The Truth About Cars » Ally The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. Mon, 28 Jul 2014 21:27:46 +0000 en-US hourly 1 The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars no The Truth About Cars (The Truth About Cars) 2006-2009 The Truth About Cars The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars » Ally GM Financial Double Crosses Their Ally Mon, 13 May 2013 12:30:26 +0000 GM-Establishes-GM-Financial-1024x539. Photo courtesy GM Authority.

Following in the footsteps of Spanish bank Santander, GM Financial announced that it would enter the prime lending market in 2014.

SNL Financial, a subscription-only financial news service, reports that

General Motors Financial Co Inc officials said on a May 2 conference call that the company plans to launch a prime retail product in North America on a limited basis with an initial focus on General Motors dealers with which the captive finance company maintains a commercial lending relationship.

GM Financial, formerly AmeriCredit, was acquired by GM in 2010 to provide leasing and subprime financing options, alongside Ally Financial, which absorbed the former GMAC. While GM Financial claims that they don’t want to become the “predominant” prime lender for GM dealers or “supplant the banks and other providers in this market,” CEO Daniel Berce said the move would help achieve “strong growth in our earning asset base over time.”

Given GM Financial’s portfolio, it’s not hard to see why Berce is eager to transition to prime lending and see some growth in its earning asset base. In 2012, 85 percent of GM Financial’s portfolio was subprime, while delinquencies grew by $200 million, to $933 million according to its latest SEC filing. Meanwhile, GM Financial’s prime customers are said to have default rates in line with the industry average. Small wonder that the firm is looking to capture more of these lenders and eliminate some risk from its subprime-heavy portfolio.

Subprime aside, the move into prime lending will help GM Financial transition into a full-fledged captive financing arm. In addition to offering lending services to consumers, GM Financial also offers commercial lending products for its dealers. SNL reports significant expansion in these areas for GM Financial

GM Financial’s lease originations for GM vehicles of $620 million in the first quarter marked a sharp increase from $384 million in the year-ago period; the captive is a full-spectrum lease provider for its parent company. GM Financial also reported $882.7 million of commercial finance receivables as of March 31, up from $560 million on Dec. 31, 2012. The company rolled out the commercial loan products in mid-April 2012.

With Chrysler forming their own captive arm with Santander and GM Financial’s expansion, Ally stands to be the biggest loser. According to SNL, their commercial floorplan financing business saw a 3 percent decline in Q1 2013 versus the same period last year, and both Santander and GM Financial will undoubtedly take a good bite out of Ally’s consumer lending business, which previously targeted Chrysler and GM buyers. Ally’s President, William Muir, was rather blunt in his assessment of the Chrysler situation, stating “pure subvented business from Chrysler should go to zero pretty quick”.


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97 Months And Running Mon, 15 Apr 2013 11:00:14 +0000

8 years to pay off a car? A report by the Wall Street Journal claims that in Q4 of 2012, the average car loan stretched out to 65 months, or just over 5 years. Loan terms were being stretched out over increasingly longer terms too, with credit firm Experian reporting that nearly 1 in 5 car loans had terms between 73 and 84 months long, with some stretching for as long as 97 months.

So why stretch out loans for such a long period of time? Per the WSJ

“[the] 75-month loan illustrates two important trends rippling through the U.S. auto industry. Rising new-car prices and competition among lenders to attract borrowers is pushing loans to lengthier terms. In part, banks see the longer terms as a way to attract buyers, by keeping monthly payments under $500 a month.”

Among the culprits cited by the WSJ are increased credit, low delinquincy rates on car loans and, according to banks, minimal downside as far as auto lending goes.

Melinda Zabritski, director of automotive credit for Experian, said the greater availability of credit is helping the surge in new car sales. The percentage of subprime loans isn’t far below the record level of 2007, and the length of loans is growing, she said…With increased competition between the banks for business, offering loans longer than 72 months, or subprime loans is one way to compete for new borrowers. “Consumers tend to be monthly payment buyers. One way that lenders compete is to offer longer term loans,” Ms. Zabritski said.

Interestingly, Zabritski claims that buyers qualifying for the longer loans tend to be those with good credit scores buying more expensive vehicles. But what nobody answered is “where is all this credit coming from?” As per our last report on auto lending, the appetite for auto back securities is enormous, and Wall Street cannot get enough of them. Sub-prime loans in particular are a favorite. At this point, nobody, not even Zabritski, is denying that the expansion of credit for automobile buyers is driving new car sales. The question is, what happens when the music stops?

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How A New Generation Of Sub-Prime Auto Financing Could Cause Another Catastrophe Fri, 05 Apr 2013 14:40:53 +0000

March was the 5th straight month of a SAAR above 15 million vehicles.  Industry analysts have explained the strength of the market in a number of ways. The need to replace older vehicles is one (new car sales were hit hard during the recession as consumers held on to their vehicles for longer. This also caused used car prices to skyrocket, something TTAC has been documenting), while others have cited increasing fleet demand, and the desire to replace vehicles damaged in Hurricane Sandy.

But one factor that is just starting to get attention outside of TTAC is sub-prime financing. Sub-prime lending, which involves giving high-interest loans to customers with poor credit scores, is driving the SAAR in a big way, by letting buyers with poor credit purchase new cars. In turn, the sub-prime bubble is being driven by Wall Street, whose clients cannot get enough of financial instruments backed by sub-prime auto loans.

On the surface, it seems unbelievable. Unemployment is at 7.7 percent, and even higher according to some pundits. Taxes are going up, wages are stagnant, the economy hasn’t really recovered according to many. And yet auto sales – for many people, the second biggest purchase they’ll ever make – are on a hot streak, rebounding back close to pre-recession levels.

Sub-prime loans, defined as a loan given to anyone with a credit score under 660, are now bigger than ever. In Q2 of 2012, new car sub-prime loans accounted for a quarter of of all loans, while 56 percent of used car loans went to sub-prime buyers.There’s even a new category called “deep subprime”, for auto loans issued to buyers with credit scores below 600. These loans account for nearly 11 percent of all car loans, despite the fact that a 600 credit score is considered abysmal.

A recent Reuters report detailed the usual routine of a sub-prime loan; a borrower with a poor credit rating is approved for a loan, often carrying an exorbitant interest rate hovering around 20 percent. In the Reuters story, the buyer agreed to finance a $10,000 2007 Suzuki at 21.5% interest using a shotgun (valued at $700) as his down payment. The buyer, stretched thin by various debts, including the car loan, ended up declaring bankruptcy. Another report by the Los Angeles Times outlined how unscrupulous used car dealers would issue sub-prime loans, knowing that their customers would default, wait for them to default, and then repossess the car and re-sell it, repeating this process over and over again.

In addition to the decreasing credit scores of car buyers (The Motley Fool reports that the sub-prime buyer’s average credit score dropped 9 points in 2012 compared to 2011), monthly payments have stayed static, due to 77 percent of loans lasting for longer than 5 years. This tactic allows buyers to manage the same monthly payment but borrow a greater amount, and thus able to afford a more expensive car without feeling more of a hit to their pocketbook.

Extending loans to unqualified buyers wantonly would seem like a poor business practice on the surface, but the demand for sub-prime loans isn’t just coming from consumers. Wall Street is also playing an enormous part in the practice. According to the New York Times, growth in securities backed by auto loans has been enormous. In 2008, investors bought $2.17 billion in auto loan securities. In 2011, that figure exploded to $11.7 billion.

The rationale behind the massive growth in auto loan securities can be linked to the Federal Reserve’s policy of Quantitative Easing. QE, which involves buying bonds and Treasury Secuities en masse, has injected liquidity into the market and kept interest rates artificially low. This has allowed banks to charge near-record low interest rates on all car loans, while also reducing yields on traditionally safer investments like bonds. Sub-prime car loans, packaged and sold into securities, are seen as riskier, albeit with the potential for greater return. And with hedge funds and institutional clients looking for a greater return on their money, auto loan securities have become the instrument of choice for a number of entities – even Google is investing in these instruments, after being frustrated by low returns elsewhere.

And just like the 2008 mortgage crisis, these sub-prime auto loans are being packaged and sold as AAA rated bonds. As the Los Angeles Times reports, the number of loans packaged and sold as a securities is in the tens of thousands. The thinking goes that even if some of the loans are delinquent, there are plenty more that will make the security safe. And like sub-prime mortgages, the securitized auto loans are being divided up into tranches, with demand for the riskiest tranches being strongest.

Unfortunately for American consumers, the biggest players in sub-prime auto financing have significant ties to domestic auto makers. A report by Reuters names Santander, which is Chrysler’s auto financing outlet, and GM Financial as the two largest sub-prime auto lenders in the United States. Santander alone accounted for 53 percent of all sub-prime financing – and Santander’s expertise in the field was apparently one reason that Chrysler decided to partner with the Spanish bank.

While both Chrysler and GM use Ally Financial for their prime loans (which are issued to qualified buyers), GM has its own seperate sub-prime arm, known as GM Financial. In Q1 2012, some 93 percent of GM Financial’s loans were to sub-prime buyers, up from 87 percent in Q4 2010. During that same period, loans to the least qualified buyers – those with FICO scores under 540, were up 79 percent. GM Financial’s delinquent loans also rose by some $200 million in 2012, to $933 million – higher than Ford Toyota and Honda’s combined delinquencies.

The situation in auto-loan securities has eerie shades of the 2008 mortgage crisis across the board: the eager distribution of not just sub-prime loans, but “deep sub-prime” loans to borrowers with the worst credit ratings. The securitization of auto loans and the hunger for the riskiest tranches of these securities. And the “AAA” rating of even the most egregiously crappy securities.

In light of these factors, it’s worth reflecting on how much of an influence sub-prime auto loan securitization is having on the lofty heights being reached by the new car market. The last time America experienced the bursting of an asset bubble, auto makers were stuck with excess capacity and significant overcapacity. Combined with a sudden contraction in consumer credit, these factors nearly brought America’s auto makers to their knees.

The current situation is not directly comparable to the mortgage crisis of 2008, but bares too many parallels for us to ignore. It would be the ultimate irony if another systemic crisis occurred, due to securitizied auto loans. They very instruments used to by auto makers to help spur sales growth will have ended up crippling them yet again.


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The Artist Formerly Known As GMAC Comes Back To Mami – Partially Thu, 22 Nov 2012 15:36:01 +0000

Bailed-out GM agreed to pay about $4.2 billion for the European and Latin American operations of likewise bailed-out Ally Financial, formerly known as GMAC.

Ally, 74 percent owned by the U.S. government, did put the international operations up for sale to raise money for the repayment of bailout funds. The money now comes from GM.

The deal is expected to add $300 million to $400 million to GM Financial’s annual earnings before taxes.

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Bailed-Out GM Wants To Help Bailed-Out Ally With Some Of Its Bail-Out Money. Investors Not Amused Fri, 17 Aug 2012 11:18:49 +0000

Bailed-out GM might sink $2 to $4 billion into likewise bailed-out Ally Financial to buy some of the lender’s international operations. Ally “ironically wants to use the proceeds to help repay its own federal bailout aid,” says Reuters. That plan does not sit too well with some observers. Says the wire: “Analysts and investors disagree on whether that would be the best use of cash, with some preferring a stock buyback or dividend payment.”

Large banks have paid back the Treasury the bailout funds they received, with GM and Ally the holdouts. GM can always take the position (popular with its apologists) that it does not owe anything to the taxpayers. Treasury took stock instead of an I.O.U.  but “critics of GM’s $50 billion federal bailout in 2009 say the Obama administration stuck taxpayers with a bill that will never be paid in full as Treasury’s 27 percent stake in GM remains underwater,” Reuters says.

To get its money back,  Treasury would need to sell its remaining 500 million shares of GM for more than $52 each. The stock is at $21. However, if GM would use its $33 billion cash pile (also a favorite talking point amongst the company’s fans) to declare a dividend or to buy back shares, the stock could reverse its downward course. Which would look a little better, especially three months before the elections.

Remember: If you pay U.S. taxes, you are a GM investor, like it or not.

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Guess Who Owned Ally Financial’s ResCap? You Did Mon, 14 May 2012 21:04:43 +0000

Minutes after Ally Financial, the bs-artist formerly known as GMAC, took its Residential Capital bankrupt, David Shepardson tweeted to his followers that all is fine:

“GM owns 9.9% of Ally Financial Inc, while @USTreasuryDept owns 74 percent”

Isn’t that reassuring?

TTAC readers are not surprised by Ally’s ResCap going under. A bankruptcy by May 14 had been predicted. Shepardson is the Washington, DC Bureau Chief of the Detroit News.

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GM’s Floorplan Banker Could Take Mortgage Arm Bankrupt Tue, 08 May 2012 10:35:47 +0000

There is new trouble brewing in an important part of GM’s business: Ally, the former GMAC. Nearly 75 percent of the credit that GM dealers in the United States use to finance their inventories is from Ally, says a Reuters report. The report also says that Residential Capital (ResCap) – Ally’s mortgage servicing and lending unit – is again on the verge of being put into bankruptcy.

Ally still owes the U.S. Treasury Department about $12 billion. GM and Chrysler, two key sources of customers, are increasingly reluctant to steer business to it, says Reuters. This puts Ally deeper into trouble.

ResCap faces litigation over underwriting standards. The suits could bring a new set of liabilities that threaten to take Ally down with it unless it is somehow separated. According to Reuters, ResCap is seriously considering filing for bankruptcy by May 14 when it must repay a portion of its debt.


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GM’s AmeriCredit Deal: Awaiting Approval Fri, 23 Jul 2010 17:59:44 +0000

Now that GM’s acquisition of the subprime lender AmeriCredit has had 24 hours to sink in, howls of protest are starting to surface. The charge is being led by Senator Chuck Grassley, who has requested a review of the deal from the SIGTARP, saying

If GM has $3.5 billion in cash to buy a financial institution, it seems like it should have paid back taxpayers first.  After GM’s experience with GMAC, which left GM seeking a taxpayer bailout, you have to think the company and, in turn, the taxpayers would be better off if GM focused on making cars that people want to buy and stayed clear of repeating its effort to make high-risk car loans.

And though Grassley’s criticism could be read as mere partisan gamesmanship from a leader of “the party of no,” there are a number of very good reasons for opposing the deal.

A look around the blogosphere reveals that opposition to the AmeriCredit deal largely falls into three categories: one camp, led by Grassley, believes that GM is burning cash on the deal that should be going to taxpayers, another worry is that the deal is an excuse for GM to fall back into bad habits, while a third objection concerns the deal’s effect on GM’s former captive lender GMAC (now known as Ally Financial). Each of these criticisms has its own valid points, and together they form a solid basis for opposition to the deal for government overseers, taxpaying citizens and potential IPO investors alike.

Grassley, who was a leading critic of GM’s “payback” ads frames his criticism of the deal by holding up full taxpayer payback as the deal’s opportunity cost. Though Grassley is on the right track with his criticism of GM’s profligate spending, $3.5b would hardly make a dent in GM’s obligations to the taxpayer. The Treasury’s stake in GM currently stands at about $43b, or over 12 times the amount GM spent on AmeriCredit. Though paying back taxpayers would likely help GM’s sales by eliminating the sense of obligation to taxpayers, the idea of GM buying back equity from Treasury is nothing short of laughable given that its cash pile stands at about $30b (or about $14b short of what it needs).

But even if you remove the taxpayer angle from the equation, there are still good reasons for sharing Grassley’s misgivings about the deal. Perhaps the best-articulated criticism of GM’s deal from a cash-management perspective comes from the NYT’s Deal Professor Steven Davidoff, who argues

With more than $35.7 billion in cash and marketable securities on its balance sheet as of the end of the first quarter of this year, G.M. is paying cash for AmeriCredit, something it certainly could not have done without the tens of billions of dollars that it received in government assistance. G.M. is also paying a 24 percent premium to AmeriCredit’s closing stock price on the day before the deal was announced.

If I were an owner of G.M., and I suppose I am in part as a taxpayer, I would wonder if that cash might not be better used as a special dividend to G.M.’s shareholders. Certainly, the fact that G.M. is spending $3.5 billion will be noticed by its unions and seen as a sign that there is cash available for them too.

Taken with TTAC’s latest analysis of the GM IPO, it’s clear that GM still doesn’t understand that its government-supplied cash pile paints a huge target on its back. Given the political overtones to anything related to subprime lending, it’s hard to imagine the UAW not seeing this deal as a sign for it to start pushing concession rollbacks. Meanwhile, $3.5b might not be enough to make an impact on taxpayer ownership, it does represent a healthy amount of R&D spending, or most of the amount needed to rescue GM’s European division, Opel, or enough to affect any of the other cash outlays that GM will not be able to get away from over the next five years. Instead of looking at looming medium-term costs, GM jumped into AmeriCredit because, as Davidoff points out

Managers with too much cash to burn will burn too much cash. If you want a real-life example, simply read the beginning of “Barbarians at the Gate” and Ross Johnson’s epic struggle to spend all of the money that RJR Nabisco was throwing off in the 1980s.

If GM could expect a serious improvement in its business by acquiring a subprime lending arm, these criticisms might be easy to dismiss. Unfortunately, the “bad habits” critique offers strong evidence that this is not the case. Davidoff lays out the case thusly

First, when G.M. owns a captive lender, it subsidizes the plants, labor unions and dealers. Captured finance means nonmarket financing for buyers when they receive a loan. Think zero percent financing. In connection with the acquisition, AmeriCredit will also re-enter the lease financing business, raising similar issues. Lease financing for automobiles usually results in artificial residual pricing for the buyout price at the end of the lease. All of this helps empty dealer lots and keeps plants running. But it oversupplies cars. The problem of artificially oversupplying new cars (like new houses) is put off for another day.

Second, the subsidy ensures that people who may not otherwise qualify to buy new cars do so. They overconsume and overspend as they shift their buying from used cars to new cars. This may be an immediate net gain for an economy in distress, but it may be a drag as well, as consumers divert income that could be used for other things that would perhaps create more wealth over all.

And, as the Peridot Capitalist points out, fueling another boom-bust cycle through lax standards is a recipe for, well, another bust.

While I am sure those in the industry will praise this deal as a way for GM to maximize unit sales, we need not completely forget how cyclical economies work. Subprime lending pays off when the economy is improving but when the business cycle inevitably turns (as every economy does), the loans turn sour, the losses are crushing, and the cycle starts all over again. To me this highlights one of the core problems our domestic economy has developed over the last 10 or 20 years. We continue to follow the path of loose credit when things are going great and at the first sign of a downturn, credit standards increase dramatically. Once things stabilize, we hear that banks are slowly reducing their standards and loan volumes increase again.

Of course, this line of reasoning is vulnerable to exaggeration. The Atlantic’s Daniel Indiviglio notes that

The auto market also doesn’t really have to worry about the kind of bubble that struck the mortgage market, specifically because autos are a depreciating asset. Millions of people are going to hope to get rich quick by flipping their cars, for example. There’s an old industry adage that most people will keep paying their auto loan even after they’ve defaulted on their mortgage, because they need their car to get to work. They can default on their mortgage and rent, but they probably don’t want to have to walk if they lose their car. Moreover, if times really got tough, and they did lose their home, they could always live in their car temporarily.

Indiviglio’s defense of subprime auto lending is cogent and well-argued, but even that isn’t enough to convince him that the AmeriCredit deal was a good idea. He concludes

Of course, none of this means to imply that it makes sense for GM to purchase Americredit. While most other auto companies, particularly foreign ones like Nissan and Honda, have found it sensible to keep a captive finance company in-house, none of those are subprime. They generally cater to people with very strong credit so they don’t have to worry about strategy and can simply earn interest on loans that are a very safe bet. So it’s puzzling that GM wouldn’t just focus on building up a new prime borrower-driven captive unit instead. And it’s even stranger that the government wouldn’t raise its eyebrows when GM is making an acquisition rather than engaging in additional divestitures to try to pay back the billions it still owes Uncle Sam.

Underlying these criticisms are the obvious incentives that GM has to improve its short-term performance even at the expense of its long-term health. IPOs are notorious pressure-cookers, focusing an entire company on projecting a certain image for one discrete moment. Given GM’s history of overproduction and volume-boosting tricks that inevitably must be paid off in either falling resale or diminished profit margin, this line of criticism can’t be ignored. Especially because we already know that much of GM’s cash is essentially spoken for over the medium term.

The final criticism of GM’s AmeriCredit acquisition involves The General’s former captive finance unit Ally Financial. The criticism is a simple one: though Ally will continue to provide floorplan financing to GM dealers as well as some retail loans, AmeriCredit will inexorably grow closer to GM once its credit rating improves on the strength of its consolidation to GM’s balance sheet. Already losing out on GM retail loans, Ally could find itself replaced by AmeriCredit as GM’s main floorplan lender, dealing Ally a devastating blow. The WSJ [sub] puts the relationship between Ally and GM into context

Ally financed 33.5% of GM’s U.S. customers in the first quarter, compared with 30.3% as of Dec. 31. It financed 87.7% of the inventory in GM’s U.S. dealerships during the same period, compared with 90.9% in the fourth quarter.

The problem is that Ally still owes taxpayers $16.3b, and by buying AmeriCredit instead, GM may have doomed Ally to a much longer payback timeline, effectively increasing its impact on taxpayers. After all, GMAC might not have been rescued from its subprime mortgage mess had it not enjoyed its close relationship with GM, which the government was set on rescuing. It’s galling enough that GMAC was rescued as a “stealth bailout” for GM, but the fact that GM is now throwing Ally to the wolves is one serious twist of the knife.

On the other hand, had GM bought Ally, it would have been doing a great disservice to its balance sheet. Not only would buying GMAC have been expensive, it would have brought more government debt on board, and would have faced regulatory issues as well, as Ally is a bank holding company. Ultimately, it’s impossible to fault GM for not going with Ally… the blame belongs to the auto task force, which saw GMAC/Ally’s importance to GM without facilitating their long-term cooperation. Both GM and Ally insist that their relationship remains strong, but it’s hard to imagine GM acquiring a lender and not moving aggressively to consolidate its credit business with that lender. And once again, the taxpayers will be left holding the bag.

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GM Captive Finance Push Explained: The General Wants More Subprime Business Mon, 17 May 2010 22:56:04 +0000

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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GM And Chrysler Racing Towards Captive Finance? Thu, 13 May 2010 18:25:16 +0000

News that GM is considering a number of options for a return to captive finance, has lit a fire under Chrysler CEO Sergio Marchionne, who tells the Detroit News that

One of the things that we do not wish under any circumstance is to have an uncompetitive relationship vis-À-vis GM

At this point, the indications aren’t good. Ally Financial CEO Michael Carpenter said in a statement yesterday that
Ally Financial Inc. (Ally) is committed to supporting the auto industry with competitive financing products and services to enable vehicle manufacturers and auto dealers to achieve their goals of selling and leasing vehicles.

As a bank holding company, we have been able to consistently and cost-effectively provide financing to approximately 6,000 dealers and millions of consumers, which has led us to be the largest financing provider for both General Motors and Chrysler.

Today, we are better positioned to offer more stable funding through a variety of economic climates and to be more competitive from improved funding costs related to an increased level of deposit funding from our commercial bank and an improving business model.

The WSJ interprets this statement as Carpenter

signaling an independent stance following word that General Motors Co. might get back into auto lending.

After all, GM is only interested in Ally’s auto finance business, which is a far more consistent performer that the bank holding company’s long-troubled residential mortgage lending division. Besides, returning to the bosom of GM would force Ally to leave a lot of auto finance business on the table, not the least of which is Chrysler’s business. Marchionne warns that

We need to transition to a permanent, stable solution for Chrysler going forward. Once they tell me that GMAC is going to go back into General Motors, we need to have the time, the space to find an alternative solution to the long-term future of Chrysler.

As the WSJ’s Heard On The Street Blog puts it,

Ally’s separation has given it lower financing costs and freedom to serve other car makers, not just GM. “The value of Ally’s franchise is maximized by being separate,” says Adam Steer of CreditSights.

In theory, GM should be able to focus on its core business of making vehicles and make a good return on investment. Ally, focused on providing financing, should be able to do the same.

In other words, GM buying up Ally’s auto business would be good for GM and it’s profit and IPO chances, but it would be bad for Ally, and bad for Chrysler… both of which are still partially owned by the government. Moreover, buying Ally would also land another $16.3b in government debt on GM’s lap, giving critics of “Government Motors” even more populist ammunition. But then, if GM doesn’t buy Ally’s auto finance business but starts its own captive lender instead, it will have to compete with the company that already finances 87 percent of the vehicles on GM’s dealers’ lots. And Chrysler will have to start its own finance company. And then Ally won’t have enough business and its $16b+ bailout will have been wasted. Unless, of course, there’s a way to finesse the situation… because GM and Chrysler seem dead set on returning to captive finance.

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Bailout Watch 579: GMAC To Score $3.5b More Thu, 31 Dec 2009 16:20:36 +0000 The artist formerly known as GMAC

The underlying cause of GMAC’s failure was no different than so many other American financial institutions: giant bets on risky mortgages at the height of a real estate bubble. And though that error alone would have qualified GMAC for a bailout rescue along with the other failed banks, The WSJ reports that the ongoing support for GMAC is “reflects the troubled company’s importance to the revival of the auto industry.” And man, it had better be important. The GMAC bailout has been one of our least-favorite of the season, rewarding poor practices in auto and mortgage lending, and exposing taxpayers to inordinate risk. But, as TTAC warned back in the pre-bailout days, once the camel gets a nose into the tent, good luck getting it out. And so, GMAC will be receiving another $3.8b in TARP support, on top of the $12.5b it has already received. As a result, the US taxpayer’s stake in GMAC is expected to rise above the current 35 percent stake, just in time for more write-downs planned for the next week. The cash injection is said to prime GMAC for a profitable Q1 2010, erasing some giant losses in the bank’s ResCap mortgage unit. And of course the move will help GMAC continue to underwrite the leases that Chrysler and GM so desperately need, but can’t afford due to plummeting resales. GMAC’s bailout often doesn’t get marked up in the auto industry bailout tally, but at over $16b so far, it’s one of the crucial pieces keeping the zombie automakers shambling along. Now, about repayment…

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