Ally Financial Inc. (GMA.XX), the government-owned auto lender, said Friday it could lose up to $1.25 billion if its struggling mortgage subsidiary, Residential Capital, files for bankruptcy.
The company’s core auto-lending business, which mainly finances General Motors Co. (GM) and Chrysler Group LLC dealers and customers, posted a pre-tax profit of $611 million, down 10.1% from a year earlier but up 3.2% from the fourth quarter.
The troubled mortgage unit, Residential Capital, lost $792 million in the three previous quarters. ResCap failed to make a $20 million interest payment this month — and it has until next month to pay it or it will be in default.
“It is possible that further defaults could occur in the future due to insufficient capital or liquidity,” the filing said.
The parent company previously extended the maturity of certain intercompany credit facilities with ResCap until May 14, but Ally may not provide future support.
As an IPO looks less likely, several news reports said, Treasury and the company might decide to sell off the company in parts. For example, GM might buy back the traditional auto-finance part of the company. Such sales would be difficult if ResCap remained on the company’s books.