposits -- an inexpensive source of funding available to Ally through its online banking franchise -- to fund riskier loans for customers with credit scores between 620 and 660. Ally still makes those riskier loans, but it uses more expensive funding sources.
Post-government ownership, Ally says it can use bank deposits to fund subprime loans. At this point, Ally says it’s not planning any sudden moves in subprime then. The company said in an SEC filing subprime loans currently account for about 11 percent of its outstanding loans.
But a lower cost of funds gives Ally more options. It could be more aggressive in subprime or achieve a higher margin -- or ideally, some of each. The potential benefit to dealerships is another lender more actively supporting their subprime customers.