By on July 28, 2008

This is going to leave a marque.To loan money to its lease customers, GMAC borrows the bucks from large-scale institutional investors. The money is backed by assets: the leased vehicles. GMAC "investors" are scared shitless [parphrasing] by the huge drop in Chrysler and GM products' residual values. But as bad as that is, the REAL fear is that Chrysler or GM will go belly-up. Once an automaker files for Chapter 11, the value of the leased vehicles craters deeply and completely, leaving the bankers exposed to billions and billions of dollars of EXTRA losses. There are lots of implications to this announcement. For one, as reported yesterday, GM stands to write-off over a billion dollars in lost residuals– which they paid up front to GMAC. For another, GM owns 49 percent of GMAC. (Chrysler's owners Cerberus own the other 51 percent.) GMAC's exposure to the gap in residual values is around $3.5b. And another: Cadillac/Saab's inability to lease their vehicles is going to cost them BIG in sales and market share (GM's other higher dollar rigs will be hurt by a lesser but not inconsiderable extent). It's highly unlikely a third party lessor will step into the breach for GM, and Toyota/Honda/Nissan or any of the premium marques are not about to exit leasing. The key takeaway: GM's going to lose a ton of deals without leasing. Their decline and fall continues.

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23 Comments on “GMAC Leasing Debacle: Bankruptcy Fears Loom Large...”


  • avatar
    toxicroach

    Poor GM.

    Everyone who works there needs to polish up their resumes and GTFO.

  • avatar
    86er

    Now, is there a chance that a Wells Fargo, for example, will pick up some of the slack?

  • avatar
    toxicroach

    Not really. At least not with terms that are remotely as generous as the ones GMAC is offering.

    I mean, if GM itself is taking a bath on this, what bank is going to step in to this mess without a titanium ass cover? They’ll be estimating the residual so low that they can’t lose money if they tried.

    My prediction is that they won’t lease, they will try to sell car loans with ludicrously long terms to get the payments in the lease area. That might not appease the new car every 3 year guys, but it’ll capture the I-want-but-can’t-actually-afford crowd.

  • avatar
    gamper

    Linky??????? Anything to support this?

    You may be right, but this still seems like a “Wild Ass Rumor”. I for one have a very difficult time believeing that GM is getting out of the leasing business.

  • avatar
    seoultrain

    Your last bit about Cadillac/Saab is the reason why this whole thing spells doom. Sure, it makes sense to cut leases for SUVs. But to do it for near-luxury to luxury sedans is just foolish. Those cars get leased very often, and also tend to hold their value reasonably well. Especially that CTS pictured. This is going to turn a lot of people off of GM.

    Two thumbs down for Wagoner and Co.

  • avatar
    Pch101

    But as bad as that is, the REAL fear is that Chrysler or GM will go belly-up.

    I don’t know if that’s quite it.

    While nobody’s doing cartwheels over Chrysler’s and GM’s credit quality, I suspect that this has a lot more to do with the product type and the severity of the credit retraction that is rippling across the markets.

    We just had a period of abundant credit, and the market is quickly degrading as investors who used to buy debt products are out the door. This is causing a severe retraction and a flight to quality across the board.

    Even highly qualified borrowers are having difficulty obtaining money. When it comes to money, this is a lender’s market, not a borrower’s market. Interest rates are due to climb, and even well capitalized companies are going to have less access to borrowed money.

    Without money coming from sales or loans, companies are going to have no choice but to shrink. This will be true well beyond the automotive industry. GM and Chrysler are far from the only companies that can expect to be affected. We will need the oil bubble to pop soon in order to mitigate the damage; I suspect that it will pop, but not soon enough.

  • avatar
    AGR

    Its relatively easy for financial institutions to do “open end” leasing where the lessee is responsible for the residual value of the vehicle.

    In most instances only captive finance companies do “closed end” (walk away) leasing where the lessee is responsible for the condition but not the residual value.

    From the customer’s perspective its the manufacturer, the captive finance, the dealer that are the automotive experts and are the professionals to place/establish residual values for leased vehicles.

    Its easy to do “open end” leasing with very conservative residual values and place the risk on the lessee.

    Its also easy to play games of chicken amongst manufacturers to see who can raise the stakes by adopting higher and higher residuals to move iron.

    Manufacturers have known for years that the residual values were “ambitious” its not a surprise, its a game of which manufacturer has the biggest appetite for residual risk, and which manufacturer has the stomach to actually digest the residual hits.

    The residual risk appetite of 2005-2006-2007 is wreaking havoc with the residual digestive system of 2008.

    The message now is: “We are in the automotive business but we no longer have the appetite or stomach to deal with residual risk”

    The other message is: “Dear customer we will dazzle and blind you with an incredible up front deal”

  • avatar
    nonce

    You guys should have a web gadget that shows the running value of a 30-year GM bond. 57 cents on the dollar right now, I think, for the 2003 issue.

    You can spend $10,000 to get bonds that will pay you about $1470 every year for 25 years, and then $17,500 back in the last year. The stream dies as soon as GM goes bankrupt.

    That’s about a 15% yield. Feeling lucky?

  • avatar
    willbodine

    As bad as I think GM’s future is, I don’t think it’s analogous to past automaker demises like Studebaker or Packard. For one thing, it’s pretty likely that both Cadillac and Chevrolet will survive post bankruptcy. Perhaps as two seperate, independent marques, or maybe together in a “new” GM.
    Chrysler, however, is far more likely to follow the Studebaker example. And I think buyers are more than just a little bit worried that if they buy a Mopar now (even a Jeep), it might soon be an orphan.

  • avatar
    Happy_Endings

    Your last bit about Cadillac/Saab is the reason why this whole thing spells doom. Sure, it makes sense to cut leases for SUVs. But to do it for near-luxury to luxury sedans is just foolish. Those cars get leased very often, and also tend to hold their value reasonably well. Especially that CTS pictured. This is going to turn a lot of people off of GM.

    Regarding Saab, here’s this which could hurts sales. GM is reducing the length of the warranty from 5 years/100K to 4 years/50K for all 2009 cars. Could a sale of Saab be near?

    http://biz.yahoo.com/ap/080728/gm_saab_warranties.html?.v=1

  • avatar
    yankinwaoz

    A Canadian poster on a previous thread mentioned that balloon loans are illegal in Quebec. I think that the US states should take a long hard look at this too.

    The reason is the I think creative financing is going to start pushing balloon notes on people in order to get the monthly down. Then 4-5 years from now we are going to have a bloody mess on our hands from people who owe the balloon amount and can’t find the money.

    Based on recent events in the mortgage market, I think that the nanny state might be needed to protect people from truly suicidally insane finance deals.

  • avatar
    RetardedSparks

    Saab would already be gone of they could find a buyer. It’s got no product, GM burned whatever quirky, alternative reputation had historically guaranteed them 30 or 40,000 sales a year. Best thing they could do is give them to Subaru (who could make them their in-house luxury brand) as a “lovely parting gift” for whatever match-made-in-hell spawned the Saab-aru to begin with.
    As much venom as I’ve spewed Detroit’s way over the years, I am still stunned at how quickly this is all going down. I never honestly imagined the US customer would flee SUVs as fast as they did, even with $4 gas. With no product to sell, or even anything in the pipeline, the Big 2.8 are flailing around like a brontosaurus trying to swat a fly. It’s no wonder they have a new story every day – they are trying to convince dealers and investors that they are OK, but they have nothing to show, and wont have so much as a concept study for year…
    It’s like some fat guy just realized his walk-a-thon turned into a 100 yard dash. At first it’s funny to see him trying to run, but when he falls down and dies of a heart attack right there it the street it’s less funny, somehow.

  • avatar
    nonce

    Then 4-5 years from now

    4-5 years from now!?!?!?!!!11

    Who cares what happens then1?!!?!!

    Just kick the can down the road, let it be someone else’s problem!

    Oh hey, time for me to eat a gallon of ice cream.

  • avatar
    hltguy

    At least one new car dealer out here is offering 84 month car loans. Domestic cars.

  • avatar
    rtz

    “GM owns 49 percent of GMAC. (Chrysler’s owners Cerberus own the other 51 percent.)”

    That’s extremely insidious on a subtle level. I can’t quite put my finger on why exactly. Something about it lurks and hasn’t yet been fully realized.

  • avatar
    mel23

    A little tidbit: WSJ articles of a few days ago indicated that Cerberus was one of the owners of Mervyn’s which today announced they might file for bankruptcy. Today’s article says Cerberus sold their share for a profit.

  • avatar
    Runfromcheney

    Get your forks out boys, this is officially the beginning of the end.

    Remember the Jim Carrey film “Fun With Dick and Jane”? There is a scene where the Globdyne stock just starts freefalling until it hits $0 and the company goes bust. I have a feeling that this will end up being the same thing with GM, they will just go into freefall mode. With no leases from GM (but plenty of Toyota leases), GM sales will fall off of a cliff. They will eventually have to file. Sales drop to next to nothing, they go under.

    A past GM death watch (I think) mentioned that Wagoner will just wait for the plane to run out of fuel and fall from the sky. The plane is out of gas. Now we just have to wait for it to hit the ground.

    However, if Ford Credit can hang on and keep leasing vehicles, I believe that Ford will get a nice dead cat bounce.

  • avatar
    John Horner

    Indeed, will Ford be able to hang tough and stay in the leasing business? If so, they stand to get some of the business GM and Chrsyler will loose.

    Obviously the financially healthy Asian and European companies are going to get pieces of the pie as well.

  • avatar
    golden2husky

    It’s like some fat guy just realized his walk-a-thon turned into a 100 yard dash. At first it’s funny to see him trying to run, but when he falls down and dies of a heart attack right there it the street it’s less funny, somehow.…

    Thanks for the visual. But when you really get down to it, this is not funny at all. GM does deserve what they are getting; that is true. But just think what might have happened had they plowed those massive SUV profits into reinvigorating their car line. If all GM vehicles had reached the “CTS” level (not class leading but competitive), they would have had a unique opportunity. The “import only” fanboys are a lost cause; few of them would be open minded enough to even look, had GM invested in their cars. But most of those GM SUV buyers were satisfied with the quality of the product. They would have been quite likely to sample GM’s car offerings had they been a competitive product. Now those buyers are more likely than not to go Japanese. Kind of like the early 70′s. Most of those early adopters dumped their Japanese vehicles as soon as gas became plentiful. GM had one of its best years in 1978, and a great opportunity to show how good its vehicles had become. Unfortunately we all know about the horrors of late 70′s GM stuff. When gas got tight again in ’79, it was back to Japan, only this time around the cars didn’t disintegrate into rust piles. The die was cast and hasn’t changed since. Oh, to ignore history…

  • avatar
    Landcrusher

    Yank,

    Those balloon deals are not like mortgages. They come with an option to return the car or make the balloon. There is no penalty for turning in the car except for damage and mileage just like any other lease.

    I believe one of the reasons they created Smart Buy was that it allowed them to get around some state laws that made it tough to lease to folks that didn’t have an LLC or other business set up that could lease the car.

    Also, I believe many states force them to offer a refinance at no greater than the current payment for people who may want to keep the car.

  • avatar
    motownr

    FYI, open end leases tend to perform poorly at the consumer level in weak markets.

    Chasing consumers for the few grand at stake is not an economic proposition.

    Sadly, there is no true solution other than lower industry volume.

    In earlier days, we used to call it ‘pull ahead.’

  • avatar
    rtz

    The problem with Ford is they don’t have anything fresh and new. Flex was a flop. Edge was a precursor to that. Mustang is stale. Focus and Fusion have potential, but we’re talking about Ford here. Bunch of 90%’ers. Just won’t go that last 10%. The cars have potential; just not in their current form. They look nice enough, and appear to be built structurally good enough. So dull and boring though. Performance? No. Price? No. Economy? No. Anything nifty or special or unique? No.

    Maybe Ford was just a two hit wonder? They had the Model T and the phenomenal original Mustang(64.5-73).

    Some might say and try and claim F150 and/or Taurus. But I say no, not really. Nothing special.

    Chevy at least has Camaro and the Volt. Chrysler’s last shot was the Challenger(Fitting?). Nothing but more of that 300 ilk and all it spawned(Chargers and Magnums and what all).

    I about puked when I saw how much the Camaro weighs. Disgusting. A big heavy American saloon car. How can one expect for it to “handle” well? This same handling crowd are the same ones who would dock this vehicle for having a “chuck wagon” or truck axle if it had one. Instead though, they got their weak and useless front wheel drive reminiscent IRS so they can under steer these tanks right into the ditch. Cars like this are only good for drag racing and need a strong differential for that. It’s beyond easy to double or triple a cars horsepower for not a whole lot of money. Takes some money to upgrade the rest of the drive line to be able to be reliable to support the increased power. If you ever put a decent pair of tires on this car; you’ll snap an axle.

    But the point is mute. Remember when they stopped selling the Camaro the last time? Said it didn’t sell well? Recount the price of it at the time. The very group of people who would have bought that car could no longer afford too. Watch that be the case all over again. The initial group will get theirs then watch sales fall off a cliff. Besides, it looks just like the Challenger!

    Going to lunch today with two others, one saw the Challenger on display and said “I thought that was the new Camaro this morning when I first saw it! It looks just like it!”. And it does.

    So about five years ago, GM started advertising this Camaro, and somehow, Chrysler beats them to market with an identical looking car?

    I personally don’t think any of the three are going to make it. They just don’t have the product and they just don’t have it in them anymore.

    Twenty or thirty years of doing their customers wrong; their not going to outlive this one.

    First of all, they build a piece of junk, sell it at a high price, have one go through a miserable experience at the dealer where they are swindled and robbed for all they’ve got, then have repeatable miserable and expensive trips to the service department because of the vehicle. Everyone’s owned them, but no one has forgotten them. Anyone who lived through the 1980′s remembers what it’s like to own a domestic vehicle. Things really haven’t changed all that much.

  • avatar
    Busbodger

    Maybe our automotive attentions spans are far too short. Instead of a product that gets stale in four years, maybe we ought to learn to appreciate designs that last ten years or more with minor tweaks and improvements.


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