Tax payer? 6 billion. UAW? Nothing. GM? Everything.
What a joke.
r8
By Brian Sullivan
Cheap and easy credit helped get the American economy into this mess, but apparently cheap and easy credit is going to get us out. At least that’s what General Motors is hoping, but the government-backed easy money may create more headaches than it cures.
Today the government agreed to give GM financing arm G.M.A.C an additional $6 billion dollars. It’s a move to help GM provide financing for consumer car purchases and comes on top of the $174 billion dollar loan provided to GM and Chrysler. The market likes this news and GM shares are on the rise, but will this meaningfully change the game for the company?
Tougher credit has been a part of the downward spiral of General Motors.
As the Journal article notes:
GMAC finances about 80% the wholesale purchases of GM’s cars by dealers world-wide. It has traditionally been the largest source of financing for the actual buyers of those vehicles once they reached the showroom. The car company said last month that a 45% sales skid for October was fueled by GMAC’s restricted lending, which cost GM anywhere from 45,000 to 60,000 sales in the month. About 25% of GM vehicle sales were financed through GMAC last month, down from more than 40% a year ago.
Credit is blamed for some of the pain, but it doesn’t mean that more easy credit will provide the solution either. There are some telling numbers that give a different view, one that mitigates some of the optimism around the GMAC announcement today. Let’s start with the size and scope of the numbers.
The $6 billion dollars GMAC received today certainly will not all go toward financing GM cars, but to make a point about what the money may mean let’s say that it does (and with GM’s announcement today that it is now offering 0% financing for up to 60 months on many cars the company is clearly covering more and more of the cost). $6 billion dollars used entirely for financing would pay for 200,000 vehicles selling at $30,000 each. While GM would love to sell an additional 200,000 cars and trucks, this is actually a fairly small number. Remember, even with November’s 41% drop in sales GM still sold 153,404 vehicles in the U.S that month. Clearly GM won’t finance 100% of the cost of a car, but even at lower percentages it is difficult to see how this additional $6 billion will meaningfully move the GM sales needle. $6 billion is real money, but for a company with hundreds of billions in revenue per year it is actually a drop in the financing bucket.
There are two other potential negatives here as well; more delinquent car loans and the continued destruction of the value of cars on the road by flooding the used car market.
With everyone fixated on home foreclosures few are looking at the auto-related problem: delinquent car loans and repossessions. According to lender Capital One Financial, nearly 10% of its car loans were late, with more than $100 million dollars being deemed uncollectable. Other articles note this trend is national, with more and more consumers unable to pay their car loans on time, if at all. Credit agency Experian notes that loans at least 60 days late have risen by 12.7% in November from last year’s same period.
Still, GM announced today that it will lower the required credit score of car buyers eligible for GMAC financing from 700 to 621. Credit scores, known as a FICO score, run from 850 down to about 350. 850 is considered perfect credit and anything below 620 is considered subprime. This is presumably how GM arrived at the 621 credit score figure for lending cut off. Credit has been available for people with credit score above 700 (about 55% of the population) but apparently those consumers haven’t been biting. So GM’s answer is to give credit - using government money - to the 25% or so of the population with credit scores just above subprime. (<-gotta love it)
Second, the car market is already saturated with cars for sale. Prices are weak as both new and used car dealers try to do what they can to move cars off the lot. Repossessed cars and cars coming off lease add even more inventory. Yet GM is doing its best to push new cars out the doors to borrowers who may end up becoming delinquent on the loan, sending more cars to auctions and onto used car dealers’ lots. This pushes prices down further, and the cycle begins again.
General Motors and its 6,000-plus car dealers need to sell cars to support an infrastructure built in large part on the 16 million cars sold as early as two years ago. They seem unwilling to accept the new reality that it may be difficult to sell 11 million cars in 2008, with Nissan predicting a similar sales figure for next year. Even if the lower credit score borrowers GM is tempting with taxpayer funded dollars buy a new car, the data from Capital One and other shows that about 1 in 10 are likely to pay that loan late or not at all.
We have too many foreclosed homes, we don’t need more repossessed cars in their driveways.
What a joke.
r8
By Brian Sullivan
Cheap and easy credit helped get the American economy into this mess, but apparently cheap and easy credit is going to get us out. At least that’s what General Motors is hoping, but the government-backed easy money may create more headaches than it cures.
Today the government agreed to give GM financing arm G.M.A.C an additional $6 billion dollars. It’s a move to help GM provide financing for consumer car purchases and comes on top of the $174 billion dollar loan provided to GM and Chrysler. The market likes this news and GM shares are on the rise, but will this meaningfully change the game for the company?
Tougher credit has been a part of the downward spiral of General Motors.
As the Journal article notes:
GMAC finances about 80% the wholesale purchases of GM’s cars by dealers world-wide. It has traditionally been the largest source of financing for the actual buyers of those vehicles once they reached the showroom. The car company said last month that a 45% sales skid for October was fueled by GMAC’s restricted lending, which cost GM anywhere from 45,000 to 60,000 sales in the month. About 25% of GM vehicle sales were financed through GMAC last month, down from more than 40% a year ago.
Credit is blamed for some of the pain, but it doesn’t mean that more easy credit will provide the solution either. There are some telling numbers that give a different view, one that mitigates some of the optimism around the GMAC announcement today. Let’s start with the size and scope of the numbers.
The $6 billion dollars GMAC received today certainly will not all go toward financing GM cars, but to make a point about what the money may mean let’s say that it does (and with GM’s announcement today that it is now offering 0% financing for up to 60 months on many cars the company is clearly covering more and more of the cost). $6 billion dollars used entirely for financing would pay for 200,000 vehicles selling at $30,000 each. While GM would love to sell an additional 200,000 cars and trucks, this is actually a fairly small number. Remember, even with November’s 41% drop in sales GM still sold 153,404 vehicles in the U.S that month. Clearly GM won’t finance 100% of the cost of a car, but even at lower percentages it is difficult to see how this additional $6 billion will meaningfully move the GM sales needle. $6 billion is real money, but for a company with hundreds of billions in revenue per year it is actually a drop in the financing bucket.
There are two other potential negatives here as well; more delinquent car loans and the continued destruction of the value of cars on the road by flooding the used car market.
With everyone fixated on home foreclosures few are looking at the auto-related problem: delinquent car loans and repossessions. According to lender Capital One Financial, nearly 10% of its car loans were late, with more than $100 million dollars being deemed uncollectable. Other articles note this trend is national, with more and more consumers unable to pay their car loans on time, if at all. Credit agency Experian notes that loans at least 60 days late have risen by 12.7% in November from last year’s same period.
Still, GM announced today that it will lower the required credit score of car buyers eligible for GMAC financing from 700 to 621. Credit scores, known as a FICO score, run from 850 down to about 350. 850 is considered perfect credit and anything below 620 is considered subprime. This is presumably how GM arrived at the 621 credit score figure for lending cut off. Credit has been available for people with credit score above 700 (about 55% of the population) but apparently those consumers haven’t been biting. So GM’s answer is to give credit - using government money - to the 25% or so of the population with credit scores just above subprime. (<-gotta love it)
Second, the car market is already saturated with cars for sale. Prices are weak as both new and used car dealers try to do what they can to move cars off the lot. Repossessed cars and cars coming off lease add even more inventory. Yet GM is doing its best to push new cars out the doors to borrowers who may end up becoming delinquent on the loan, sending more cars to auctions and onto used car dealers’ lots. This pushes prices down further, and the cycle begins again.
General Motors and its 6,000-plus car dealers need to sell cars to support an infrastructure built in large part on the 16 million cars sold as early as two years ago. They seem unwilling to accept the new reality that it may be difficult to sell 11 million cars in 2008, with Nissan predicting a similar sales figure for next year. Even if the lower credit score borrowers GM is tempting with taxpayer funded dollars buy a new car, the data from Capital One and other shows that about 1 in 10 are likely to pay that loan late or not at all.
We have too many foreclosed homes, we don’t need more repossessed cars in their driveways.
(Slow day at work) 
I still want my want my tax dollars back though
, but even if it wasn't, I'd have a very hard time with this.
