GMAC: Happy to Lend You Some of Your Own Money 18 comments
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If the shenanigans surrounding the GMAC conversion to a bank holding company haven’t gotten under your skin, then maybe this will. GMAC announced that it intends to significantly lower its lending standards in order to, in its own words “… (get) back in the game.”
GMAC said that it intended to lower its minimum FICO requirement to 621 from 700 and late today indicated it would reintroduce 0% loans. This begs the question as to what the competition does in response. It’s unlikely that Toyota (TM), Nissan (NSANY) and all of the others are going to sit by and cede precious market share to General Motors (GM). At the same time they are hemorrhaging, so do their governments start pumping in money to keep them competitive? In the end does this just become a zero sum game that maybe pushes a few more units out the door at enormous cost?
Once in motion, this process has nowhere to go but a rush to the bottom. Not for a minute will rational underwriting standards rule this process. It will be a contest to push money -- taxpayer money actually -- out the door in order to maintain some level of sales. GM won’t be alone, but it can claim the honor of being the first.
More: here
Note: If you were as confused as I was about the events surrounding the conversion of GMAC to a bank, the debt/equity swap and exactly what if any the Fed’s conditions were in terms of the bank holding company status then let me direct you to Felix Salmon’s late post Tuesday. He makes some excellent points. I will have my own but I need to think it all over first. At the very least it is duplicity at the highest levels of government.
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This article has 18 comments:
That's exactly what it is, the other carmakers shouldn't be that concerned about losing market share as GM artificially opens up the market to a group that shouldn't have access to it. There's no point in going down that route to maintain market share if it's obvious that it's going ti cause damage in the long run in the form of defaults. Another market distortion sponsord by the government...
On Dec 31 11:27 AM uncle bubba wrote:
> 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.
Two questions should come to mind here even if you're part of the "pragmatic" or "utilitarian" school of thought; i.e., a mainstream thinker. (Those of us who are principled don't care about these questions because the move is obviously damnable regardless.)
First, is this actually helpful to the economy? In other words, how much marginal demand for GM automobiles is out there between 621 and 700 that could not obtain financing anywhere else, or would not buy under the terms previously on offer but would now? That range of credit scores covers something like 25% of potential buyers. Given that around 5% of surveyed individuals intend buying a car in the next six months, if we assume that 1/3 of them will not consider GM at any price and the most hopeless credit risks have already excluded themselves from answering the survey, we might conclude that at most 0.8% of all households are in play at all, or about 800,000 of them. Not all who wouldn't have bought GM before will do so now, but let's be generous and suppose that half will. That would be enough to increase GM sales by about 800,000 vehicles per year, less than 10%. In fact this is probably generous. But notice that most if not all of these sales are simply being taken away from other vendors, meaning only a very slight net win for the US economy (after all, the "foreign" carmakers still have dealers, service shops, and usually manufacturing operations in the US anyway). Most of the benefit here accrues specifically to GM, not to the economy writ large.
Second, even if we suppose that encouraging people to "buy stuff" and giving them money to do so is a sound strategy, should we really be encouraging them to buy cars specifically? After all, there are already plenty of cars out there, and they pollute, place great strain on locally-funded infrastructure, and due to resource and space constraints provide much less marginal utility as their number increases. Worse still, a cheap car with interest-free financing is like a cheap puppy with interest-free financing. Most of the individuals who might take advantage of these offers really cannot afford the cost of owning and operating a vehicle, or a second vehicle. They have little or no savings and marginal jobs and should really be focused on saving and paying down existing debt (hint: you don't get a credit score of 650 without having some unpaid debts lying around). In many cases we have to believe that both these people individually and the economy as a whole would be better off if they moved closer to work and walked, took the bus or train, or bicycled. No doubt there are exceptional cases, but by and large there should be real questions about encouraging this particular purchase.
So on balance it looks like the taxpayer is handing GM at most an additional 800,000 sales per year, many of them taken from other vendors. In addition to the up-front costs, he is also on the hook for additional road work and construction (paid out of already barren city and state coffers), the cost of pollution cleanup and/or environmental degradation, and the likelihood that more bailouts will be required elsewhere as more new car owners on marginal credit decide to make their car payments instead of paying on existing debts.
A better strategy would be to simply give GM the marginal revenue from another 800,000 sales (call it $20b) and tell them that it has to be used in one of two ways: to downsize their brand and dealer fleets, or as severance payments for UAW workers. The net effect on GM's balance sheet would be better, the net effect on the Treasury's balance sheet would be no worse, and the net effect on individual Americans' collective balance sheets would be better. There would also be intangible quality of life improvements (cleaner air and water, less traffic congestion) due to having slightly fewer cars on the road.
Another option would be to use the money to support a prepackaged bankruptcy filing. It's going to be hard for GM/GMAC to obtain the financing they'll need to get through the filing. No doubt the taxpayers will be providing that, too, when the time comes. It would have been better to just make that move at the beginning rather than throwing some away now and then providing the loans later after the initial "investment" is written off.
There can't be too many people who profited from this move. With the possible exception of GM dealers and perhaps the UAW workers in their 40s and 50s who would (and will) be laid off when GM downsizes, it's likely that every single American lost money on it. That enrages those of us who value free markets, small and limited government, and low taxes, but as I've shown here it should enrage even mainstream observers as well. This is entirely consistent with a thoroughly corrupt and incompetent system of government that continues to fail its stakeholders.
IS THERE ANY ONE HOME?
They really didn't have to pay bonuses to have them straighten out the mess, the government just needed to show them that if they would like to face prosecution for mismanagement the alternative would seem much less attractive - then of course there are people in the government that were put in place to control this as well that should have been doing a song & dance for Detroit and the rest of the country instead of burying the heads of the Big 3 in a smoke and mirrors show.
Now lets just hope that they look at EQUAL trade as opposed to FREE trade and fix a few other issues as well !!
In short, if you have a credit score in the 800s, you can probably borrow tens of thousands of dollars without providing anything at all. You probably cannot borrow hundreds of thousands without doing so, except maybe in a trading account.
Now, if you have a credit score of 620, you're going to have a tough time borrowing money on any kind of reasonable terms, regardless of your income or employment situation. Crazy? Maybe, but true. Personally, I think it's pretty reasonable; if a loan is small or well-secured, there are no red flags about a particular transaction or your recent credit history, and you have a long track record of paying reliably, proof of employment isn't really that important. Likewise, if you have a track record of not paying your bills, I don't really care that you're a hedge fund manager making $800k a year. You don't pay your other creditors and I don't really care why. All I can do is assume you won't pay me either, and not lend to you.
Welcome to the bizarre world of consumer credit. It's very different from corporate credit, which places far more emphasis on ability to pay. In general, the assumption is that a history of payment in the absence of sudden increases in borrowing connotes both ability and willingness to pay; people who are able to pay for a long period of time are assumed to be the same kind of people who manage their balance sheets well, so they'll probably be able to pay in the future as well. More importantly, they're also willing to pay; many people are able to pay but unwilling, which is rare in the corporate credit universe (probably because the amounts are large enough, and the debtor's assets easy enough to find, that it's worthwhile for creditors to seek legal remedies in case of default).
So coming back to the issue at hand, no, having a few more people working making cars doesn't really mean very much to the economy if there are also a few more people buying cars who can't really afford them. More wages being paid to a particular group of people doesn't necessarily equate to a bigger real economy. Strange but true.
Needless to say, I was refused a loan of the balance which was $10k.
Now a crappy $10k loan for a gas guzzler, with a 50% cash down payment with a 800 credit score, on a vehicle GM.
Let GM/GMAC tell me they are lending and maybe they can tell me some more BS stories about how great their mileage is on their trucks too.
The BIG 3 will fall, not because people aren't buying, its because NO ONE IS LENDING. People with perfect credit and cash down payments in this economy aren't widespread these days, NOR would if every single one of them went out a bought a car save the BIG 3.
So GM and rest of these idiots had better figure out rest soon how to loan money to people with bad credit and repo's if they expect to survive past next summer.
On Jan 05 09:13 PM GM is full of crap wrote:
> I spent New Years Eve at a local dealer trying to buy a new truck,
> mind you I have a credit score of 800 and had a 50% cash down payment.
>
>
> Needless to say, I was refused a loan of the balance which was $10k.
>
>
> Now a crappy $10k loan for a gas guzzler, with a 50% cash down payment
> with a 800 credit score, on a vehicle GM.
>
> Let GM/GMAC tell me they are lending and maybe they can tell me some
> more BS stories about how great their mileage is on their trucks
> too.
>
> The BIG 3 will fall, not because people aren't buying, its because
> NO ONE IS LENDING. People with perfect credit and cash down payments
> in this economy aren't widespread these days, NOR would if every
> single one of them went out a bought a car save the BIG 3.
>
> So GM and rest of these idiots had better figure out rest soon how
> to loan money to people with bad credit and repo's if they expect
> to survive past next summer.
>