That’s actually not true. Leasing has had broad appeal to a wide demographic. SUV’s had higher than average lease rates across the industry (something more than 20%). As a vehicle class, they tended to appeal to higher income earners who were willing to get trucks that often carried luxury and near-luxury price tags.

The point, though, was that anyone would have trouble right now getting great leasing terms for an SUV, whether that’s Cerberus or you and me.

The problem for Cerberus’s creditors is that is that they aren’t going to lend money to support Chrysler’s leasing program if they can’t reasonably predict the vehicle’s future values. Factor in a global credit crunch, and it’s understandable that it would be difficult to attract money to bankroll the leasing of unpopular vehicles.

Since Cerberus isn’t going to put their own investor money into it, they are going to pull the program because leasing would only lose them money. Cerberus’ priority is cash flow, not moving units at a loss.

If the consumer wants to lease a Caliber, the dealer should be able to work something out through a third-party leasing company. It won’t be a subsidized lease, so the terms may not be great, but the option will likely be available to someone with decent credit. But getting a lease for an SUV is going to be difficult, if not impossible, and they are going to need even larger incentives to sell them.

There are plenty of indications that Chrysler is in trouble, including falling sales, rising inventories and a lack of popular vehicles. This leasing cancellation just may not be one of them.

I’d say that it’s more of a byproduct of having too many SUV’s and trucks in their portfolios than it is about Chrysler per se. Since creditors don’t want to provide leasing money for a fleet of gas guzzlers, and since Cerberus wants immediate cash flow, they’re going to have to sell them instead. I wish them luck, because God knows, they’re going to need it.

A whole lot of people are looking very smart right now for having leased their SUVs and monster trucks. When the lease is up they turn it in and are done with it.

I would assume that most people in this demographic don’t lease. That is, if they had any financial sense, which a perfect credit score might indicate. I know lots of people with high incomes and no financial sense, and probably a crappy credit score (once their house gets foreclosed on).

To get close to a typical 36 month lease rate, ceteris paribus, CLLC is pitching a buy at 60 months. Typical customer will be underwater almost until the end of the contract….that’s sure to help sales.

Leasing was a wonderful tool to ‘juice’ consumption…but like any kind of financial leverage, it plays both ways.

The reason that they are unhappy, though, is primarily because of the product type.

With a lease, a customer is basically renting the car based upon some projected amount of depreciation, paid for at a given interest rate. Clearly, the leasing companies who are now holding SUV’s and trucks in their portfolios are getting killed, and nobody with any accuracy can predict the bleeding, which makes them as good as poison.

Even if you had a perfect credit score and high income, you would have difficulty obtaining an SUV from a third-party leasing company that would make any financial sense, because they would have to assume the worst on depreciation and jack up the payment accordingly. The more depreciation that there is, the higher the payment, and the worse it is for you.

At a higher level, Cerberus faces the same problem — their creditors don’t like the uncertainty of the residuals, either. So the money gets expensive, and since Cerberus doesn’t want to use its own money to support the leasing (the returns are too low and future residuals too uncertain), it’s going to punt.

Step back, and the future is clear — rebates on these types of vehicles are about to climb even higher than they have been, particularly for the 2.8, and residuals are about to take another hit. For those in the market to buy an SUV, I’d wait a few months and see what happens.

Ten months ago, I went lease shopping. My business favors leasing, so I was interested in a set term and returning the car.

I was amazed when the lease prices for a loaded 300 were HIGHER than that for an E-Class. It was explained to me by the manager that “they want to sell these cars, not lease them”.

Oh well…..clearly the banks know something we don’t.

So it’s looking like we might be into what they said they wouldn’t be able to deal with.

Link to article about the letter:

http://www.detnews.com/apps/pbcs.dll/article?AID=/20080216/AUTO01/802160349

I’ll remember that. Very appropriate re. Bill Gates who’s grinning face irritates me no end. And I wasn’t even in any way connected to the many who were driven out of business by his illegal marketing practices. His hide was about to get nailed to the wall when Ballmer had a meeting with Cheney and presto, the antitrust suit was dropped.

If that were the case Capital One would probably be the largest title pawn company in the world. Unfortunately, since they are incorporated with a bank, they actually have a lot of limitations.

“has minimal fixed costs”

Biggest myth in the business. Capital One requires a lot of people in order to succeed in their work. Contrary to what most people assume (a bunch of guys working on a computer model and a few sales people), the actual business requires a substantial number of employees.

“and a fire-at-will employee base.”

This is true but it cuts both ways. C1 has sometimes replaced divisions or unique functions and had it turn out very badly (internal IT, call centers, collections). It takes years to rebuild that competency and has cost them many, many millions.

Also keep in mind that most of Chrysler’s financing activities are run by white collar employees who can also be ‘fired-at-will’ given that they’re located in a right to work state. On the flip side, Capital One usually gets only about 90% of what Chrysler gets at the dealer auctions due to the stigma of repos vs. certified models.

Trust me. If it were easy and financially viable, they would be doing it. Nothing motivates careless short-term decision making better than trying to meet the next quarter’s earning expectations.

There is an old saying: “Behind every great fortune hides a great crime.”

Not always true, but often enough so that the saying lives on. Using influence in Washington to make money is a very, very old game.

Great posts.

Agree on the Cerberus vision, as confirmed to me by someone who bid against them for various auto assets.

I’d add that the weak link in the execution of this vision is the supplier base: unlike retailing or consumer electronics, the auto industry’s supply base is horribly undercapitalized, frayed, and generally unable to withstand any more exogenous shocks. The changes in volume hitting them may be sufficient to force many of the them into chapter (again), and have a domino effect that ultimately pushes the Big 3 into pre-packaged restructurings.

So they might well not lose anything on this deal unless the space stays vacant for an extended period. Hard to see how they can come out positive on the GMAC deal though. One thing that’s always puzzled me about Cerberus is the involvment of John Snow and Dan Quayle. There is nothing in either of their records to recommend them for a serious job AFAIK except their political connections, which would seem to lose significant value unless the Republicans can make a comeback in the next few months. But I will not be at all surprised to see a bailout of Cerberus in some form by guess who.

I love that analogy

Capital One has an almost infinite number of choices about where to risk it’s money, has minimal fixed costs and a fire-at-will employee base. Chrsyler, on the other hand, has the extraordinarily high fixed costs of a heavy manufacturer and contracts with unionized labor. Chrsyler absolutely has to move the metal to keep going. Ditching leasing is going to give them even more difficulty moving the metal than they have already. This is a desperation move which a company in their situation makes only when they have no other choice. There is no way to spin this into good news for Chrysler or brilliant managerial deep-thinking.

0% finance,Zero down and 120 month terms. We forgot a lifetime power train warranty…Sure, we will be around to honor it.

It’s called the “time value of money,” (Google that term, you’ll provided a lot of explanations for it) which basically says that it’s better to get a dollar today than it is to get a dollar tomorrow because if you had it today, you could do something else with it in the meantime.

Private equity investors typically want to make 20-30%. Those sorts of demands obviously can’t be achieved from leasing if the typical unsubsidized lease generates something in high single digits to low teens, and if the subsidized leases earn less than that or earn nothing at all.

Cerberus would have to do something else really spectacular to make up for the drag created by leasing, and as you can guess, they probably have more than enough problems hitting their numbers already to bother with that.

Another context for this is that private equity firms commonly employ outsourcing as a strategy. They get the acquired company back to its core functions, get rid of the stuff that doesn’t matter, and then outsource the rest on the theory that an outside party can do it better and cheaper. Outsourcing a low-return product such as leasing, as they are effectively doing here, would make perfect sense to someone who views the world in this way.

My theory about the Chrysler acquisition has always been that it was not intended to be a strip-and-flip but that Cerberus wanted to outsource a lot of major functions, such as design and manufacturing, and to focus Chrysler instead on branded retailing and distribution.

In theory, that would dump a lot of the risk onto its vendors and partners, greatly reduce their overhead and create very high returns for the investors because the cost of managing an operation structured like this would be lower than anyone else in the industry.

In practice, I think that this brilliant plan will prove to be mildly disastrous, because it isn’t easy to outsource these kinds of functions for products as complicated as automobiles. As we can see, Cerberus’ efforts to create effective partnerships are going very slowly, and they could come close to running out of cash before they can implement them, particularly if their cost of borrowing goes up a lot.

I’m guessing that Cerberus saw an opportunity to reinvent the entire automotive business, but like the mad scientist gone awry, they have inadvertently created a monster that is angry, hungry and turning on its master. If things go badly enough, this may lower their credibility to the point that they may end up being out of the PE business.

That may be. Still, you’re mixing apples and some other fruit here.

First, all sorts of department stores frequently have sales that feature clothes at steep discounts, it’s a typical business model used by companies whether they are successful or not. The use of sales to move inventory is in and of itself not a sign of trouble. That doesn’t mean that Mervyn’s is doing brilliantly (I wouldn’t know, I don’t follow them), but only that you can’t draw any useful conclusions from that particular information.

Second, if you understand how PE funds work, then you know that most of the time, these investments are all separate holdings with different investors who provided most of the money.

While it may suck for Cerberus’ management to have a few eggs on its face (GMAC, Chrysler, and I guess Mervyn’s), and while it may even drain them of some cash, this doesn’t necessarily matter much to those investors who have money in other Cerberus deals. The folks who have their money into Air Canada or whatever else they own may not be affected much at all, because their eggs are in a completely different basket. The fate of Mervyn’s and Chrysler are most likely not directly linked.

At Capital One Auto Finance, we played with the idea of leasing for a long time. We decided against it due to the following…

1) On a price basis we simply couldn’t compete with the manufacturers. At the time (post 9/11) the overwhelming majority of leases were done at a loss and the volatility of the market was far worse than the 1990’s.

2) We differentiated who we will finance to by the brand of the dealership. We would finance any Nissan, but no Kia or Mistubishi regardless of the demographics for that model.

Leasing, like financing, is simply one of those items where you simply can’t cut a line between offering one model and not another. In the case of Chrysler, the predominant majority of their vehicles are trucks. While the cars have been exceptionally poor sellers and fleet queens. They simply don’t have the produt foundation across their product lines to make viable leasing options a reality.

Leasing is going to make a comeback for the simple fact that many folks simply can’t afford to finance a vehicle during a recession and ‘want’ a new fuel efficient vehicle.

Look I state the obvious here only because I think everyone is getting their undies tied in a knot over this story: the residual values on certain types of leased vehicles SUCK. I don’t have to tell which ones. The residual values on certain Toyondassans don’t suck as bad, but they still SUCK. So if your company leases a lot of trucks and you are losing money when they come back then maybe it’s a good idea to stop this. No doubt, the finance sector of Cerberus business is not good right now and they probably couldn’t get the credit terms they need if they continued this insanity of leasing. So what? This is not the automotive apocalypse some have been predicting.

The conclusion that some of you have is that it’s bad to stop doing something that you are losing money on. But if they continued this and offered 0% financing and financing to “anyone with a pulse” some would say that’s bad too. So which is it? Do you offer financial terms that you will lose your shirt on or stop the madness and take a hit on sales? You damned if do and (more) damned if you don’t – just like with rental fleet sales.

Here’s a thought: what if Chrysler doesn’t have to “move metal” no matter what to stay in business? What if their situation is different than GM’s? All we know is they have an estimated 8-10 billion dollars. If the figure is accurate then you have to calculate the burn rate. That’s all that matters.

Now leasing is something that I can actually claim to know something about. I have never leased a vehicle (I don’t think I ever will). But I worked for a company that was in the leasing the business. I said was. I was a programmer analyst for the largest (private) Toyota distributorship in the country. The company had several major divisions including parts, auto chemicals, and the highest selling Lexus dealership in the country. They had a finance and insurance division that floorplanned the Toyota dealers and insured the cars and poperty. The finance division also was a third party leasing agency. That was the system I was responsible for. Everything was going fine until after 9/11. There was a glut of cars coming off lease and the residuals were not what the company had anticipated. Although they provided leasing for many makes of vehicles, many of these vehicles were Toyotas. One day they had “town hall” meeting with all of IT and announced that they were getting out of the leasing business. Just like that. And this company was making billions of dollars. They could have carried any losses from that aspect of the business with ease. Instead they got out. I knew my days were numbered and sure enough not long after that I was laid off along with about 40 other people as they were consolidating data centers too. And that was from a company that was making a profit.

So don’t be shocked that a company that is losing money does this. This is no different than trying to get out of massive rental fleet sales. Cash burn is all that matters. Before Cerberus gets to zero they will sell Chrysler (in whole or in part). Gm and Ford can’t be sold to anyone.

“Nobody is saying (at least here) that Chrysler is doing fantastically well, but there isn’t any reason to believe that there is only one single way to interpret the news, particularly if you have a knowledge of how these types of entities tend to operate.”

Well said Pch101.

“Cerberus is having its issues, but you can’t use sales at Mervyn’s as an example. Successful or not, there will always be an 50% off rack at most department stores, it’s just a part of how they do business.”

OK, you have now made my list of commenters who actually know something about business.