Remember Baghdad Bob, the former Information Minister of Iraq? Well, Jim Press, Co-President of Chrysler, appears to have graduated from the Baghdad Bob School of Corporate Communications. On Friday, Press said it was good that Chrysler suddenly suspended vehicle lease financing and declared that dealers and customers should be happy.

Press blamed the current environment for the leasing suspension but didn’t say what in this environment was different from past environments. I think things are different because Chrysler is attempting to roll over $30 billion of short term debt that is collateralized by loans and leases and Chrysler’s creditors are reluctant to continue financing Chrysler’s leasing business. But rather than admit to what I think is the truth about Chrysler’s access to financing, Press decided to spout corporate “propaganda” that rivals anything uttered by Baghdad Bob.

The New York Times reported on Chrysler’s decision in its article titled Plummeting Resale Values Lead Chrysler to End Leases and included three quotes from Press that are discussed below.

  • Lease financing isn’t attractive because “low interest rates already have made financing more appealing than leasing”. Press suggests the illogical, i.e., that low interest rates don’t equally apply to lease and loan financing and therefore loan financing is more appealing. In fact, low interest rates tend to favor leasing over loans because leases have a higher implied unpaid principal balance than loans and a higher proportion of monthly payment are for interest. As such, low interest rates reduce lease payments more than loan payments. I think Chrysler’s problem is that it can’t borrow money cheaply enough to provide competitive leases because Chrysler vehicles have high residual risk that creditors don’t want to finance.  As a result, I believe Chrysler can borrow for loan financing more cheaply than lease financing. What Press should have said is that “for Chrysler vehicle financing is more appealing than leasing“.
     
  • “We really reached a point today, in this environment, where the economic advantages of leasing have really disappeared”. Ummm…is Press suggesting that the US and state tax laws have been secretly amended to eliminate the large tax advantages of leasing? There are two principal tax benefits that leasing provides. The first is depreciation tax benefits. Assuming a $30,000 vehicle is leased for 36 months and depreciates 50% during the lease term, the leasing company deducts $15,000 for depreciation which at a 40% tax rate saves $6,000 in taxes. If the same vehicle is financed with a loan the tax savings is lost (because individuals cannot deduct depreciation). What Press should have said is that “in this environment Chrysler doesn’t have taxable income and therefore can’t use the tax benefits from leasing”. He forgot the part about Chrysler not having taxable income. Second, sales tax is only paid on vehicle depreciation during the lease versus paying sales tax on the entire cost of the vehicle in the case of a purchase. Assuming a $30,000 car price and 7% sales tax, if the vehicle is purchased the consumer will pay $2,100 versus $1,050 if the vehicle is leased, or a $1,050 tax savings. For a vehicle costing $30,000 the total tax benefit from leasing is approximately $7,050. It is hard to understand what Press is talking about when he says that the economic advantages of leasing have really disappeared.
     
  • “Chrysler would offer discounts so that many customers who financed a vehicle would end up with about the same monthly payment that they would have had in a lease” Chrysler can’t offer discounts deep enough to make monthly payments the same for leases and loans. What Chrysler seems to be doing is replacing 36 month leases with 72 month loans. The 72 month loans will include down payments and upfront sales tax payments that are greater than the 36 month leases. Since 36 month leases have an underlying 72 months depreciation assumption, the “principal payment” on a 36 month lease is about the same as for a 72 month loan. And, the interest rate for a loan and a lease (other than provided by Chrysler) should be similar. Since the interest rate and the principal payment is similar for a 36 month lease and a 72 month loan, the combined monthly payment should be about similar and Chrysler can claim that it is offering the “same” monthly payment for lending as leasing.  I think Chrysler is betting that consumers won’t notice the larger upfront payments, the longer financing term and the fact that resale risk has been shifted from Chrysler to consumers.

While I was writing this blog post, the TV was on with car ads playing (I was watching VS and the Tour de France coverage). Chrysler, Honda, Kia and Toyota bought advertising while I watched. Strangly, all of Chrysler’s ads were pushing a lease package, not a purchase package (they were for the Sebring). Kia and Toyota’s ads were for leased and purchased vehicles and Honda was mostly without any financing package mentioned. I guess Press forgot to tell the advertising guys that the economic advantages of leasing have really disappeared.

Like Baghdad Bob, Chrysler had to put the best spin on defeat. Let’s hope that Chrysler’s credibility survives this propaganda campaign.