Sergio Marchionne doesn't want to ally with Ally.
Chrysler Group is looking for ways to change another part of the bailout plan originally imposed by the Obama administration’s auto czar while the company was facing bankruptcy three year ago.
Chrysler has notified Ally Financial Inc. it will not renew its current operating agreement with the lender when it expires in April 2013. It will seek to form a relationship with another source of financing for customers and dealers but Sergio Marchionne, Chrysler’s chief executive officer, said the maker has no plans to try and restart its own captive finance company.
Chrysler actually may give up some profits produced by a captive finance company. But not having a captive finance company also removes the ever present temptation to use the subsidiary to produce short-term profits by taking unsustainable risks.
“It won’t pollute the industrial company,” noted Marchionne, who did not rule out signing a new agreement with Ally that includes modified terms.
Chrysler lost control of its own captive finance company as it began spiraling towards bankruptcy during the auto industry’s crash in 2008 and 2009. As part of the auto bailout, Chrysler was required by the US Treasury Department to switch to Ally Bank, the former General Motors Acceptance Corp., to satisfy its needs for dealer and consumer financing.
The former Chrysler Financial was spun and then became a wholly-owned subsidiary of Toronto Dominion Bank in 2011.
Under the agreement signed during the bailout, Chrysler Group was obliged to give Ally at least twelve months’ notice that it did not intend to renew the agreement. Chrysler Group is in discussions with
Ally and other financial institutions regarding various options to meet the financing needs of Chrysler Group dealers and customers.
Meanwhile, Ally reported net income of $310 million for the first quarter of 2012, compared to a net loss of $206 million in the prior quarter and net income of $146 million for the first quarter of 2011. The company reported core pre-tax income of $474 million for the first quarter of 2012, compared to $20 million in the prior quarter and $425 million in the comparable prior year period.
“Ally’s auto finance business posted strong and steady results for the quarter, and we are encouraged by the diversification we have been able to achieve with our product mix and dealer customers,” said Ally Chief Executive Officer Michael A. Carpenter. “The business continues to see earning asset growth even amid one of the most competitive periods for auto financing assets.”
Ally’s performance in the first quarter was driven by continued positive and stable results in the Global Automotive Services business. The lender, however, is still hobbled by its crippled mortgage business, with 784,000 mortgages on which consumers have now defaulted.
“Our objective with respect to the mortgage business is unchanged. We continue to have a keen focus on taking steps to reduce risk in that business, while protecting the remaining Ally franchises,” said Carpenter. “This will be critical toward our longer-term efforts to maximize value for our shareholders and continue to repay the U.S. Treasury’s investment in full.”
The Treasury Department still owns 70% of Ally’s stock.
Carpenter also noted Chrysler had notified Ally on April 25, 2012 that the existing agreement between the two companies governing the subvented consumer financing business will not renew in April 2013.
This notification was expected and is required in order to enable both companies to continue discussions on how to evolve the terms of the relationship.
“Chrysler and Ally continue to have constructive discussions about the future relationship. Ally expects to continue to play a significant role with Chrysler dealers in the future as the dealer is Ally’s direct customer for the majority of business that is conducted. Ally remains committed to offering all dealers the most comprehensive suite of products and services in the industry that drive value for these businesses,” Ally Bank officials said.