One of the more dangerous conflicts embedded in the US auto bailout that was identified in the recent Congressional Oversight Panel report has been a TTAC hobbyhorse for some time, namely the tradeoff between GM’s success and that of its former captive finance arm GMAC (now known as Ally Financial). As we wrote back in May,
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.
Fast forward the better part of a year, and GM has indeed bought its own in-house subprime lender, leaving the COP to term The General’s lack of interest in taking care of “the Ally Tradeoff” as “disconcerting.” After all, with over 20 percent of GM’s equity and over 70 percent of Ally’s stick, the Government should have been able to work out some kind of deal that gets GM and Ally back on the same page… right? Not so fast, reports the WSJ. Ally turned down a $5b GM offer for its wholesale lending business earlier this year, and now it seems another deal may be in the works. But it has nothing to do with maximizing taxpayer payback, and everything to do with shoring up GM’s floorplanning credit. And it’s not coming from the government, but from GM’s newly-ubiquitous CEO Dan Akerson.
The move seems to be motivated by the same fundamental concerns as those that drove the GM-Americredit deal earlier last year, namely analysis from like this nugget from Morgan Stanley
Returning to captive financing is likely a prerequisite for maintaining U.S. market share over 20% longer term. While impossible to quantify, we believe GM is ceding hundreds of basis points of U.S. market share to competitors with integrated finance operations.
But GM CFO Chris Liddell has a serious concern that seems to stand in the way of a GM-Ally reunion, explaining
I am philosophically against having a $100 billion finance company attached to a $50 billion to $60 billion car company. In a [market] downturn, we might be exposed. It’s critical we have credit flowing through those times.
Which raises a very interesting question in light of the credit market’s recent escapades: is it better for an auto firm to take its up-and-down lumps on the open market, or to open itself for even more reward and risk by setting up its own lender which, if improperly managed, could become a driver of credit market failure as GMAC was? Obviously the question is as much about execution as it is about abstract principle (for example, Toyota’s $84b captive lender hasn’t been blamed for any of the company’s recent woes), but because GM seems to be most worried about foregone sales opportunities in the subprime sector, it seems safe to assume that we’re talking about some serious risk.
Meanwhile, with its own IPO planned for the near future, Ally has its own future to worry about. As Chrysler’s main lender, GMAC would lose much of its current business if it became an exclusive GM lender… and based on its relative product situation, it’s fair to assume that Chrysler might suffer even more from credit interruptions than GM. Which means that even a reunion between GM and Ally would not tie up the bailout’s loose ends and internal conflicts. Besides, if Americans are supposed to believe the copious hype around Detroit’s improved products, GM and Chrysler will have to stop blaming a lack of risky loans for their mediocre sales performances. Otherwise, taxpayers will have bailed out companies that must push more risky loans to survive… and the point of the bailout was certainly not to save America’s status as the world’s subprime auto leader.