It has been a long journey for Ally Financial and Michael Carpenter.
Carpenter, who has been CEO of the Detroit company since November 2009, finally has Ally positioned to buy out the U.S. Treasury's stake in the lender. That likely will be followed by an initial public offering of stock.
The Ally Financial that is emerging is much smaller, with a new focus. The former GMAC Financial Services -- a multinational giant mortgage lender that also made auto loans -- today is a U.S.-only auto lender with its own online bank.
Ally's transformation began in 2006, when General Motors sold a majority stake in GMAC to Cerberus Capital Management, a private equity firm. In late 2008 GM and Cerberus gave up most of their stakes as part of a government bailout. GMAC became a bank holding company, later renamed Ally Financial.
The bailout was necessary because GMAC's mortgage subsidiary, ResCap, was heavily invested in subprime mortgages, which tanked in the recession. Last year ResCap filed for bankruptcy when Ally withdrew financial support. Carpenter said sealing off Ally from any liability for the legacy mortgage business is a necessary step toward pursuing an IPO.
On Nov. 20, Ally said it had repaid the U.S. Treasury $5.9 billion, which reduced the government's stake to 64 percent, from 74 percent.
Carpenter, 66, spoke in his New York office with Special Correspondent Jim Henry.
Q. What's your take on GM and GM Financial?
A. When GM came out of bankruptcy, the financial crisis was plowing along at great speed. If you looked at us objectively you would have to say, "These guys are a little bit at risk." If you're GM, you've got all your eggs in one basket and you're not sure that basket doesn't have some holes in it. So, what to do? They bought AmeriCredit [which became GM Financial]. It's a very simple idea. We basically split the market. They're subprime. We're the top half of the market and they're the bottom half.
Why did you sell the international operations?
The reason we sold is very simple. We owe the U.S. government a ton of money. So you go down the list of relative strategic importance. How important are those international businesses to us? In general, they have already withdrawn to those markets they consider core. GM was not happy because we had withdrawn, and so that was an issue.
[In 2009 and 2010, Ally streamlined its International Operations unit to focus on five core markets: Germany, United Kingdom, Brazil, Mexico and China. That involved selling operations or parts of operations in markets such as Poland and New Zealand.]
You even sold the operations in Canada.
We sold the Canadian operations for a good price. Basically, selling gave us the opportunity to get some money back to the government and -- we thought at the same time -- not damage the core franchise, which is franchised U.S. auto dealers and online banking.
In the long run, are you going to have to buy your way back into international business?
No. We are very comfortable with the domestic auto business for the foreseeable future.
You're a bank, but a bank whose main business is auto lending. Do you position yourself to dealers as not like those other banks?
Banks get in when it suits them and get out when it suits them. It's the nature of the product. For most banks it's a sideshow. Dealers know when the going gets tough we will be here. We are very credible with dealers. We have longstanding dealer relationships. The average is something like 14 years.
Are you glad to be out of the mortgage business?
It was the 800-pound gorilla.
What's the short version of the new strategy?
This is the strategy, which has been consistent since post-2009: One, build the leading auto finance franchise. Two, we are almost at the end of reducing mortgage-related risk. Three, source liquidity with diversity, at ever-lower costs. Four, build Ally Bank into the leading online banking franchise.
With all those things in place, you get a low and stable cost of funds. Compared to firms that are dependent only on the financial markets for funding, this is the only advantage of being a bank.
All these things are under way. What's next?
Five is cost reduction and continuous productivity improvement. We've already achieved the first 18 percent cost reduction. Sixth is attaining the expected regulatory standards for bank holding companies and financial holding companies.
Costs automatically go down when you sell assets, right? Do you mean cost reduction beyond that for the business that remains?
We've done what companies do. As the expense base has gone down, costs have gone down. It's about half selling assets, and half is cost reduction.
Does the average person, even in the auto industry, realize how much Ally has changed?
We have migrated from a finance company to a bank holding company and from a captive to a market-driven competitor. We are also migrating from a manufacturer culture to a dealer culture. That's not to say GMAC wasn't focused on its customer base.
We are going from a multinational to U.S.-focused and from a multibusiness focus to auto-focused. There are huge cultural implications to that. I'm not aware of any company that has gone through the magnitude of change that we have -- no one.