GMAC's Bad Medicine: Rates Were Never the Problem

Includes: GKM, GM
by: Brian A. Davis

More good news for GMAC (NYSE: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!

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