GMAC: Three Key Questions 15 comments
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By James Kwak
I’m a little late to the GMAC bailout story, but after reading all the newspapers and blogs I usually read, there are still some things I don’t understand. I’m particularly confused about the announcement that GMAC will start lending to anyone with a credit score above 620, down from their previous minimum of 700. (The median credit score in the U.S. is 723.)
1. What is the relationship between GM and GMAC? I know that Cerberus owns 51% of GMAC and GM owns the other 49%. I also know that, in order to become a bank holding company, both were forced to reduce their ownership stakes. In any case, GMAC is an independent company that should not be run for the benefit of GM. Its obvious that GM benefits if GMAC reduces its lending standards. But how does GMAC benefit?
2. If a loan to someone with a credit score of 621 was a bad idea on Monday, why was it a good idea on Tuesday? The only theory I can think of under which this makes sense is that GMAC thinks that loans to people with credit scores of 621 are profitable, but they couldn’t get the capital cheaply enough until they got their government bailout money.
3. Who is going to pay the bill when these loans go bad? It looks to me like GMAC is making a big gamble by trying to pump up its lending volume with higher-risk borrowers, right in the middle of the worst recession since. . . 1981? the 1930s? (In any case, it won’t be able to get anything like the lending volume it used to have, simply because fewer people are buying cars.) Isn’t this a situation where a company is choosing a high-risk strategy because its only option is to watch its revenues shrink away to nothing because the demand for credit has plummeted? But if that’s the case, how smart is it to go chasing after high-risk borrowers because the low-risk ones are suddenly saving their money? And now that GMAC has gotten the Henry Paulson seal of approval (remember, TARP money was not supposed to go to unhealthy “banks”), I think there’s a fair chance they are counting on Treasury to bail them out of their next round of bad loans.
Of course, it could be said in GMAC’s defense that they are just doing what Congress wants them to do: take TARP money and use it to make loans more available to consumers. But this goes back to the fundamental schizophrenia of TARP: it was conceived to keep banks from failing, but most people think its purpose should be to increase credit. And in this case I suspect GMAC’s taxpayer money is being used to sell GM cars that people wouldn’t buy otherwise, and when it runs out GMAC will be back for more.
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This article has 15 comments:
This is absurd and will just result in even bigger taxpayer losses - all for the benefit of Cerberus and the UAW.
As a culture, we have gone totally insane. Who are we? What have we become?
"If a loan to someone with a credit score of 621 was a bad idea on Monday, why was it a good idea on Tuesday? The only theory I can think of under which this makes sense is that GMAC thinks that loans to people with credit scores of 621 are profitable, but they couldn’t get the capital cheaply enough until they got their government bailout money."
Two things:
The reason why it is now a good idea is not that they got cheap money (they pay %8 on what they received). The real reason is that it is no longer their money (or the governments). It is tax payers money and I wish people will call it for what it is.
The second thing is that Treasury and the FED asked GMAC to lower their standards because they want easy loans available regardless of cost to the tax payers (IMHO).
Crooks and the incompetent run the country no other explanation needed.
2. If a loan to someone with a credit score of 621 was a bad idea on Monday, why was it a good idea on Tuesday? I would guess they can now raise the capital to make the loans which they couldn't before, which was the real reason for the cut back. the capitives almost always have the lowest loss ratio of any finance company doing car loans. and GMAC was no different than any of the others.
3. Who is going to pay the bill when these loans go bad? this is the same as was. they just had cut back to match their actual capital levels. and they do like all of the other finance companies. they raise the interest rates to match their risk level. and they don't tend to have dealers that will do what the mortgage brokers did. which is make notes that have no reason to be made other than the income to the broker. the captives will charge back to the dealer for bad loans if they find they are not doing due diligence.
The issue is simple: help the little guy, one who has no money or qualifiy for a loan. I mean this is tax money right? and tax money is suppose to help the people? Who are the people? Apparently none of them are on this forum.
Compare with the money the US Treasury had spend on AIG to this pitttance sum, then you can get the idea that "trickle down economy" is alive and well. The Bush administration had brought us to this point with their "hands off" and "trickle down" policies, and we are still continue make the same due dilligence for helping out the little guy.
Sad day for America.
From the little guy.
GMAC is ripe with foul players.
1) Cerberus: Pre-bailout Cerberus owned 51% of GMAC. Dan Quayle is the Chairman of Cerberus Global Investments. It's no shock the Executive Branch caved in on the autos. Cerberus also LBO'd Chrysler. They took excessive risk, stuffed investors with bad paper, and their exit strategy is to be bailed out by the tax payer.
2) CDS World: The most popular trade in the CDS world was to be long GMAC credit and short GM credit. The CDS market dwarfs the cash market. There is hundreds of billions of this trade on scattered throughout bank prop desks and hedge funds. By propping up GMAC, the government is saving additional use of the TARP as the gains from that trade will let them offset the billions more of losses they are hiding on their balance sheets.
3) The UAW. The $400 million lobby (bribe) to the Democrats could be the best trade of 2008. With it, they have opened the spigot to billions of dollars of bail outs. Ron Gettelfinger is a private equity guy at heart. He is spending $400 million of equity to fuel the LBO of America as the world will be stuffed with U.S. Treasuries. Good work Ron!
Whether you realize it or not, all the politicans are doing is pretending to help Main Street but the only ones who will benefit are those connected to the political machine.
It is one giant bait and switch they are using to pay off their pals at the expense of the nation. The politicans just want votes and power.
To understand AIG and the banks, one has to understand the complexity of the CDS market. The impact of AIG failing would have been like a meteor crashing into the Earth. Blame Hank Paulson. He was the biggest proponent for letting the banks lever up when he ran Goldman and then looked the other way as Treasury Secretary.
The impact of the Autos going bankrupt would be painful in the short run but be healthy in the long run without the same radiation sickness as AIG.
What irks me is that the financials are still mismarking their assets. We are now in an era where nobody really cares how much paper losses the banks have. They should just open the kimono and show the ugliness they keep on trying to cover up with TARP.
Let's get this farce over with. This is like a patient with an infected wound. Instead of letting the infection spread by applying band aids we should just cut off the limb and move on.
On Jan 01 05:01 PM vloscomp wrote:
> It's very interesting to see the responses against the bail out;
> I guess every one here are millionaires or billionares except me,
> because the last time i look into my bank account i was not one.
>
> The issue is simple: help the little guy, one who has no money or
> qualifiy for a loan. I mean this is tax money right? and tax money
> is suppose to help the people? Who are the people? Apparently none
> of them are on this forum.
> Compare with the money the US Treasury had spend on AIG to this pitttance
> sum, then you can get the idea that "trickle down economy" is alive
> and well. The Bush administration had brought us to this point with
> their "hands off" and "trickle down" policies, and we are still continue
> make the same due dilligence for helping out the little guy.
>
> Sad day for America.
> From the little guy.
> Simple. No loans, no car sales. No car sales, massive unemployment,
> collapse of associated businesses, and more foreclosures.This is
> a TARP bailout. Gotta do it.... jegan
Hello, did you not know that GMAC consolidated 16 nationwide offices to 4 and sent the remainder of the jobs to the Phillipines and India. They have nothing to lose. They have sent the American taxpayers jobs to foreign countries and now the taxpayers are paying their bill.
As far as the beacons they are now accepting again. These are no different than the standards previously accepted by them. They raised the bar to force some sort of taxpayer assistance for themselves and GM. They are not considered subprime with those lending standards.
Paulson must love GMAC's announcement that they're lowering lending standards. TARP funds were supposed to provide liquidity to banks, declaring to the world that recipients are solvent, thenceforth stimulating lending activity. That last result hasn't transpired. Kudos to providing solvency, but I think TARP funds might be a band-aid concealing the wounds of severely crippled institutions; I somewhat prefer the well-planned triage approach.
Anyway, I couldn't help read their press release without thinking: 'lowered lending standards is one of the viruses that go us here in the first place!' I understand they need to amplify loan volumes to generate some revenue, but it sounds to me like GMAC, with the consent of the Treasury, is willing to risk an onslaught of defaulted loans in return for reviving itself and giving the Treasury some ST return for its investment/injection.
I would've preferred that GMAC maintain its higher credit-score minimum, but offer much lower interest loans... particularly in this ZIRP environment. If inflation does dawn, GMAC should've securitized and passed on these ZIRP loans. (Yes, securitization got us here too, but it's to be used as a hedge--as I've proposed here--not leverage.)
Your first problem is referencing your usual papers and blogs. The media, and the financial community, are remarkably uninformed about the auto industry and there are plenty of opinions out there but far fewer facts.
Here are some short answers to your questions:
1) I like this question the best. General Motors Acceptance Corporation (GMAC) has been a subsidiary of GM since its inception and its primary business is providing financing to GM customers, and more importantly to 70%+ of GM's dealers. GM sold 51% of GMAC to Cerberus to raise cash to fund the pension and health care VEBA GM negotiated with the UAW in 2007 and to try to protect GMAC's credit rating by isolating it from GM's debt. GMAC has never been an independent company, until last week. GMAC also has a division called ResCap (Residential Capital) that provided sub-prime loans and was minting $ until the sub-prime crisis. ResCap is bleeding badly, it destroyed GMAC's credit rating, and it as a result GMAC was running out of $ to lend. Ironically, GMAC set up a financial 'fire wall' between ResCap and the auto loan business to 'protect' ResCap. The 'firewall' has been the only thing keeping the auto loan business, which does not have a default problem, from being killed by the bad mortgages at ResCap. The auto loan business has always been profitable (GMAC had a problem with lease write-offs which is why they stopped issuing leases) and GMAC needs to issue more good auto loans to offset the bad mortgages. GMAC didn't restrict their auto loans because they were not profitable, they restricted them because they didn't have the $ to lend.
2) GMAC is simply going back to the policy they had in place prior to September. After they could not renew their lines of credit, they issued a new policy of only issuing auto loans to customers w/a 700+ credit score. Coincidentally, or not, Cerberus was negotiating with GM to swap GM's 49% of GMAC for Chrysler. Some believe Cerberus' move reflected GMAC's lack of capital, others suggest that Cerberus was putting the screws to GM to force them to take the auto company Cerberus no longer wanted. If it was ok to loan to people with a credit score under 700 (I assume 620 was the previous floor, but it may have been higher/lower) before September, why is it a bad idea now?
3) Who says the loans are going to go bad? The default rate for auto loans is much lower than for mortgages. Since there has never been a huge international market for packaged auto loans, like the bottomless market that used to exist for mortgage backed securities, the auto financing companies never got into the liar loan business. Cars always depreciate, unlike homes, so GMAC's auto loan business has never given out unqualified loans because they know they will lose $ if the loan defaults & they repossess the car. The sub-prime mess was built on the assumption that if the loan went into default in a year or two the house could be foreclosed and sold at minimal or no loss. This concept has never existed in the auto loan business. Offering loans to credit scores 620 and above simply goes back to a previous, profitable, model that does not unnecessarily restrict credit & loans.
Lastly, you seem to have a nice revisionist interpretation of the TARP. When Paulson was lobbying congress for the money the TARP was supposed to restore liquidity to the financial system by creating a market for 'toxic' securities like packaged mortgages, auto loans, & credit card loans. The $750B was supposed to be used to purchase these loan packages. It was only after Paulson had the $ that he changed his mind and started giving it to 'healthy' banks. Maybe you can explain how helping banks hide their mistakes with billions of taxpayer $ helps anyone except the bank execs & their shareholders.
It should be noted that the day after GMAC was approved and had access to the TARP, GM & GMAC announced new incentive financing to get people back into the car market. This approach worked well after 9/11 and hopefully it will have a positive impact again. It would be nice to see the banks and Wall Street put some of their taxpayer billions back into circulation.
BTW, what a great plan, pay the Treasury 8% and make car loans for 60 months at 0%, that seems like a brilliant plan for future profits.
usajobs.... In response. Yes. I am very aware of the migration of jobs outside of the USA. If you have ever come across any of my prior posts, you would note that Carly Fiorina (ex-CEO of HP/Compaq) and that gas-bag Larry Kudlow are high on my list of disgusting egomaniacs that are more concerned with the **concept** of free-market over the lives of the populace of the US.One of the most poignant exposes was a lady in the Midwest who lost her job to the local Wallmart store and when asked why she stilll shopped there, looked confused and said simply that she was on welfare and they had the best prices.
Sincerely hoping for the best in the New Year, but expecting more of teh same..... jegan
Not just to selfish people who think that they are all right because of their high credit score until their business fail beause of a lack of spending from people who have low credit scores.