Ally Financial's Woeful Performance

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For most financial institutions, the Fed-mandated stress test and Comprehensive Capital Analysis and Review went pretty well, with prior year laggards Citigroup and Bank of America emerging stronger than ever.

But for Ally Financial, the former auto-loan segment of General Motors, things went even further south than last year, when it was able to muster a 2.5% minimum ratio. This year, Ally finished up with a measly 1.5% Tier 1 common ratio -- and the same ratio for its post-stress, proposed capital actions metric. These were the lowest scores of any of the 19 financial institutions tested.

Ally: Not our fault
Almost immediately after the results were in, Ally released a statement opining that the Fed’s methodology was faulty, and stating that, among other things, Ally’s capital levels are just fine and dandy. Was the Fed unfair to poor Ally?

Of course, Ally wasn’t the only institution flagged by the Fed. Both JPMorgan Chase (NYSE: JPM  ) and Goldman Sachs (NYSE: GS  ) were told that their capital plans didn’t meet specifications, and they must resubmit new and improved proposals before the end of the third quarter.

More surprisingly, regional heavyweight BB&T (NYSE: BBT  ) , like Ally, had its plan rejected despite its stellar performance on the stress test. This is likely because of some changes the bank made to its risk-weighted asset calculation, however, and not because of some other, more serious problem.

Government would like to shed the Ally albatross
Ally complained about being ill-used by the stress test last year, so it’s really no surprise that it would do so this year, as well. Of course, going into the test with a Tier 1 common ratio of 7.3%, the lowest of any institution tested, could have something to do with the results. In addition, the Fed was clear about Ally still being considered responsible for liabilities tied to Residential Capital, its bankrupt mortgage loan subsidiary.

Also, like American Express (NYSE: AXP  ) , Ally was allowed to submit a spanking-new capital plan after the Fed gave the original entry an early thumbs-down. American Express emerged triumphant -- but even with that boost, Ally failed. The mulligan also made Ally look less than astute, since the original plan would have left them with a slightly higher, albeit still failing, score.

Just as it did with AIG, the government seems keen to sell off its 74% interest in Ally, possibly this year. This probably won’t happen until Ally looks healthier, and sheds more mortgage-related assets, such as the mortgage servicing rights it recently sold to Quicken Loans.

Certainly, then, the government would want to make Ally look better, not worse. It seems, however, that this was not possible, and Ally has only itself to blame.

Will BB&T's stumble create a buying opportunity? With big finance firms still trading at deep discounts to their historic norms, investors everywhere are wondering if this is the new normal, or whether finance stocks are a screaming buy today. The answer depends on the company, so to help you figure out whether BB&T should be on you radar, I invite you to read our premium research report on the company today. We’ll fill you in on both reasons to buy and reasons to sell BB&T, and what areas BB&T investors need to watch going forward. Click here now for instant access!

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