The Truth About Cars » Risk The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. Wed, 23 Jul 2014 18:25:17 +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 » Risk Question Of The Day: When Financing A Car, What Information Should Be Fair Game? Fri, 07 Dec 2012 15:56:59 +0000

Your personal information is valuable.

When I liquidated vehicles for Capital One, we typically examined over 14,000 variables before lending out our money to a customer.

Any customer. A credit card. An automobile. A commercial loan. It didn’t matter. We needed to get to know the economics of you first.

All of the low rates and big profits were dependent on buying your personal information, and then crafting decision models and metrics to determine your personal risk.

Our success in auto finance generated low rates for our customers and low delinquencies for our investors. But they both could have been far lower.

There is a line of demarcation between what is private, and what is public.

Your payment history? Public for the most part. There are those landlords, small money lenders and car lots that don’t report your credit history. But most utilities, credit cards, mortgage companies, and auto finance companies do so on a regular basis.

It’s a trade. You get money. They get the opportunity for a profit. Along with the right to buy and sell the resources needed to make sound future decisions.

Even the low tech version of a customer’s credit history work fairly well. Pay stubs, utility bills, bank statements, references, and recent housing information are typically used by car dealers to determine your eligibility.

So are criminal histories. In certain areas of this country you can type in a person’s name , state of residence, and the word “mugshot” or “arrested”. Or even access a state information database that records prison histories.

Lo and behold, you may see a familiar face staring right back at you.

All of these things are publicly available. But what about a few of the private things? Should they be fair game too?

If you were financing a car to a complete stranger, wouldn’t you want to know their recent accident history? Or the number of times over the last few years that their insurance was dropped due to non-payment of their premium?

I had three customers who wrecked their cars so far this year. Thankfully, they all kept paying on their full coverage insurance with a $500 deductible. That alone made a $13,000 difference to my bottom line.

A credit union that had the means to examine this behavior could make a lot of better decisions for their members.

A lot of insurance companies these days levy their premiums based, in part, on a customer’s age.

I am not convinced if that is always a fair way to measure risk.

That rare young adult who has managed to find a stable good paying job. Or that student who has earned a free ride to school and kept their GPA on the high end. I think they are far more responsible and creditworthy than that fifty year old who has consistently wrecked cars and dropped their insurance.

So where should that line be?

Should certain resources that are now publicly available become private?

Should other things that are only available upon a special request, become just as accessible as your credit report?

It’s a tough question. Ponder it.

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GM’s S-1 IPO Filing: The Risks Wed, 18 Aug 2010 22:49:27 +0000

The most interesting section of every S-1 filing is undoubtedly the “risks” section, in which companies are legally compelled to disclose all possible material risks associated with investing in their IPOs. Unfortunately, these risks are typically overstated, as no firm on the verge of going public wants to run into trouble with the SEC for under-reporting risk. As a result, many of the risks disclosed are fairly mundane, everyday risks in the world of business (currency, commodity price, and other economic fluctuations, etc). At the same time, companies rarely give reporters a full tour of their major risk areas the way these sections do, so they’re usually worth a read. GM’s just-released S-1 filing is no exception…

Sure enough, the first several disclosures are mundane in the extreme.

Our business is highly dependent on sales volume. Global vehicle sales have declined significantly from their peak levels, and there is no assurance that the global automobile market will recover in the near future or that it will not suffer a significant further downturn.

Our ability to attract a sufficient number of consumers to consider our vehicles, particularly our new products, is essential to our ability to achieve long-term profitability.

These repetitions of simple business facts might seem like compliance boilerplate (probably because they are), but given GM’s history, one can’t read certain lines and not feel that, on some level, a whole lot has changed ’round RenCen way. For instance, on the second risk factor listed above, the filing elaborates

The automotive industry, particularly in the U.S., is very competitive, and our competitors have been very successful in persuading customers that previously purchased our products to purchase their vehicles instead as is reflected by our loss of market share over the past three years. We believe that this is due, in part, to a negative public perception of our products in relation to those of some of our competitors. Changing this perception, including with respect to the fuel efficiency of our products, will be critical to our long-term profitability. If we are unable to change public perception of our company and products, especially our new products, including cars and crossovers, our results of operations and financial condition could be materially adversely affected.

Amen! Meanwhile, a pattern emerges: generic headings followed by generic description, capped with a kernel of specificity. One warning on the need to constantly improve production efficiency concludes with the admission that

Reducing costs may prove difficult due to our focus on increasing advertising and our belief that engineering expenses necessary to improve the performance, safety, and customer satisfaction of our vehicles are likely to increase.

But some warnings never quite get specific enough, particularly when disclosing risks that have been chronically problematic for GM in the past (supplier failure risk, cash flow risk, currency loss risk). On the other hand, GM is a new company now, with new management and a new balance sheet… perhaps history is no longer so important.

But the very newness of New GM, particularly the newness of its incoming top executive (Dan Akerson) is a risk unto itself. In perhaps the strangest disclosure of the document, GM admits that

The ability of our new executive management team to quickly learn the automotive industry and lead our company will be critical to Within the past year we have substantially changed our executive management team. We have elected a new Chief Executive Officer who will start on September 1, 2010 and a new Chief Financial Officer who started on January 1, 2010, both of whom have no outside automotive industry experience. We have also promoted from within GM many new senior officers. It is important to our success that the new members of the executive management team quickly understand the automotive industry and that our senior officers quickly adapt and excel in their new senior management roles. If they are unable to do so, and as a result are unable to provide effective guidance and leadership, our business and financial results could be materially adversely affected.

Yikes! But if you think that’s scary, check this out: the most specific, yet cryptic, and totally terrifying disclosure of the bunch

Our management team for financial reporting, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our internal controls. At December 31, 2009, because of the inability to sufficiently test the effectiveness of remediated internal controls, we concluded that our internal control over financial reporting was not effective. At June 30, 2010 we concluded that our disclosure controls and procedures were not effective at a reasonable assurance level because of the material weakness in our internal control over financial reporting that continued to exist. Until we have been able to test the operating effectiveness of remediated internal controls and ensure the effectiveness of our disclosure controls and procedures, any material weaknesses may materially adversely affect our ability to report accurately our financial condition and results of operations in the future in a timely and reliable manner. In addition, although we continually review and evaluate internal control systems to allow management to report on the sufficiency of our internal controls, we cannot assure you that we will not discover additional weaknesses in our internal control over financial reporting. Any such additional weakness or failure to remediate the existing weakness could materially adversely affect our financial condition or ability to comply with applicable financial reporting requirements and the requirements of the Company’s various financing agreements. [Emphasis added]

Did GM just admit that its financial reports may not be accurate? What in the Wagoner is going on here? Anyone? Bueller?

GM also discloses that it will continue to be at least partially owned by the US Treasury after the IPO, and as a result

the UST is able to exercise significant influence over our business if it elects to do so. This includes the ability to have significant influence over matters brought for a stockholder vote. To the extent the UST elects to exercise such influence over us, its interests (as a government entity) may differ from those of our other stockholders and it may influence, through its ability to vote for the election of our directors, matters including:

The selection, tenure and compensation of our management;
Our business strategy and product offerings;
Our relationship with our employees, unions and other constituencies; and
Our financing activities, including the issuance of debt and equity securities.

And yet, bizarrely, GM claims that government ownership might actually make it subject to increased regulation rather than preferential treatment.

In the future we may also become subject to new and additional laws and government regulations regarding various aspects of our business as a result of participation in the TARP program and the U.S. government’s ownership in our business. These regulations could make it more difficult for us to compete with other companies that are not subject to similar regulations.

In a similar vein, GM still says there’s a risk that it won’t receive $14.4b in section 136 (ATVM) retooling loans from the Department of Energy. But that’s only because the money isn’t actually in GM’s bank account yet. The DOE has been dragging its heels on GM’s request, but according to the most recent reports, DOE was waiting for positive financial numbers to prove GM’s viability. With two quarters worth of positive results released since then, one wonders why GM still hasn’t received notice on that $14.4b loose thread. Still, as long as the Treasury maintains even a reduced stake in GM, it’s difficult to imagine GM being singled out for regulation or denied loans. On the other hand, GM discloses that the  dealer cull which was one of its bailout conditions has hurt its market share. So there’s some precedent for GM’s government equity stake being counterproductive.

And then there are other, bigger issues: the $27.4b pension shortfall, the possible bankruptcy of Opel/Vauxhall, the lack of a stock dividend, the possible devaluating effect on common stock prices of Series B preferred stock, the restrictions on executive pay, the VEBA contributions, the debt. All told, there’s a mountain of risk attached to GM’s IPO. Individually the disclosures may seem mundane, but taken together they illustrate the breadth of the challenge facing GM’s turnaround… and that financial controls disclosure is just plain scary.

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