The Treasury Department converted $5.5 billion of its preferred shares in Ally Financial, the lender once known as GMAC, into common stock, laying the groundwork for exiting the investment.

Ally, which hopes to go public next year and has been working to clean up its balance sheet, was buffeted by losses on mortgages and other loans amid the financial crisis and received more than $17 billion in several rounds of government cash injections.

The move to convert almost half of the Treasury's preferred stock, a year after Ally received its last government cash injection, is designed to accelerate Treasury's ability to exit its investment in the company, the department said in a statement on Thursday.

It will take the government's common stock ownership of the firm to 74 percent, up from 56 percent.

For Ally, the conversion is important because it boosts the lender's tier one capital -- an important measure of capital strength -- and brings it in line with its peers, a senior Treasury official said.

That should help the company attract outside investment, he added.

By converting some of its preferred stock in Ally, the Treasury is following the path it laid when selling its stakes in other bailed out companies, including Citigroup .

The government has seen strong market appetite for stock in bailed-out companies in the past few months, allowing it to be more aggressive in winding down its unpopular rescue of companies like Citi and insurer American International Group Inc .

The Treasury sold its remaining shares in Citi, which also received multiple injections of government cash during the crisis, earlier this month.

It also reduced its stake in General Motors Co , which was steered through a government-sponsored bankruptcy in 2009, to about a third after the company's blockbuster share offering last month.

MORTGAGES

U.S. taxpayers became majority owners of Ally as part of the government's bailout of the auto sector in late 2008.

General Motors owned Ally, then known as GMAC, but sold a controlling stake to private equity investors in 2006.

GMAC expanded rapidly in mortgage lending in the middle part of the last decade. Ally's Chief Executive Michael Carpenter spent much of this year trying to trim that part of the business.

In October, Ally unit Residential Capital sold its European mortgage assets and operations to Fortress Investment Group.

The lender has also been trying to address worries over potential liabilities it may face as a result of bad underwriting of mortgages earlier in the decade.

Ally on Monday said it agreed to pay $462 million to Fannie Mae to avoid having to repurchase poorly underwritten mortgages sold to the housing finance giant. It arranged a similar settlement with Freddie Mac in March.

The company in November posted its third straight quarterly profit, as it made more car and mortgage loans and set aside less money to cover bad assets.

Ally's tangible common equity will increase to $13.8 billion after the conversion. The company had $8.25 billion in tangible common equity at the end of the third quarter.

(Reporting by Pedro Nicolaci da Costa in Washington and Elinor Comlay in New York. Editing by Chizu Nomiyama, Robert MacMillan and Bernard Orr)

Investment