GMAC today issued a statement commenting on the filing of its once parent corporation General Motors. The statement shows that while the financing company does have exposure to GM, bankruptcy will hopefully minimize the losses.

Ally Bank, a bank that has been in the news quite a bit over the last week due to its high rates on savings and certificates of deposit is a subsidiary of GMAC. Ally Bank was formerly known as GMAC Direct.

The statement on the GMAC site says:

DETROIT (June 1, 2009) -- GMAC Financial Services is a creditor of General Motors Corp. (GM) and as such is taking the appropriate steps to protect GMAC's interests during GM's restructuring.

GM has submitted a motion to the U.S. Bankruptcy Court that, pending approval, would allow its direct business with GMAC to continue in the ordinary course during GM's restructuring. In addition, GMAC has been advised by GM that GM will take appropriate steps in the bankruptcy court to authorize a purchaser of the assets to comply with all of the contracts with GMAC, including all payment obligations.

GMAC continues to provide automotive financing products and services to GM and Chrysler dealers and customers, including retail auto originations, wholesale financing, insurance products, and servicing of customer loans. The company's non-automotive activities also continue uninterrupted.

GMAC is a bank holding company with a newly appointed board of directors and a diversified ownership structure. GMAC has not filed for bankruptcy, nor does it intend to, and the company continues to meet all of its obligations.

The wording of this couldn't be more ambigious business-speak. GMAC is a creditor to GM, meaning that it does have exposure. I'm guessing that the majority of the exposure comes from loans to dealers to purchase cars from the automaker (wholesale financing). At the same time, the statement implies that the bankruptcy filing will ensure that GMAC is made whole for these transactions and will keep the financing relationship in place : "In addition, GMAC has been advised by GM that GM will take appropriate steps in the bankruptcy court to authorize a purchaser of the assets to comply with all of the contracts with GMAC, including all payment obligations."

So, for depositors of Ally Bank, this looks like a non-event for now. GMAC Finance issued a statement earlier today on an unrelated matter stating that the company was financially sound and had aqequate capital.

I've contacted GMAC and will post any further information that I receive.

The FDIC today passed a final ruling limiting the rates that undercapitalized banks can offer on savings, certificates of deposit, and other deposit products. The ruling leaves a lot of unanswered questions, including how much of an impact will it have on adequantly capitalized institutions.

The key component of this ruling titled Final Rule for Interest Rate Restrictions on Insured Depository Institutions That Are Not Well Capitalized is that banks that are undercapitalized (exactly how this is now measured is unclear) cannot offer rates that are more than 75 basis points higher than a "national average" established by the FDIC.

The biggest change is in how this national average is calculated. In the draft rulings, it was calculated as 120% of the current yield on similiar obligation US Treasuries. In the case of deposits in which less than half were insured, the rate went up to 130% of similiar yield Treasuries. But with Treasuries at record low yields over the last year, this has severaly constrained the ability of some instititutions to fund themslves.

The new ruling redefined "national rate" to "a simple average of rates paid by insured depository institutions and branches for which data is available." This severs the connection between the national rate and US Treasuries. This market rate will then be the benchmark rate in all market areas. Based on the ruling, banks will not be able to offer rates that are more than 75 basis points above this "national average" unless they make a case of the FDIC that local rates are markedly higher than this national average.

So, is this good or bad? For now, because of the artificially low level of Treasury yields, this is probably good and will allow some banks to raise their rates. Longer term, it may be bad for savers if Treasury rates spike, as many suspect they will due to government borrowing.

The other problem has to do with Internet banks, many of which we cover on BestCashCow. As a reader mentioned in a post on the ABA and Ally Bank, it doesn't seem right to lump Internet banks and brick-and-mortar banks together. Shouldn't Internet banks be allowed a bit more flexibility since they presumably have a lower cost structure?

Lastly, it appears this ruling isn't just for undercapitalized banks. The ruling differentiates between three different types of banks:

1. Adequately capitalized that accept broker deposits.

2. Adequately capitalized that do not accept broker deposits

3. Undercapitalized banks.

All of these institutions must adhere to the rate limits set by the "national average." Why the ruling is said to only address undercapitalized institutions is unclear to me. If this is true, then the ruling is really a major change to the way banks, under or adequatly capitalized, can price their deposits. It in essence, brings everyone under the sway of a "national rate" set by the Fed.

The ruling goes into effect on January 1, 2010 but the Fed will begin to publish this new national rate starting immediately. I have a call in to the Fed for further clarification and will be following this issue as the regulation becomes clearer and begins to impact the rates you are able to receive on your hard-earned savings.

If anyone has additional insight on this issue, please post it below.

The BankDeals Blog posted an excellent article today regarding a letter sent from the American Bankers Association (ABA) to FDIC Chairmwoman Sheila Bair. The letter asks the FDIC to intervene to force Ally Bank (formerly GMAC) to lower the rates it offers on certificates of deposit and savings accounts. Why? Here are a few excerpts from the letter:

Recognizing that the Internet forces banks to compete in a national market for deposits, the FDIC recently issued a proposal to amend its rules by suggesting a bank, under restrictions for deposit growth, use a "national rate" when determing whether the bank is offerfing rates that significantly exceed the market rate. Notwithstanding the government's concen about banks using high-rates to solicit out-of-market deposits, GMAC/Ally Bank is apparantly is permitted to solicit deposits over the Internet by offering rates that are generally the highest in the nation.

The letter ends by asking the regulators to force Ally/GMAC to lower rates:

ABA believes it is completely innapropriate, and indeed risky, for GMAC/Ally Bank to be allowed by regulators to continue to pay rates well above the market. We urge you to apply the same princples that would apply to other banks in a comparable situation to GMAC/Ally.

The ABA's argument is that banks should not be allowed to collect deposits above a certain average "national rate." So what ever happened to bank competition? The statement above alludes to the FDIC's program to force impaired banks from collecting depoists at an excessive rate. But Ally bank is not part of that program, yet. The letter states that the Treasury added $13 billion in capital to the bank but much of this capital was actually used for GMAC Financing and is unrelated to the actual bank, which existed as a separate entity within the company's finance division.

Nor are high deposit rates a cause of failure. Banks fail because of a run on the bank, usually precipitated by loan losses. Or they can be closed by regulators due to capital ratios, non-performing assets, etc. Bank of America, Citi, etc. were not bailed out due to high cd and savings rates. Bad loans made by ABA companies have caused the financial crisis, not a bank that is offering depositors a good deal.

Nor should the high deposit rates offered by Ally be a source of its losses. Ally may not make as much money, but it should be able to make money. Because of the slope of the yield curve there has almost been a better time for banks to make money. They can borrow money from depositors at 2-3% and lend it out to consumers at 5-20%. I recently received a notice from Chase that my credit card rate was increasing to Prime rate plus 14.99%, which is currently 18.24%. I'm not alone.

If banks can't borrow at 3% and lend out at 18.24% and make money, they shouldn't be in business.

Savers have already been punished as banks have dropped savings and cd rates precipitiously over the last year. This occurred because of a financial crisis precipitated by these same banks. Now, they want savers to subsidize their recovery by both funding the TARP and by accepting artificially low rates while at the same increasing fees and the rates they charge on various credit products.

Let the FDIC know that you want competition in savings and cd rates. Send them an email at webmaster@fdic.gov.