Fed's 'White Horse' GMAC Bailout Enables Consumer Credit Habit

The U.S. Treasury’s decision to inject $6bn worth of capital into GMAC (GOM) allows the auto financer to broaden its distribution lending base to customers with minimum credit scores of 621 versus its previous standard of 700. This sounds counter-intuitive as cheap and easy credit is what precipitated today’s financial crisis. Then again, desperate times call for desparate measures.

The American consumer (economy) became addicted to the cheap and easy credit pushed by former Fed Chairman Greenspan and the Bush administration. Withdrawal symptoms have been nothing short of excruciatingly painful, e.g. massive writedowns, rising unemployment, and contracting GDP.

The Fed has thrown everything but the kitchen sink at a problem that has stubbornly refused to yield progress. Cold turkey is not an option as credit junkies and their Wall Street enablers fear that it would kill the patients (consumers and the economy). Yet, the morphine and methadone administered by the Fed’s acronymous programs, e.g. TARP, seem to lack sufficient potency.

Any good pusher knows that a dead-addict (customer) is bad for business. Better to keep the addict alive so one can cheat him again and again and again. In this case, the customers are consumers while the pusher represents myopic greedy bankers who lack the patience and innovation to create sustainably profitable products independent of high leverage. Their kingpin dealer, or the Fed, is the only one riding the white horse these days and monopolistically controlling the distribution of supply (i.e., cheap money and bailouts).

Despite the above criticism, I will admit that this latest move by the Fed probably will stimulate auto sales and more importantly, grant reprieve from the bankruptcies and potential job layoffs that stare down auto manufacturers and their supply chain industry. Besides, this manufacturing infrastructure is just as vital to the U.S. economy as the little pieces of monopoly paper that Wall Street trades back and forth with one another on a daily basis.

In the big picture, the economy will eventually digest this orgy of cheap credit and government bailouts. But when it does, the "fit will hit the shan" with the excretion of high inflation. (Now there’s something that would really stink to high heaven for our progeny and long term U.S. treasury bonds.)

In the meantime, General Motors’ (GM) common stock should find support from buyers and short sellers over the short to intermediate timeframe. Anyone hungry for a bargain might want to skip the appetitzers and go for GM while it’s still bloody rare. However, just don’t over-indulge as the reputed risks involve more than just heartburn.

Disclosures: Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

Comments

[sr9web:]

Buy GM common?

You should be banned from this site!

2008 Dec 31 02:09 AM

[Byallmeans:]

This move will get the rest of the banks off their azz. They won't want to be left out of the game. You watch the banks follow into the 620 FICO score game shortly.

2008 Dec 31 02:17 AM

[Byallmeans:]

620 puts 40 million more eligable(sic) buyers into the game instantly

2008 Dec 31 02:18 AM

[John Polomny:]

This guy admits US consumers are addicted to debt but then goes on to say that any attempt at withdrawl will be painful. Well thats exactly what we need. We have to save and invest not borrow and consume. We are going to have inflation like people will not believe next year. If the FED can never pull access to credit due to the negative effects of withdrawl on the economy then hyperinflation is in the bag.

2008 Dec 31 02:37 AM

[iapproveu:]

your right, it puts them in the game. BUT, their jobs are the ref, and a flag has been thrown on the play! The problem is no one has any confidence in keeping their job. Hell, people arent buying clothes at 75% off, whos gonna buy a car? Now I have one question for ya.....when FORD has employee pricing PLUS where they take $11,000 off a car.....what do you think happens to the value of my trade in? RIGHT, it goes down by $13k-$15k.....so now im upside down on my 72 month loan i got 6 months ago....and now i cant buy a damn thing for 6 years. And just something to think about the next time your on the throan......If they can take $11,000 off a car and still make money.....what they hell did they do with all the money they made before. My god, talk about a bad business model that we are keeping alive.

2008 Dec 31 02:38 AM

[iapproveu:]

The bottom line is....Chrysler needs to go away. Cerberus purchased this deal on the cheap, thought it was a HUGE money making bargain, kept it private, and if it did well, do you think they would just start thowing money out the window to all of america would it? Of course not.....so, therefore they should go to their OWN investors and beg for money instead of the govt. period. THEN, we should stand behind GM, get a team of BUSINESS people in there and make the company profitable. NOT another car guy that grew up in the car business with the same worn out ideas. NOW, FORD has announced a self parking lexus knockoff system for their cars. GREAT, now give it back to the company selling it to you, shelve the idea, and have FORD build a BASIC Corolla/Camry, Civic/Accord killer and sell it by the thousands. OH, and by the way, while your at it, build the damn thing here in the USA so the workers can go to Best Buy, Circuit City, Kroger, Macaroni Grill, and Sears spending their paychecks so THOSE people keep their jobs and we sell even more cars(maybe pay their mortgage?). Personally, I dont care if we close an engine plant in some swill infested backwoods swamp in a third world country, but I care about the plant they close here in the USA. Simple isnt it? Our heads are up our butts here in this country I swear.

2008 Dec 31 02:51 AM