ACF Americredit Corp.

The U.S. government is expected to raise its stake in auto lender Ally Financial Inc. to 80% from its current 56%, say people familiar with the matter. The move is the first step in the unwind of a $17.2 billion bailout that could last until the end of 2012.

The U.S. won't be putting more money directly into Ally. Rather, people familiar with the matter say, it will likely convert $11.4 billion in preferred securities it holds in Ally, formerly known as GMAC, into common stock, boosting its stake in the company. The conversion would be made by the time of Ally's initial public stock offering, expected some time next year. The Treasury Department also has a $2.7 billion debt investment in Ally.

The government will have to sell its shareholdings over months or years to be fully repaid, much as it is doing with Citigroup Inc. (C) and plans to do with American International Group Inc. (AIG) and General Motors Co.

Ally repaying the Treasury in 12 to 18 months "isn't a reasonable expectation," says Mark Wasden, an analyst at Moody's Investors Service. Ally internally expects it won't finish paying back its federal aid until the end of 2012, according to people familiar with the matter.

The money it ultimately realizes will depend on Ally's operating results and the market's evaluation of them. Ally must prosper in a troubled market for auto sales, while facing a shifting alliance with GM, its former owner and largest customer.

Ally spokeswoman Gina Proia said, "Ally is on the right trajectory and we are confident in our ability to repay the U.S. government's investment in full over time." A Treasury Department official declined to comment.

One indication of the challenges facing Ally in paying off the government's bailout: When GM bid for the heart of Ally's auto operations in mid-June, the auto maker only offered $5 billion, say people familiar with the matter.

This low price would have made it impossible for Ally to repay its federal aid. Ally's board rejected the bid.

Ally, once a lender owned by GM and subsequently majority-owned by private-equity investors, became a bank holding company at the end of 2008 to survive the credit crisis. The change made it eligible for the federal aid it received. It was bailed out by the government as part of efforts to rescue GM and Chrysler Group LLC.

As with almost any IPO, Ally will sell a fraction of its shares in its initial public stock offering. One benefit the government will lose when it converts its preferred securities into common stock is the 9% dividend Ally pays on the preferred; Ally has paid $1.5 billion in dividends to the government through August.

Certainly GM didn't put a high value on Ally in June when it placed its bid. Chief Executive Michael A. Carpenter learned of GM's bid from a phone call in his car, says a person familiar with the matter. Carpenter, this person says, was surprised by GM's low bid of $5 billion for the heart of Ally's auto operations, including its prized business of lending to auto dealerships but excluding retail auto lending.

Kim S. Fennebresque, an Ally board member appointed by the Treasury, says: "We understand the value in our business and accepting a proposal that would effectively destroy that value made no sense. There was absolutely no benefit for the taxpayer."

After Ally's rejection, GM never came back with a revised offer. On the morning of July 22, Carpenter got a call from a senior GM executive to say the auto maker was buying subprime auto lender AmeriCredit Corp. (ACF) for $3.5 billion, says the person familiar with the matter. AmeriCredit, though small now, could eventually compete with Ally, many analysts say.

-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729; aparajita.saha-bubna@dowjones.com

(Sharon Terlep in Detroit and Meena Thiruvengadam in Washington D.C. contributed to this report.)

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