Ally to pay $2.1 billion to settle claims tied to ResCap

Thu May 23, 2013 1:37pm EDT
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By Tom Hals

(Reuters) - Ally Financial Inc agreed on Thursday to pay $2.1 billion to settle legal claims tied to its bankrupt Residential Capital LLC unit, nearly triple the amount it initially offered to creditors of the subprime mortgage business.

Ally hopes the deal will finally end allegations that ResCap was stripped of choice assets such as its online bank, Ally Bank, before being put into bankruptcy, leaving the mortgage unit's creditors empty-handed.

Putting the issue behind it will help Ally focus on its core business of auto lending and on repaying the U.S. government for a $17 billion bailout during the financial crisis.

The government is still owed more than $10 billion and owns about three-quarters of Ally, formerly a General Motors (GM.N: Quote) unit known as General Motors Acceptance Corp. Mortgages made by ResCap led to huge losses for Ally during the crisis.

Hurdles still remain to a final deal. Thursday's agreement with creditors, detailed in a court filing, requires court approval, which the pact said had to be obtained by July 3.

The settlement has the support of some major ResCap creditors, including bond insurer MBIA Corp (MBI.N: Quote) and the hedge fund Paulson & Co, but it remains to be seen whether other creditors will go along. One big creditor, Warren Buffett's Berkshire Hathaway Inc (BRKa.N: Quote) (BRKb.N: Quote), has already moved to upset one aspect of the deal.

Last year, Ally Chief Executive Michael Carpenter offered to settle the same legal claims with a $750 million payment to ResCap, but creditors rejected the offer as too low. Earlier this month Carpenter called that offer a "hostage payment."

Ally has raised billions of dollars by selling its international business to repay the government, but the cash pile has proven tempting to ResCap's creditors.   Continued...

An Ally Financial sign is seen on a building in Charlotte, North Carolina May 1, 2012. REUTERS/Chris Keane