GMAC's Bad Medicine: Rates Were Never the Problem

More good news for GMAC (GKM). Now that GMAC is more like a bank, the Treasury gave them $6 billion dollars in TARP money. GMAC said that it would use these monies immediately to introduce 0% loans, and loosen lending standards. Management hopes that this move will help GM reduce its car inventory, and create additional cash to keep it floating.

I am not as optimistic. As we have noted, rates (whether they were for cars, credit cards, homes, or business loans) were never really the problem. When rates were lowered it encouraged more people to buy and refinance, money was cheap to borrow. Now that we have extended too much credit to the wrong borrowers, we are seeing the fallout. GMAC's move may be the initial step. It may temporarily sell cars. The large glut of inventory may move. However, extending more credit could well be a recipe for disaster.

According to Nouriel Roubini:

Today's global crisis was triggered by the collapse of the US housing bubble, but it was not caused by it. America's credit excesses were in residential mortgages, commercial mortgages, credit cards, auto loans, and student loans. There was also excess in the securitized products that converted these debts into toxic financial derivatives; in borrowing by local governments; in financing for leveraged buyouts that should never have occurred; in corporate bonds that will now suffer massive losses in a surge of defaults; in the dangerous and unregulated credit default swap market.

As companies and governments attempt to remedy borrowing through reduced rates... and loosening credit standards... they may only exacerbate the situation. I remind readers that government intervention is not only limited to GMAC, but a variety of lending institutions which have received direct infusions from the Fed as well.

To encourage the same practices that caused the original problems is not only senseless, it encourages the same people who have helped cause the financial crisis to remain in the picture. It is almost as if governments are encouraging a policy of natural de-selection (encouraging the weak, in-efficient, and dumb) to survive. And we watched Wall Street react with 185 point run-up... go figure!

Comments

[User 328672:]

I hate people only criticize. If you are that good, why did not you be a part of the system to help the country in stead of using your word? Well, maybe you are not that good

2008 Dec 31 08:12 AM

[hurricanecbr:]

Seeking Alpha is nothing but armchair quarterbacks with all he answers to America, and the world's, problems. Your negativity (Seeking Alpha and all the other fear-creating media fools), in my humble opinion, is the real root of our countries economic woes.

2008 Dec 31 08:27 AM

[uncle bubba:]

The help is the stability of GM and keeping GMAC out of bankruptcy which could have pulled GM down further. The fact is credit is and has always been availible to anyone with decent credit. GMAC went to cutting off approvals at anything below a 700 credit score because they did not have the funds to lend. They now can and will look at credit down to a 621 credit score. This is still much higher than in the past, persons with scores as low as 480 had sources for financing with high rates. Credit now is generally unavailible to persons below 600. Credit has tighten but not for the majority of the country. The news made it sound that even with good credit auto loans were hard to get or unavailible. This news helps GM from the standpoint of changing that perception. It is amazing that people with very limited understanding of the financial workings in general are given space to write about things they don't understand.

2008 Dec 31 09:49 AM

[uncle bubba:]

One last thought, with the government using the TARP funds to help GM this program may do what it was intended to do. The economy is slow due in large part to people not buying, not putting dollars through the system. If Joe six pack buys a car, the dealer profits, the manufacturer profits. Those profits are paid to employes who in turn spend at the local resturant and stores and the economy starts working its magic as the dollars turn. This seems to me to achieve the ends envisioned by the congress as opposed to the banks who have held on to their funds to make the balance sheet look better without putting the money into the economy.

2008 Dec 31 09:58 AM

[Brian A. Davis:]

Dear Readers,

I only buy American cars. Currently, a Ford and GM product sit in my driveway.

It is clear that management in in American cars in general, and GM in particular have made a series of pacts with the devil. As a result, any bailout will fail to address the real problems that persist with American car manufacturers. While this bailout may temporarily ease problems at the Big Three, it does not address the fundamental problems that have caused some of these problems to begin with.

usmegatrends.blogspot....

Respectfully,
Brian A. Davis

Jan 01 07:25 AM