By on May 17, 2010

When we first heard that GM was eying a return to in-house financing, our first reaction was to worry that

the potential for falling back into old bad habits can’t be ignored.

Clearly our concern wasn’t wasted, as the AP [via Google] reports that The General’s major motivation for considering re-creating a captive lender is to chase subprime business its current major lender won’t touch. And considering that that lender is GM’s bailed-out former captive finance lender GMAC (now Ally Financial), which was badly burned by subprime mortgages, it’s not surprising that GM is frustrated by GMAC’s tentative approach. But should The General charge into the low-standard lending sectors where Ally fears to tread?

At the moment, GM’s window of opportunity for forming an in-house finance unit that could sweep up subprime business is as good as it is likely to get. Not only is the overall market for cars struggling to regain its footing after a disastrous 2009, Toyota has responded to its recent recall scandal by offering unprecedented incentives and finance deals. GM may be making money in this environment thanks to deep cost-cutting and a bankruptcy-rinsed balance sheet, but its volume isn’t increasing the way leadership would like to see, despite exceeding industry incentive-per-vehicle averages for all but one of the last 16 months .As a result, GM’s market share is remaining stagnant.

New product coming through development is ultimately responsible for improving volume and market share, but aside from the Cruze which launches this year, there’s not a lot of big-volume new products planned for release over the next 9-12 months. And that’s the timeframe for GM’s likely IPO, which will likely require a minimum of two back-to-back quarterly profits, and marked improvements in volume. Until the Cruze comes, GM has few other options for “moving the needle” in its business, except for targeting subprime buyers.

GM’s North American boss Mark Reuss points out that Honda gets 20 percent of its sales from subprime borrowers, whereas GM gets a mere one percent of its business from these riskier lenders (through April, GM has sold 659,475 units whereas Honda sold 331,597). Reuss says the difference is captive finance.

They’re able to finance their cars at a much lower level than we are. I’m not sure what the answer is. But it would sure help my sales, the company’s sales in North America, if we were able to get access.

Specifically, it will help sales soon. Credit raters Experian say 16 percent of all car loans in the fourth quarter of 2009 were subprime, a distinction it bestows on borrowers with credit ratings below 620 on its 300-800 scale. Though Ally won’t reveal how many subprime loans it approves now, it does disclose that only 12 percent of its Q1 auto business was in leases. Ally spokesfolks say that

As the financial crisis has eased and as the credit markets come back we have been able to broaden our offerings and look at the credit spectrum more broadly

But that’s clearly not happening fast enough for GM. Though Reuss stops short of admitting GM is pressuring Ally for more subprime business, he did indicate that the topic was “an area of opportunity.” But if government-owned Ally isn’t interested in underwriting GM’s volume gains with risky loans but also isn’t interested in seeing its auto lending business bought by GM, there’s trouble brewing. After all, that would leave GM with only two options: partnering with another bank, or starting a new captive lender. Either way, a new GM captive lender would likely force Ally into offering more subprime business anyway, or face losing its huge percentage of GM business.

Either way, GM’s understandable impatience with government ownership is pushing it into risky territory. And the dangers of redlining a car business through risky loans isn’t limited to the risk of default: brand degradation, falling resale values, and boom-bust bubbles all come with the territory. Which is not to say GM is incapable of handling more subprime business… but rushing into risky positions in order to goose short-term performance has been a consistent bugbear of The General’s.

And with state-owned Ally hanging in the balance, the political calculations won’t be easy either: should Ally be forced to sacrifice its most profitable business that GM might live to pull off an IPO? Or should GM forgo in-house lending, and struggle along without putting up the kind of performance that could inspire a successful IPO, until the next downturn forces another bailout? Meanwhile, what about Chrysler? In any of these scenarios, the taxpayers lose. And even if there is a way to get GM to fatten itself on in-house, subprime loans without killing Ally and Chrysler, there’s still the longer-term default risk inherent in the subprime strategy, which could also bring down the General in the case of another downturn.

There are no easy answers in this mess, but there is plenty of past behavior on which to predict future performance. History, with apologies to William F. Buckley, is standing astride General Motors and shouting “stop.”

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19 Comments on “GM Captive Finance Push Explained: The General Wants More Subprime Business...”


  • avatar
    tparkit

    …”there’s still the longer-term default risk inherent in the subprime strategy, which could also bring down the General in the case of another downturn.”

    Surely not. Try this, about Fannie and Freddie:

    http://www.msnbc.msn.com/id/37086504/ns/business-economy_at_a_crossroads/

    Here’s a snip to give the flavor:

    ——–

    “Fannie Mae said on Monday it would need an additional $8.4 billion from the U.S. Treasury. The two firms have now tapped about $145 billion from the government and the Obama administration has said it will backstop losses, no matter how high they go, through 2012… Under the terms of the government “conservatorship,” the firms have access to a separate, unlimited credit line from Treasury to backstop their losses.”

    ———

    In view of that, it’s hard to see why GM might have “impatience with government ownership” – the source of a cornucopia of benefits which include everything from an endless flow of cash, to a Transportation Secretary extorting $250 million from Toyota while beating the crap out of a major GM competitor. With all that behind GM, why wouldn’t the company sell cars to people who can’t actually afford to pay for them?

    Further along this theme, let’s keep in mind that GMAC is a holding bank, with too-big-to-fail access to Washington’s river of bailout money for the financial industry.

    That said, there’s one thing I’ll agree with Edward about: “In any of these scenarios, the taxpayers lose.”

    PS – Is all this bailing out a problem for an IPO? Not at all. “Investors” (especially the Fed+Treasury’s captive banks) will be looking to these federal guarantees of GM as part of their rich reward for taking this turkey off Washington’s hands while making the IPO look like a success. It will all be Goldman Sachs-style political theatre… the taxpayers will still be picking up the losses, the banks (and their owners) will be kept whole, and DC will declare mission accomplished – in the same sense that GM did when it paid back the taxpayers with the taxpayers’ own money.

  • avatar
    segfault

    Subprime lending sounds like a great idea. I’m almost certain no one has tried it before. GM could get in on the ground floor!

  • avatar
    Rod Panhard

    If you’ve followed the flameout of Harley-Davidson, you’d see that H-D closed a lot of sales in the past few years with subprime loans. They’d saturated the market of upscale buyers who could afford their products, so they expanded into the subprime market.

    It didn’t work out so well when the economy needed training wheels.

  • avatar

    10% of Americans are unemployed.
    17% (or higher) are underemployed

    With Hyundai, Nissan, Toyota and Honda offering $199 a month leases and $300 a month financing on many of their cars, just how is GM suppossed to compete?

    • 0 avatar
      Acc azda atch

      There are A LOT of people.. unemployed.

      Ive been out of the work for 6 months now (joining the average 10% in MD, DE, PA and NJ).. and the last thing I’d buy is a damn car.. from THEM, laid off from the Utility (Gas, Electric, Waste) field (drafting dept).

      But then again.. I have sense, intelligence and an 00 Accord with 230k running fine.

      I’d like to know… what kind of SMACK these yahoos are snorting.. to want to get back into the SUBPRIME MESS?!

      We need the bankers and the mortgage types.. to go call these bastards.. and go ask them how good of an idea is giving people who cant pay their bills.. a cheap car?!.. its a really bad idea.. all the way around, next the people at ally are going to be pushing ads for home refi’s.

      Seriously?

      Does no one EVER FUCKING LEARN!?!

  • avatar
    CyCarConsulting

    This is the old GM again. They lived off credit bandits for years along with Chrysler and Mitsubishi with disastrous results. Coupled with the poor resale values and over optimistic residual values, these games almost put Mitsubishi completely out of business. With Honda and Toyota a bit more prudent in their finance tier program it forced the credit challenged to run to the domestic market for a car. That is the pinch GM is feeling right now without the financing. If they think due to the unusually high resale values on domestic cars now, they can weather a new storm, I think they are mistaken. Used values are up due to the lack of overall car business and trade ins. What happens when all that changes?

  • avatar

    there are numerous other ways to increase sales that are healthier and more profitable.

    appropriate to picture Red Ink Rick the Rat Fink who destroyed the lives of so many GM loyalists.

  • avatar
    kablamo

    Ahhh GM, always repeating the same stupid mistakes; still run by financiers instead of car folk, still short-sighted.

  • avatar
    Steven02

    Why is everyone picking on GM for industry practice? Honda does it. Ford does it. Pretty sure Honda does it. GM can’t???

    When the subprime lending bubble burst, it was in mortgages that was the real problem. The homes were worth far less than the mortgages were on them. This didn’t happen with cars.

    With all of the cheap leasing and financing deals that other automakers are offering, GM is going to have to compete in subprime auto lending.

    • 0 avatar
      psarhjinian

      It’s not so much that it didn’t happen with cars. It happens all the time.

      Cars are a depreciating asset, and any car loan is, by definition, under water and going sub-prime is about the only way to make car debt palatable. Do you really want to be pay 7%+ on a depreciating asset that’ll likely turn into a money pit after the amortization period ends?

      Houses aren’t supposed to depreciate appreciably; that was what made the subprime mortgage crisis quite so horrible.

    • 0 avatar
      Steven02

      psarhjinian,
      Looks like I left out a few things of my post. You are exactly right. Cars are underwater, at least for the first few years that you own it. There has been some fluctuations with cars prices over the past few years, but these fluctuations were pretty small compared to the housing market that really tanked.

      Also, with the car market, the cars are expected to be underwater as soon as they leave the lot. This isn’t expected to be the case with the homes. They are expected to hold there value.

      GMAC had lots of money in subprime mortgages. It wasn’t the subprime auto market that hurt them.

  • avatar
    John Horner

    Note this paragraph from the referenced AP article:

    “For example, Honda Motor Co. gets 20 percent of its sales and leases from subprime buyers, he said. GM, on the other hand, gets only 1 percent because it can’t access the money to loan to those customers.”

    So, why isn’t TTAC lambasting Honda for getting 20% of its sales from sub-prime borrowers?

    • 0 avatar
      Tricky Dicky

      Could the reason be John, that Honda haven’t experienced a colossal bankruptcy in the last 12 months and have never had to reschedule or write-off any corporate debt? Isn’t this posting about how GM have an unreliable track record and could be in danger of repeating the temptations/ mistakes of the past?

      None of that exists when discussing Honda. 20% of US sales to subprime does sound risky to me, but there’s no evidence to suggest that this approach is lifting the axe over Honda’s head.

  • avatar
    mtymsi

    Is sounds to me like GM is just trying to regain the ability they had and all the other captive finance arms have, the ability to finance traditional subprime buyers. It is no secret that for at least 30 years that I am personally aware of captive finance arms would routinely finance subprime buyers that banks and credit unions wouldn’t touch. If as it appears GM doesn’t have this ability they are at a distinct disadvantage to everyone else. Depending on how you define subprime even by the most conservative definition it accounts for a lot of business. One thing to remember about subprime buyers is unless they are completely without money they pay their car notes simply because they must have a car. Not to say there aren’t defaults but the interest rate is high enough to make it a profitable business model. If it wasn’t profitable all the other captives wouldn’t offer it. The difference between 1% for GM and 20% for Honda tells the story better than anything else.

  • avatar
    Rday

    Honda and others that offer subprime financing do so at their own risk. And they continue to make money doing it. GM and Chrysler have lost their shirts when it comes to their financing practices. And now we taxpayers are going to have to underwrite their incredibly poor financing/management practices. GM and Chrysler need to struggle without more government support to get their act together. Is there anyone in their right mind that would trust the con men to be honest and actually go thru the hard work necessary to build their own brands. GM is still acting like the old GM and really hasn’t learned their lesson and probably never will. These guys should have been reorganized and not bailed out. Mark my word, we will have to bail out these turkeys again some day. Maybe by then there will be common sense politicians that will say ‘no’. But don’t hold your breath or count on it.

    • 0 avatar
      Steven02

      GMAC had problems from subprime mortgages, not so much the vehicle side of it. There were some problems with leases of large vehicles as well, but the bulk of it was from the mortgage business. Something that I believe the rest of their competitor stayed out of.

  • avatar
    jznzfs

    GM needs a captive finance company with a business model of 1979 or 1989…not the 1999 or 2009. BuickMan’s dad moved a hellvu lot of cars out of Brockport on “old” GMAC financing. We bought what we were capable of collecting.


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