Treasury Makes Subprime Auto Loans

One day after the treasury (taxpayers) injected $6 billion into the failing auto industry GM, GMAC ease lending rules to entice car buyers.

General Motors Corp and its GMAC funding affiliate launched programs on Tuesday to lure U.S. car and truck buyers back into showrooms as the largest U.S. automaker tries to revive its sagging fortunes.

GM began offering zero-percent financing on some models, and GMAC resumed lending to a wider range of potential customers, after the government said it will inject billions of dollars to help ensure that both survive.

Through January 5, GM will offer zero percent to 4.9 percent financing on loans of up to five years on some 2008 model-year vehicles, and 3.9 to 5.9 percent on some 2009 vehicles. Many of the vehicles also carry cash discounts of $500 to $4,250.

GMAC, meanwhile, will extend loans to retail buyers with credit scores, known as FICO, of 621 or higher. In October, it had restricted loans to borrowers with scores of 700 or higher.

Many analysts consider borrowers with credit scores of 620 or lower to be "subprime." The median U.S. credit score is 723, according to Fair Isaac Corp's myFICO unit.

"The bottom line is much better access to funding," said Mark LaNeve, GM's vice president for North American sales, on a conference call with reporters. He said GMAC may now be able to fund 75 to 80 percent of new vehicle purchases, up from 40 percent since October.

The bottom line is more taxpayer risk. Of course GM will proclaim those are "prime" loans because they are 1 FICO point above the minimum. This is the lipstick on a pig play once again.

Elephant In the Room

I discussed the bailout yesterday in Paulson's $6 Billion Foot In The Door Play. Today the Treasury upped the taxpayer ante by offering subprime auto loans with our money. But only so many cars will be sold, period. And with the massive overcapacity issue, and near-subprime lending, taxpayers are further at risk.

Kevin Depew on Minyanville discusses this situation today in Automakers, Banks Ignore Elephant In the Room.

Ordinarily, when a business/industry fails from poor management and/or (in the case of the banks) overleveraging, what happens?

You know what happens intuitively, even if you've never opened an economics
textbook. It is very simple. Entrepreneurs, seeing the mistakes made by those business/industry operators, rush in to start competing businesses to 1) take advantage of the weakened competition, and 2) operate the business better than the competition having the benefit of seeing their mistakes.

Under normal circumstances, this process happens in every industry. It is the normal cycle of capitalism.

But look at what is happening now. Are there any entrepreneurs setting out to start automotive manufacturing businesses? What about entrepreneurs setting out to charter new banks? You already know the answer to that. The question, then, is why?

First, and most important, it is because the business models within those industries have failed. Second, because the government (taxpayer) has now stepped in to prop up those businesses with their failed business models, it is no longer economically viable for an entrepreneur to try and compete with the government even if the entrepreneur has a better business model. Third, even if it were economically viable, the government is installing roadblocks via the FDIC and other agencies to purposefully make it difficult for entrepreneurs to compete against the failed businesses in those two industries.

Make no mistake, the inevitable outcome will be failure. What is taking place is the extension of that failure to a decade or more. That is what the government is purchasing with the bailout monies; an extension, life support, even though death is inevitable. Why? Why would government do this? Because those who are demanding the monies and the extensions have more political clout than you do.

The more money wasted on stupidity like this, the longer the recession, and the slower the recovery. There is only so much capital, and using that capital to keep failed business models alive is sickening.

Addendum:

In Paulson's $6 Billion Foot In The Door Play I asked the following question: "How much GM and GMAC bonds is First Pacific Advisors sitting on?"

That question was in response to a quote in the Bloomberg article I was referring to.

“This is a good start by the federal government,” said Thomas Atteberry, who helps manage $3.5 billion in fixed-income assets at First Pacific Advisors in Los Angeles. Still unknown, he said, is whether the government cash will “make it palatable for new investors to come in.”

I was cynical because there have been instances by PIMCO and others positioning for a bailout of Fannie and Freddie then asking, almost demanding a bailout.

Tom Atteberry just pinged me with this:

I can understand your cynical comment asking how many GMAC bonds does First Pacific Advisors own. As a partner at the firm, Co Portfolio Manager of the FPA New Income Fund, and Portfolio Manager for the firm's fixed income accounts we do not own any GMAC or GM bonds nor have we owned them in the past. As an aside the reporter for Bloomberg asked me the same question. I assume because my answer is none he felt no need to mention that fact in his article.

Our firm is not a proponent of government bail outs of private industry which in today's society is a minority view. If the government decides to bail out an industry the least it can do is set the situation up where it could attract private capital and thus enable the government to exit the transaction. In the case of GMAC I doubt that will happen. In the case of AIG the government at least asked the CEO to leave. In this case there is no management change request or new board.

In both cases the management and board of GMAC ran the company into the ground. I would submit that the same is true for GM. I am surprised to see little mentioned about a strong need to replace management. Under new management maybe new private capital could be attracted to the company. With the same old management in place that created the problem why would a new investor put a dime into either company. Finally we should be asking the question why was Cerberus allowed to continue to have an equity stake. At a minimum the taxpayer or a new equity owner should be put in place and the Cerberus position reduced to "0".

Thanks Tom.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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