Ally Financial Inc (ALLY) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2010 GMAC earnings conference call. My name is Steve and I will be your operator for today.

At this time all participants are in a listen-only mode. Towards the end of today's call we will conduct a question-and-answer session. (Operator Instructions) As a reminder this call is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Mr. Michael Brown, Executive Director of Investor Relations.

Thanks, Steve, and thank you, everyone, for joining us as we review GMAC Inc.'s first-quarter 2010 results. You can find the materials we will reference during the call as well as our press release on the Investor Relations section of our website GMACFS.com.

I would like to direct your attention to the legend on the second page of the presentation regarding forward-looking statements and risk factors. Contents of our conference call will be governed by this language.

This morning Michael Carpenter, our CEO, and Jim Mackey, our interim CFO, will cover the Q1 2010 earnings review. After the presentation portion of the call around 30 minutes will be set aside for questions from investors, analysts, and the financial press. When we reach that portion of the call the operator will you know how to queue to ask a question.

To help in answering your questions we also have with us today Jeff Brown, Corporate Treasurer, and Tom Marano, the Head of our Mortgage Operations. Now I would like to turn the call over to Michael Carpenter.

Good morning, everybody. Thanks for joining us. I am pleased to report to you that the strategic plan that we laid out at the end of last year when I took over as CEO is beginning to produce good early results.

In the first quarter we showed net income of $162 million, that is the first operating profit the Company has had since the second quarter of 2007. It's up $800 million from the first quarter last year and a little over $5 million from the fourth quarter of 2009.

As we look at our operations, because we have such an unusual capital structure, we focus [on what we call] core pretax earnings which is earnings before tax, before the OID. And that number for the quarter, which we will talk to you a lot about in the future, was $564 million a result which we are very pleased to have.

The results are a direct result of the strategy that we began implementing in December. We also are the beneficiary of improving credit trends that we are seeing in financial institutions throughout the economy. We have an aggressive expense reduction effort in which we are targeting a $600 million cost reduction and that is kicking in.

We have also continued to divest non-core operations. Our US property and casualty company, North American factoring, auto retail business in Australia, and as we talk to you in the fourth quarter we are very focused on ring fencing our mortgage issues that have dogged the Company historically. And we have been making very strong progress selling assets at or above our marks in the fourth quarter and importantly the agreed sale of our European mortgage operations.

Our auto franchise, which will be the focus of our future, has done well in the quarter. We have increased penetration both at GM and Chrysler and we have also added Saab and Thor as additional OEMs.

The quarter has been marked by a tremendous amount of capital markets activity. We are pleased that the capital markets have been available to us at better and better pricing.

During the quarter we issued over $5 billion of unsecured debt. We did $6 billion of asset-backed auto financing. We did a $7 billion secured credit facility at Ally Bank and we also did financing at ResCap. Net bank deposits grew also about $900 million with strong CD retention rate even as rates have fallen.

As I mentioned, we feel that we have made a lot of progress on containing the mortgage risks. We did sign a definitive agreement to sell our European mortgage origination and servicing business to Fortress.

We, as you know, posted rep and warranty reserves in the third and fourth quarters last year and are pleased that we entered into a settlement with one of our top three counterparties that will go unnamed and have that behind us. That settlement was within the range of our estimates. We have begun selling whole loan pools, usually at or above our marks. ResCap has not required any additional capital liquidity support in the first quarter and our objective is to keep it that way through the rest of the year.

Let me turn your attention to page four. We are also announcing today that it is our intention on the 10th of May to rebrand GMAC Ally Financial. There are a number of reasons for that primarily that we essentially have the use of the GMAC name only until I think it's 2012 or 2013. We need to move on from that name and so today we are -- I am sorry it was 2016.

And so today we are moving on to use the Ally brand, which has gained significant momentum through Ally Bank, and will be changing GMAC to Ally Financial, as I said, on the 10th of May. This brand will not be used in any of our operations at this time, although we may consider doing that in the future.

So with that introduction, let me hand over to Jim Mackey who is going to take you through the detailed results of the quarter.

Thanks, Mike. Let's turn to slide six where we will review our first-quarter results. As Mike mentioned, excluding our bond exchange gains from the fourth quarter of 2008 we posted our first quarterly operating profit in 11 quarters with core pretax income of $564 million and net income of $162 million.

We define core pretax income as earnings from continuing operations before taxes and OID amortization expense. We believe this is a better representation of earnings for our core businesses. We back out the OID since this is a non-cash item that results from amortizing the discount associated with our bond exchanges. This item will continue to hit our bottom line over time but will eventually subside significantly after 2011.

Our total net revenue, excluding OID, of over $2.2 billion was driven by three primary factors. First, our margins improved as our average deposit rate dropped due to a large number of maturing CDs that renewed at lower rates.

Second, we experienced strong gains on asset sales in both auto and mortgage as we delivered over $5 billion of auto loans under our forward flow agreements and sold certain legacy mortgage assets at a gain through marks established at year-end. Third, our mortgage servicing fee income was strong where we saw a rebound from the fourth quarter.

Our provision expense was down significantly this quarter while we still maintained robust allowance coverage ratios. This reflects the progress we made working through the challenges of legacy portfolios. Keep in mind that the fourth-quarter provision expense included $2.4 billion of charges related to the strategic mortgage actions.

Normalizing for these actions provision expense was still down around $1 billion compared to last quarter as we have seen improved auto credit trends and strong used car prices which helped reduce our loss severity. And our mortgage portfolio has performed in line with the expectations and the valuations established in the last quarter.

Our non-interest expense declined by around $1 billion, primarily as a result of lower mortgage repurchase reserve expense. In addition, our controllable expenses declined by $288 million as we are beginning to see the benefits of our cost reduction efforts.

Our total balance sheet increased to $179 billion, up $7 billion from the fourth quarter, as we brought approximately $19 billion of assets back on balance sheet as a result of implementing FAS 167. This increase was partially offset by whole loan sales, continued amortization of our lease portfolio, and the completion of our sale of the US property and casualty business.

Our capital ratios increased this quarter with a total capital ratio of 16.4%, which is primarily due to the reduction of around $10 billion of risk-weighted assets.

Turning to slide seven, we provide our results by segment. The story here is that each one of our four operating segments were profitable this quarter. I would also like to note that both our ResCap and Ally Bank legal entity subsidiaries were profitable in the first quarter. In particular, we saw good results across our global auto businesses where originations and credit trends have improved.

In mortgage the value of our legacy assets held up well due to improving market conditions and performances in line with our expectations. Our core origination and servicing business generated positive results and we saw gains on sale related to our loan production as well as strong servicing revenue.

Our global auto business, which is highlighted on slide eight, includes our North American operations, international operations, as well as our insurance segment. Performance for the quarter was strong with a pretax profit of $846 million. Our North American segment is the foundation of our auto franchise but we also had positive contributions from both our international and insurance segments.

Conditions continue to improve in this business as loss and delinquency rates have declined and originations have been stable over the last few quarters despite weaker than expected retail auto sales. This business will be our main focus going forward as we expand by leveraging our core competencies. We are committed to helping General Motors, Chrysler, and our other OEM partners by continuing to provide innovative and value-added products and services for their dealers and customers.

A key step as we continue to expand our business is our new relationship with DealerTrack, which we announced in the first quarter and will provide us access to additional loan application flow. Also we reached agreements with both Saab and Thor to be their preferred financing partners. Thor is the largest manufacturer of recreational vehicles and while we don't expect a tremendous amount of volume in the near term, this represents a clear example of how we can leverage our experience, infrastructure, and expertise in secured lending to successfully expand into businesses over time.

Turning to slide nine we will focus a little bit more on our North American operations which earned pretax income of $653 million. This is up from $369 million in the fourth quarter of 2009. Our retail penetration rates were up for both GM and Chrysler with GM penetration rising to 34% and Chrysler penetration increasing to 42%.

In addition, we recorded strong gains on sale of $113 million as we utilized our forward flow agreements to sell over $5 billion of auto loans in the quarter. Let me remind you that our forward flow agreements are scheduled to expire later this year and we will begin to finance more originations on balance sheet where we will realize interest income over time rather than through gain on sales.

Our results were helped by continued high-use vehicle prices which impacted us in two key areas. First, we experienced lower depreciation expense as a result of off-lease vehicle remarketing gains and, second, our provision expense was lower due to reduced loss severity. We have seen some increase in leasing activity recently and we look to support our OEMs in making leasing more available to their customers.

We clearly took some hits on our leasing portfolio back in 2008 and as a result we will have much more rigor around where we set residual values and the risk that we take through offering this product. Our percentage of originations coming from incentivized programs was 47% in the first quarter, down from almost 79% a year ago.

While this is driven to some extent by incentive programs that are being offered by our OEM partners, our ability to maintain overall origination volumes is evidence of our ability to compete head to head with other market participants by strengthening our relationship with dealers and through offering attractive programs such as Ally Dealer Rewards.

On slide 10 we cover our international operations which earned $10 million of pretax income compared to a loss of $146 million last quarter. Results were driven by a decline in provision expense due to lower charge-off levels and improved recovery performance in Europe and Latin America.

Our non-interest expense was down as costs of winding down non-core operations moderated during the quarter. However, these positives were offset by a $41 million mark recorded in other revenue related to our Australian loan portfolio where we moved it from held for investment to held for sale.

Our international operations are being streamlined from 40 countries to 14 as we have discussed previously and five main countries Germany, Brazil, the UK, Mexico, and China generate approximately 85% of our new origination volume. While we will talk about liquidity in more detail in just a second, it's important to note that our liquidity continues to improve in local jurisdictions and we like to fund in local currencies whenever possible.

Turning to delinquencies on slide 11, you can see that the 30-day past due amounts fell meaningfully to 2.87% in the first quarter from 3.48% in the fourth quarter. Excluding our Nuvell portfolio delinquencies dropped to 2.22% from 2.62% in the fourth quarter.

While we typically see a delinquency drop in the first quarter due to seasonal trends, there are a variety of other factors that we believe attributed to the improvement including improved results as many older vintages have seasoned past their peak delinquency period and newer vintages are beginning to see improved performance due to our improved underwriting standards that we put in place in 2008.

Additionally, we introduced improved collection processes which included a new collection system in 2009, new collector incentive programs, as well as enhanced behavioral analytics. And of course the stabilizing unemployment picture and other economic factors are beginning to show some benefit.

Much of our headway on the Nuvell portfolio is a result of additional collection resources that we have dedicated to this portfolio. We have made significant strides this quarter with delinquency dollars falling by around $160 million. It's important to note this portfolio has declined to $3.5 billion in balances and we expect it to be around $2 billion by the end of the year.

You can see on slide 12 that we experienced an even larger improvement in our loss numbers. Even after normalizing for the elevated losses in the second half of last year due to the change in our charge-off policy, this was a result of becoming a bank holding company, our loss numbers dropped considerably as a result of the combination of several factors which affected both loss severity as well as frequency.

On the loss severity side improved used car prices and improved skip tracing measures are helping our sales recovery rates run at over 60%. On the loss frequency side again we are seeing improved performance due to the seasoning of older vintages and improved underwriting processes.

Beginning in 2008 we implemented a more stringent layered risk approach to underwriting where we focus more heavily on limiting advance rates by credit tier or FICO score and the improved performance of recent vintages are a direct result of those steps. While we are still cautious about declaring victory given overall economic conditions, we are encouraged by recent performance trends.

On slide 13 we highlight our auto credit allowance ratio. In our North American consumer portfolio, while our allowance balance has continued to increase due to reconsolidation securitization assets due to the implementation of FAS 167, our coverage ratio declined to 3.3%. This was driven by several factors that are similar to those mentioned earlier that influenced our loss and delinquency performance. We continue to see run-off of our more problematic legacy portfolios which previously required proportionately more allowance coverage. A larger proportion of our older vintages are running off and are past their peak loss periods and are being replaced by newer higher-quality vintages.

Finally, the reconsolidation that I just mentioned of the securitization assets are seasoned loans and they are well past their peak loss period. Our North American commercial ratios remain steady as we continue to experience low losses in this attractive asset class and despite unprecedented economic conditions losses in this $28 billion portfolio have remained very low given the structure of the loans and the strength of the collateral.

On slide 14 we highlight our insurance segment which is being streamlined to focus on dealer-centric products and is an attractive complement to our auto finance business and a source of steady and stable revenue. This quarter's performance was assisted by some outsized realized capital gains due to improvements in the equity markets. Our combined ratio improved as we had fewer weather-related losses and benefited from tighter expense control targets.

Our premiums written increased 23% this quarter as we saw improvement in our primary service contract business as well as success internationally where we work with local governments to provide auto insurance on certain vehicle fleets. It is important to note that we will experience the positive financial impacts of these higher written premiums over time as they flow into earnings over the term of the policy.

Turning to slide 15 we will spend some time talking about our mortgage operations. As you know this segment includes ResCap as well as the Ally Bank and ResMor mortgage activities. Our ability to report a profit in mortgage operations this quarter validates the strategic actions we took in the fourth quarter where we marked assets down and positioned them for sale.

Our pretax profit in mortgage ops was $175 million and as we mentioned earlier, the ResCap legal entity reported net income of $110 million.

In the first quarter we made important additional progress in further ring fencing this business to mitigate losses on legacy assets. First, we signed a definitive agreement to sell our European mortgage operations, which when coupled with several whole loan sales in progress will effectively exit GMAC from the mortgage business in Europe allowing us to refocus resources and capital elsewhere.

Secondly, we have begun the process of specific asset sales and in the first quarter sold two individual pools of loans at a combined gain to book value of approximately $58 million. We have seen market conditions and demand for these assets improve and we continue to believe the marks we took in the fourth quarter on our riskier assets reflect appropriate values. In addition to selling these pools we have generated additional gains on loan sales of approximately $85 million due to the sale of loans to mortgage agencies.

The important step that we reached this quarter was a settlement of one of our top three counterparty claims related to breeches of reps and warranties. The amount of this settlement was in line with expectations used to establish our reserve levels in the second half of last year. We ended 2009 with a reserve of around $1.3 billion. Based on this large settlement, the claims payment activity during the quarter, and the addition of approximately $50 million in reserve we ended the quarter with a reserve liability of approximately $890 million. This reserve balance we believe continues to reflect the full coverage of expected lifetime losses as a result of repurchased settlements due to claims. We continue to monitor trends in our claims and believe we are making good progress in containing this exposure.

You can see our provision expense declined this quarter as our allowance balance and the size of our held for investment portfolio was roughly flat. Performance in the held for investment book at Ally Bank has been within expectations and we believe the value of our held for sale portfolio marks are appropriate.

The performance of our mortgage servicing asset was strong this quarter with net servicing revenue of $193 million driven primarily by improved hedge efficiency. Servicing revenue was also a key driver of the improvement to our other revenue line.

GMAC continues to participate in the Home Affordable Modification Program and as of the end of March GMAC had executed more than 17,000 permanent loan modifications and had started more than 40,000 trial modifications. GMAC's active modifications as a percentage of estimated eligible 60-plus-day delinquency leads all other servicers.

Originations in the quarter were approximately $13 billion due to lower overall mortgage market and typical first-quarter seasonality. Around 95% of our production was again concentrated in conforming and government loans which we sell to the mortgage agencies.

Turning to slide 16 we provide additional detail on ResCap's balance sheet and have provided you with a pro forma view of our pending European mortgage actions. You can see that the balance sheet was grossed up to $28 billion at the end of the quarter and this is a result of the implementation of FAS 167. But after our pending European asset sales will decline back to under $17 billion after these sales are completed.

At the end of the fourth quarter we completed several strategic actions to stabilize our mortgage business and we are putting the legacy issues behind us. In the fourth quarter we have continued this progress by selling whole loans and signing an agreement to sell our European mortgage operations.

One of our key priorities is for ResCap to now support itself on a stand-alone basis without incremental capital or liquidity from GMAC above current levels. This will be accomplished through various liquidity measures such as asset sales, portfolio wind downs, capital markets, and third-party bank transactions. We are in the final stages of establishing new third-party bank facilities at ResCap which will complement the secured facilities in place with GMAC which were recently extended for a one-year period.

In addition, ResCap was able to restructure its servicer advanced funding facility while at the same time accessing the term ABS market for over $500 million of stand-alone funding. We know there is more work to do to fully resolve the challenges caused by legacy issues but we are encouraged by the progress year to date.

On slide 17 we discuss our mortgage coverage ratios which were largely unchanged as the portfolio continues to perform in line with expectations and our loan balances were fairly flat in our held for investment portfolio. As a reminder, we moved the riskier assets out of our held for investment book into held for sale and the remaining portfolio is of relatively better quality.

While we moved the majority of delinquent loans out of this portfolio at year-end, our allowance balance reflect the expectation that delinquency rates will normalize as the portfolio seasons. Our commercial ratio has been declining as a large majority of our legacy real estate lending assets have been resolved or charged off and the remaining balance of around $1.5 billion consists largely of Ally Bank's correspondent lending warehouse lines which are of high quality.

On slide 18 we detail our corporate and other segment which reflects our treasury activities, OID expense, and commercial finance business. As you can see in the table on the right OID expense accounted for around half of the total loss in corporate and other. Our OID expense was $397 million, which was higher this quarter due to a liability management transaction that accelerated the recognition of around $101 million of expense and reduces future overhang.

The table on the bottom of the page shows that we are scheduled to absorb around $900 million more of OID expense in 2010 and around $1 billion in 2011 with large declines thereafter. Similar to other businesses our commercial finance platform experienced lower provision expense as our resort finance portfolio has been more stable since the third quarter of last year.

We provide an update to our discontinued operations on slide 19. This quarter we continued the process of streamlining our operations to focus our resources on core businesses. While no additional platforms were added to discontinued operations this quarter, we did make progress towards divesting certain held for sale businesses. We close the sale of our US property and casualty business and in April sold three additional businesses -- our North American factoring business and our full-service leasing businesses in Australia and Poland.

Importantly, we continue to feel good about where these businesses are marked and we experienced positive net income as market conditions have improved.

Now let's turn to liquidity on slide 20. Our funding strategy employs a two-pronged approach designed to support continued, stable liquidity during all economic cycles. The first component is the use of our cost efficient funding at our banking entities, Ally Bank in the US and ResMor Trust in Canada.

Use of deposits and other bank funding results in less reliance on wholesale funding and differentiates GMAC from the captive finance model. We have made good progress towards migrating additional assets to the bank level and in the first quarter originated over 60% of our new retail auto originations through Ally Bank. We were able to increase deposits again in the first quarter and we recently put in place a $7 billion secured credit facility at Ally Bank to fund auto originations.

The second important component of the plan is for consistent and diversified access to the capital markets. We made tremendous progress this year improving our access to the capital markets which serves as a validation of the transformational steps that we took in 2009. For the first time since 2007 we were able to successfully access the unsecured markets with over $5 billion of US equivalent dollars thus far in 2010.

We have also benefited from improved conditions in the ABS market as we issued over $6 billion of term auto-related securitizations globally. The improvement in this market has been dramatic as average AAA spreads for a retail loan deal have dropped from over 200 basis points a year ago to under 3o today.

We provided a breakout of our available liquidity at both the parent company level as well as Ally Bank in the table at the bottom of the page. In aggregate you can see the cash levels and liquidity available based on current collateral have remained fairly consistent since the last quarter. Notably you can see that a portion of our overall liquidity has shifted from the parent company to Ally Bank as we utilize the bank to fund more new originations.

We perform stress testing regularly on our parent company liquidity where we project cash levels assuming no new issuance in the unsecured debt markets. Our strong liquidity position bolstered by the transactions executed year to date and our funding strategy with Ally Bank enables us to be confident in meeting our upcoming debt maturities well into the future without requiring additional unsecured debt issuance if needed. This can allow GMAC to continue to be opportunistic with its plans to raise unsecured funding.

That being said, we will continue to be vigilant on bolstering our liquidity and addressing our upcoming maturities on a prudent basis and based on market conditions.

We provide an update on deposits on slide 21. Our total deposits at Ally Bank and ResMor have increased by approximately $900 million in the first quarter to $32 billion. The pace of deposit growth is in line with our expectations as we don't expect to repeat the significant increases we saw last year.

We are focused on expanding retail deposits versus brokered CDs and Ally Bank's retail deposit base has grown from 37% of total deposits at the end of 2008 to approximately 60% as we launched our Ally brand and deposit-taking initiatives in 2009. Ally's product suite now contains a checking account in addition to CDs, savings, and money market accounts.

We are pleased with our deposit retention rates and in the first quarter we were able to retain approximately 69% of balances up for renewal, which we believe is well above the industry average.

You can see on slide 22 that our nominal capital levels are down slightly as our net income was more than offset by dividends on our preferred stock that had been paid or declared. However, our risk-based capital ratios improved during the quarter with our total capital ratio increasing to 16.4% from 15.5% last quarter as risk weighted assets dropped by approximately $10 billion. Our risk-weighted assets dropped primarily due to the whole loan sales discussed previously, amortization on our lease book, and the completion of the sale of US property and casualty insurance business.

As a reminder, we have elected the deferral option on FAS 167 and therefore assets added back to the balance sheet will be phased in through RWA beginning in the third quarter. A large portion of these additional assets will be sold as part of our agreement to sell our European mortgage platform and we expect the total impact on our capital ratios will be less than 15 basis points.

To wrap up on slide 23, we are pleased with the accomplishments this quarter. All four of our operating segments were profitable, we expanded our auto finance franchise with new relationships and higher penetration with existing OEMs, we successfully reentered the unsecured debt market, and we reached important agreements to further contain the risk of our legacy mortgage business.

As Mike mentioned earlier, executing on our strategic objectives is key to building on our recent momentum, transforming our business, and ultimately repaying the US Treasury's investment in a timely manner. With that we can move to Q&A.

Thanks, Jim. Steve, we are ready to take calls from investors.

(Operator Instructions) Doug Karson, GMAC.

Thanks. That is with actually Bank of America.

Thank God for that.

Good morning, guys. The first question I have circles around the mortgage business and the ResCap bonds that mature in May and June. On the balance sheet it reads I think you have got $725 million in cash, which on the surface seems insufficient for those maturities.

Can you just maybe help us outline where within the consolidated company you may get the cash to pay these bonds out at par and should we feel comfortable about that? If you could help us there.

As we mentioned in the prepared remarks, we have received agreements to put a new bank line in place. They are just commitments at this point but we are working towards finalizing those transactions. We have renewed some secured facilities, our intercompany lines have been renewed, our servicer advanced facility has renewed, and we did a $508 million servicer advance deal in the capital markets.

And we continue to sell whole loan assets given the strength in that market. So all of those things combined we feel pretty good about the upcoming maturities. Tom, anything you want to add?

No, not at all. I think you covered it all.

That is great. And then just one or two kind of bigger picture things. The settlement with the rep and warranties, which I think is pretty key, one of the three parties, can you share with us maybe some communication you have had with the other two parties?

Do you think it's kind of leaning towards we can clear that issue up? And if so, would that fit in with the strategy, if there is one, of potentially selling the North American mortgage business? Would it help market that business if need be?

We continue to talk to all of our major counterparties about settling rep and warranties and we will be settling them where we think we have got common ground with the counterparty.

As far as sale of the North American mortgage operation, we have as you can see in the presentation hired advisers to look at what we should do with the business. And as we complete the work with them we will be back to you.

Okay. And then last thing on the GMAC business on whole, bigger picture again, you have had some success here in the capital markets and I guess the market is kind of wondering what the game plan is for paying back the government investments, whether it's an IPO or something else. Can you just maybe share with us what you are thinking about that?

Very topical conversation because we are going back down to Treasury to have exactly that discussion tomorrow. I think we believe that a combination of elements which may well include an IPO allow us to repay treasury in a reasonable period of time.

Great.

And we are certainly focused on executing the strategic objectives that we have laid out. And as we begin to execute those that will make it available for us to consider all capital raising opportunities.

Next, and my final question, because I get a lot of this from investors to cover both GM and GMAC, looking across the auto industry most finance companies are kind of aligned with their auto counterpart and they have been for many years before the separation. Is there any thoughts internally that you could share with us at this time about potentially remerging those businesses? I know that is a very big question.

Well, let's come at a somewhat different way which is we believe that over -- first of all, we have a very, very strong working relationship with GM. As you can see in the [deck] we continue to gain share in the dealer channel on the retail side of the business. We have been very active on new lease products in the last quarter and so the relationship is very strong and the momentum in the marketplace is very strong also.

Now when you look at the captive model it's kind of interesting because if you look at where we are not necessarily today, but where we could be in the relatively near future, we could, as an organization, have a substantially lower cost of capital than an integrated auto manufacturer/finance company could hope to have.

So I think you have to kind of look at it the other way around and say does it really make a lot of sense for an auto company to put $100 million of assets on its balance sheet to finance dealers and end customers when it's being done perfectly well already. And secondly, when the implication of that would be that they would not be able to own a bank and the potential cost of funds advantage of owning a bank is very substantial.

And so I would almost turn it the other way around and say is it possible to over time those manufacturers that have an integrated finance company would actually consider going in the other direction because of the advantages that we potentially have over time.

All right, that is a good point. I think it's the bank status that may be an obstacle for them to separate. Well, thanks for answering my questions and that is it for me. Bye.

Kirk Ludtke, CRT Capital.

Good morning, everyone. I just wanted to follow up on the repurchase liability settlement. I am curious, does the settlement resolve all of your issues with that particular counterparty?

The settlement resolves the vast majority of the issues. The settlement is confidential so there is not much more I can add.

The decline in the reserve from year-end 2009 to March 31 was I thought I heard about $400 million?

Yes, think about it as the vast majority of the decline was due to the settlement. We also had some claims activity during the quarter and we increased the reserve by $50 million but we are comfortable holding a lower reserve level given that we have settled with one of our top three counter-parties.

Two comments, one is don't draw a straight line between $400 million and the cost of the settlement. Second observation is the cost of the settlement was within our estimate when we established the reserve in the fourth quarter. And thirdly, based on our recent experience, we believe the remaining reserve is adequate on a lifetime basis for the claims that we face.

Excellent. You mentioned that you settled with this one because you had some more common ground with this one than the others. I guess my question is there anything particular about the entity that you -- your exposure to this particular counterparty that we might find interesting?

There was nothing really unique. It was a negotiation and this negotiation resolved itself ahead of the others.

Okay. And the -- I am sorry.

I was going to say we have settled other claims last year so this is not the first one.

Okay. Are the three entities the GSEs?

We don't want to comment on that.

Okay. And then I just wanted to touch on the Treasury's preferred. I think in the past from time to time you talked about the Treasury converting the preferred into common and I am curious what circumstances or what might be the catalyst for that. Would the FDIC allow you to ramp up deposit taking faster if the Treasury's preferred was converted? Things like that if you could just elaborate a little.

Well, I think when we had the discussion at the end of the year Treasury, as you know, converted $3 billion of MCT into common and that took them to a level of ownership above 50% which I am sure they would have preferred not to have done at that time.

I think that Treasury's position has been, okay, we understand the strategy that you are embarked on. We would like to see if it works and when we see if it works we will have further conversations about next steps. And so, obviously, we are in constant dialogue with them on is our strategy working and obviously we think it is.

We and they need to be thinking together about what exactly is the path to get them out over time. And as part of that if there are things that we need them to do, like credit conversion for example, we are certainly not shy about asking.

Okay. And then lastly, with respect to the first-quarter results and the 560 of core pretax income, I know you don't give guidance but is there any reason why assuming auto originations hold up that we shouldn't be annualizing that number?

You are right, we are not going to give guidance and clearly we are encouraged by results this quarter. 2009 was a transformational year and we have worked hard to get some of the legacy problems behind us. A lot of it will depend on the economy and our ability to continue to execute on the plans that we have set forth, but we are encouraged by the first quarter.

Also just to make one mechanical point, if we saw huge growth in originations in the third and fourth quarter that would actually be a depressant to earnings. So it's only the new business that we put on the books in the first half that generates earnings in the same year. Just as a technical observation.

Okay, got it. Thank you very much.

(Operator Instructions) Eric Selle, JPMorgan.

Good morning, good quarter. Looking at some housekeeping stuff, looking at your loan loss severity and your lease depreciation, how sensitive are those going forward to rises in gas prices? And I guess a better way of asking it is what proportion of your portfolio is your lease and loan portfolio are tied into pickups and SUVs?

Well, that is a good question. We will probably have to get back to you on some of the specifics on SUVs and pickups. Clearly used car prices are at all-time highs; they are quite high. I think we would expect them to moderate over time regardless of gasoline prices.

So when we look at our credit allowance, etc., we are assuming some moderation. We will get back to you on the other statistics.

Okay. And this one might -- I know it might be as well, but looking at interest rate sensitivity what portion of your floating debt is hedged in? Or do you guys -- I mean how sensitive is that to a rise in interest rates? As you can tell I am an inflation hawk here.

We certainly run interest rate sensitivity and I would say we are not very sensitive right now. I think we have talked about in the past the first 75 basis points of a rise we will be hurt by it. A lot of our wholesale lending is prime based and we -- it's based on a floor, it's floored out at 4%. So as prime rises the first 75 basis points of that will hurt us, but beyond that we are pretty interest rate sensitive [neutral].

And are you able to renegotiate those wholesales on a year basis so you could pass that through ultimately or --?

That is a case-by-case basis, but generally I would say not.

And that is also only for the wholesale part of the book.

And then just 10,000 feet up, if I could get a general statement on the consumer. I know we are going into the spring season where delinquencies drop and looking year-over-year obviously the used has benefited us, but if you could speak to the trend in delinquencies going into the summer. And then conversely kind of give me the behavior of your competitors. How are underwriting standards holding up?

Let me make a comment. I would say first of all that the consumer seems to be behaving better and that looks to be across the board; whether it's on the auto side or on the mortgage side the consumer is behaving better.

What was the second part of the question?

Looking at your competitors we have heard of a lot of people coming in the market.

I don't think we see anything, any significant change in competitive activity. The only thing that we would observe -- again in the auto space the only thing is that in the super prime area you have got a lot of banks with excess liquidity that are being pretty aggressive in that space. That is not really our prime target market but you do see some banks trying to mop up excess liquidity in the super prime end of the marketplace.

Anything on the mortgage side, Tom?

No, on the mortgage side again the delinquencies have improved better than we would have expected despite the seasonality. And on the volume, our volume at $13 billion for that quarter. We probably could have done more but we took a defensive position towards the end of the year and the beginning of this year just because we were concerned about market spreads. And as a result we did not generate as much volume as we could have, but that was a conscious risk decision.

And then I will jump off after this one but your forward flow agreement expires, I guess it was a five-year agreement. What is the appetite towards replacing that? Is that with a new bank facility or just do it in the ABS market, and kind of how are banks looking at those type assets these days? Thanks for your time.

Yes, certainly -- this is Jeff Brown. I certainly think that the $7 billion credit facility at Ally Bank is the way we designed to sort of mitigate the offset of the forward flows going away. But between utilization there and continued access to the ABS markets -- obviously as you heard from Mike and Jim, we were pretty active in the first quarter and we will continue to be opportunistic on a go-forward basis. So between both of those we feel fine about the liquidity situation and the loss of the forward flow.

I think obviously just do evolving regulatory guidance across the banking industry banks have lower appetite to sign up for five-year credit commitments any longer so we are sort of operating within the facilities and in.

Great. Thanks a lot, guys.

All right, Steve. We have time for one more call.

[Marvin Lo], Pershing.

Good morning, gentlemen. Are there any scenarios that you can envision with regard to ResCap that would have you change your strategic view on the sale of that part of the Company?

First of all, we haven't said that we are selling that part of the Company. What we have said is that we have demonstrated that our intention is to sell some of the assets in the Company and we have also said that strategically we are exploring alternatives. And that is code for selling.

But if we don't -- I think Tom and his team have actually done a great job in the origination and servicing business of rationalizing the economics of it, getting the cost structure down, managing the risks better. And it's really a question of what kind of opportunities are there out there.

We are not sitting here as a distressed seller waiting for somebody to come along with a dollar to take it off our hands. So if there is an attractive transaction, we will go in that direction. If there is not, we will do something else.

Okay. Excellent, thank you.

Okay. That is all the time we have this morning. If you have additional questions, please feel free to contact investor relations. Thanks to all of you for listening and for your interest in GMAC. Thank you, Steve.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.