Billions of reasons for taxpayers to love Ally’s IPO

March 28, 2014, 1:00 PM UTC

FORTUNE — Crocuses and various other bulbs are popping up in my garden, a tangible sign that our brutal East Coast winter has finally ended. Something similar is sprouting on Wall Street, of all places: a tangible sign that taxpayers are finally going to get enough cash to turn a profit on Ally Financial, which had long seemed fated to cost the U.S. Treasury big bucks.

I’m talking about yesterday’s announcement that the Treasury is planning to sell a chunk of its stake in Ally, formerly General Motors’ (GM) finance subsidiary, to public investors in an initial public offering at a projected range of $25 to $28 a share.

At those prices, the Treasury’s stake in Ally has an indicated value of $4.4 billion to $5.0 billion. That’s far more than the $1.9 billion that Treasury is currently out of pocket on the $17.2 billion of taxpayer money that it shelled out, beginning in 2008, to keep Ally — and thus GM’s dealer network, and GM itself — from collapsing during the financial crisis.

Even at the bottom projected range of the IPO — the Treasury selling 95 million shares at $25 each — taxpayers will be cash ahead on their investment.

This is my third swing at the topic of taxpayers’ investment in Ally, but the first time that I can use tangible, projected sales prices rather than my own estimate of what Ally shares would fetch in an offering.

Taxpayers are coming out less ahead than I projected in the summer of 2013, but somewhat farther ahead than I projected two months ago.

There’s a profit for taxpayers despite the fact that the Treasury is now likely to realize less money from Ally’s common stock than it paid for it. That’s because the Treasury collected $3.7 billion of dividends on Ally preferred stock, some of which it ultimately sold and some of which it converted to Ally common stock.

But even though the Treasury is likely to realize a small loss on the stock, this is an amazing outcome compared to how things looked for Ally not long ago.

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The problem, you see, is that Ally had a former crown jewel called Residential Capital, which made a ton of money (for a while) in the subprime (a fancy word for “junk”) mortgage market. However, ResCap turned toxic shortly after the Treasury began putting money into Ally to help it keep GM’s dealers afloat by continuing to finance their inventories of GM vehicles at a time when other financing sources had dried up.

Ally ultimately threw more than $10 billion down the ResCap rathole: $8.3 billion to keep it afloat, before it finally decided to put it into bankruptcy in June of 2012. Then, Ally had to shell out $2 billion-plus to satisfy ResCap bankruptcy creditors to remove its ResCap liability so that it could become a publicly traded company and offer the Treasury an orderly way to liquidate taxpayers’ Ally investment.

So there you have it: spring in the real world, spring in the Ally bailout world. It looks like winter has finally departed both worlds. Praise the Lord.


Here’s how I calculated (for what I hope is the final time) the value of the Treasury’s stake in Ally: The Treasury currently owns 571,971 Ally shares, which Ally will split 310-for-1 to arrive at an attractive per-share price for a public offering. This means that Treasury will own 177.311 million new shares. At $25 each, those are worth about $4.43 billion. At $28, $4.96 billion.

Source: Ally public filings