--Ally to receive release from legal liabilities under settlement

--Ally plans to record a $1.55 billion charge related to the settlement in the second quarter

--Ally CEO: Deal will help company avoid year of potential litigation

(Adds CEO comments beginning in paragraph four, details about capital plan in paragraphs 12-13 and new details throughout.)

 
   By Andrew R. Johnson and Joseph Checkler 
 

Ally Financial Inc. said Thursday it will pay $2.1 billion to its mortgage subsidiary Residential Capital and the unit's creditors under an agreement reached last week that could move the Detroit-based lender closer to repaying its government bailout.

The amount is $1.35 billion more than what Ally previously offered to pay to fend off ResCap creditors trying to hold the government-owned lender responsible for billions of dollars of the mortgage subsidiary's liabilities.

But the deal would give Ally a legal release from nearly all of those issues, which have cast a shadow over the company's efforts to repay the $17.2 billion government bailout it received during the financial crisis and focus on its core auto-lending and online-banking businesses.

"If I look through the lens of 'Did we do anything wrong for which we should pay money,' the answer for this is we hugely overpaid," Ally Chief Executive Michael Carpenter said in an interview Thursday, referring to the settlement. "If I look through the lens of 'avoiding ... years of litigation so that we could actually get on with our life and build the company and repay the American taxpayer,' then I look at it as very reasonable."

The deal, subject to U.S. Bankruptcy Court approval, involves Ally, ResCap and several large ResCap creditors, including American International Group Inc. (AIG), Paulson & Co., MBIA Inc. (MBI) and Allstate Corp. (ALL). It also includes investors in ResCap's mortgage-backed securities, which stand to be paid $8.7 billion under an existing agreement.

Under the settlement, the parties have agreed to enter a so-called support agreement backing ResCap's plan for how it will repay creditors.

U.S. Bankruptcy Judge Martin Glenn is set to consider the agreement at a June 26 hearing.

ResCap, once the fifth-largest mortgage servicer in the country, filed for Chapter 11 bankruptcy on May 14, 2012, as litigation over soured mortgage securities mounted and bond payments loomed. Last year, ResCap struck deals to sell mortgage-servicing platforms and loan portfolios as a part of bankruptcy auctions that generated $4.5 billion in proceeds.

The mortgage firm's bankruptcy filing was intended to help Ally, which is 74%-owned by U.S. taxpayers and not part of the bankruptcy, make a clean break from ResCap so it can move forward with repaying the bailout it received through the Troubled Asset Relief Program.

The company has repaid about $6.1 billion of the $17.2 billion it received including dividends and interest, and executives have set their sights on eliminating $5.9 billion of the firm's mandatory convertible preferred shares, or MCP, owned by the U.S. Treasury Department.

"We feel we have adequate capital to be able to repurchase the MCP, but is really for the Federal Reserve to decide," Mr. Carpenter said.

The Fed in March rejected a capital plan Ally submitted under the regulator's most recent round of bank "stress tests," deeming the lender's capital levels insufficient to survive a prolonged economic downturn. The results had factored in Ally's exposure to ResCap.

Ally is having discussions with the Fed on the timing for submitting a new capital plan, Mr. Carpenter said.

The Treasury's ability to exit from Ally will depend on progress made toward gaining court approval for the settlement, he added.

Timothy Massad, assistant secretary for financial stability for the Treasury, said in a recent interview prior to the settlement details being made public that the agreement should aid in that effort.

"The announcement last week is obviously terrific progress with respect to addressing the legacy mortgage issues," Mr. Massad said. "There's still some work that needs to be done to fully implement that, but we're very pleased that they've accomplished this and it will help facilitate our exit and help maximize taxpayers'" investment.

Mr. Massad declined to speculate on timing for a potential exit.

Uncertainty over ResCap's mortgage-related liabilities scuttled plans Ally had in 2011 for an initial public offering that could facilitate a sale of the Treasury's stake in the company and contributed to the Fed's denying a capital plan in March that Ally submitted under the regulator's most recent round of bank stress tests.

Mr. Carpenter has said an IPO could still be a possibility in the future, and the company has had conversations with the Fed on submitting a new capital plan.

Ally's payment is significantly larger than its previous offer of $750 million, which Mr. Carpenter had described as a "hostage payment" to ResCap creditors.

Ally has already reserved for the $750 million it initially planned to pay and expects to take a charge of $1.55 billion in the second quarter related to the new agreement. The company's $2.1 billion payment to ResCap's bankruptcy estate will include $1.95 billion in cash and $150 million in insurance proceeds it expects to receive under the plan.

In return, Ally will receive a full repayment of its secured claims against ResCap worth about $1.13 billion.

The company, formerly the in-house financing arm of General Motors Co. (GM), has been selling international businesses to help repay its bailout. The company has received about $7.6 billion out of an expected $9.2 billion in proceeds from the sales so far.

Ally and ResCap first announced they had reached a new deal on May 14, though the parties have kept the specific details confidential until now.

The agreement also allows Ally to receive full repayment of its secured claims in ResCap's bankruptcy, which includes $1.13 billion owed to it under existing credit facilities.

ResCap's creditors--AIG, Paulson & Co., MBIA and Allstate--had balked at Ally's previous offer. They argued Ally controlled ResCap prior to the mortgage subsidiary's bankruptcy and stripped the unit of valuable assets, making it responsible for ResCap's liabilities.

Ally pushed back against such claims, arguing the companies operated independently of each other. But the scheduled release of an independent examiner's report last week helped accelerate negotiations among the parties through a court-appointed mediator.

The report's findings, which were ultimately filed under seal and haven't been made public, could fuel creditors' arguments that Ally exerted full control of ResCap. Judge Glenn last week agreed to keep the report filed under seal until as late as July 3 as long as ResCap met certain milestones, including filing of settlement documents by Thursday.

ResCap creditor Berkshire Hathaway Inc. (BRKA, BRKB) on Wednesday filed a motion asking the court to make the report public, arguing its findings are necessary for creditors to determine if the settlement reached last week is a fair deal.

The settlement could be terminated, though, if the examiner's report is disclosed to any party before the court approves ResCap's plan support agreement, according to terms laid out in ResCap's court filing.

The deal also prohibits parties from terminating the agreement "based in any way upon the Examiner's Report," the filing said.

Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com and Joseph Checkler at joseph.checkler@dowjones.com

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