By on July 25, 2008

It was the lease they could doJust when you thought it couldn't get any more miserable being one of Chrysler's Dealer "Partners" comes the news that the Chrysler Financial is out of the lease business! The Wall Street Journal reports the decision with a note that "Chrysler is expected to brief dealers formally later in the day in a conference call". Boy, it must suck to find this out in the news before getting word from corporate. Nardelli's previous claims that renegotiating bank loans is just a routine matter have been blown out of the water. That $30B revolving line of credit only runs through August, and IF Chrysler is able to get it extended the terms will surely be much more costly than before. Negotiations must be going very, very badly for Chrysler to take one of the most popular sales financing tools off the table. One has to wonder if come August any new lending will be of the Debtor in Possession variety.

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61 Comments on “Chrysler to Stop Offering Auto Leases...”


  • avatar
    Ryan

    Good, I hope they go under soon. Junk is what junk does.

  • avatar
    Point Given

    I talked with a sales rep for a pre-owned leasing/financing company about two weeks ago, he said that they were prepping to offer new vehicles leases as they had heard rumors that Chrysler was pulling the plug on retail leases. Guess I should have listened to him.

    How can this be considered anything but a horrific red flag for the companies future viability?

  • avatar
    Lichtronamo

    NOT GOOD.

  • avatar
    ZoomZoom

    I think they should dump the sand-dollar/pentagram icon. It makes them look like fossils.

    Waitaminute, that’s an accurate representation! Silly me…

  • avatar
    cleek

    I can already see the spin…

    Chrysler Corp. announces another exciting industry first. The “Zero-Residual Lease”….

  • avatar
    Justin Berkowitz

    Now the dealers wishing to offer leases will just collaborate with shady third party finance companies.

    That’s gotta be all good news.

  • avatar

    The legs are still kicking but wait a little while and then hold a mirror up to the nostrils to see if any condensation appears.

    Won’t be long now

  • avatar
    motownr

    Banks refused to finance the leasing business any longer; expect GM to exit leasing shortly.

    They are going to emulate the department store model of markdowns in the near term. They quoted Macy’s, not Mervyn’s, which was good. :)

    Expect up to 50% price reductions on vehicles to entice buyers to purchase.

    Nationally, it’s a 20% reduction in sales for CLLC, but the pain is not spread evenly: in Detroit, 80-90% of the market is leasing. It’s going to be interesting to see how that plays out.

    Independent leasing companies are going to have to fill the gap, as they used to do prior to the factories taking over the business 20 years ago.

  • avatar
    Pch101

    While it isn’t great news, it’s not entirely surprising and it may or may not be a sign of trouble.

    Private equity funds such as Cerberus care about internal rate of return. The IRR is much higher from a chunk of money received up front from a sale than it is from a stream of lease payments. Unless they could earn an effective interest rate of 20% or better from a lease, their numbers look much better with a sale.

    They would probably be doing this, with or without financial problems, leasing just isn’t optimal for their particular business model. It’s not only better for cash flows, it is also better for the return.

    They’ll have to keep offering fat cash rebates in order to move product, because the vehicles aren’t good enough to sell themselves. Dealers will probably apply the cash rebates to the leases, and try to fanagle a way to pocket those rebates for themselves, as they always do.

  • avatar
    motownr

    It will be interesting to see how this impacts their fixed cost coverage. It’s going to be a shock to the market, and will certainly result in CLLC taking back some unknown amount of inventory b/c of dealer failures.

    It’s also going to absolutely kill higher end brands like Cadillac, where lease rates are high and few own the vehicle for more than a few years.

  • avatar
    npbheights

    They put forth their very best effort. Another shining moment for Chrysler. This is as good as it gets.

    My last Chrysler product: an outboard engine that snapped off its mounting plate and fell into the river while I was cruising along. I just cut the cable and cord and let it sink to the bottom. Replaced it with a Merc and never looked back

    Sounds like what it’s creditors are planning to do, too.

  • avatar
    NickR

    What percent of their sales were done through leasing? I think for most manufacturers the figure now is relatively high. Yes, there are third party lease providers but they are a bit iffy from what I have read. And what’s a reasonable estimate for the share of Chrysler’s former lease business they will pick up…50% maybe? Even that would translate into a big chunk of lost sales, which they can ill afford to lose.

  • avatar
    Stephan Wilkinson

    People renting, I mean leasing, cars that they couldn’t otherwise afford are simply another element of this great society’s spin into terminal debt.

    I understand that there are tax advantages for a few people to lease a “car for business,” but to me, most of it is like those storefronts we used to see in Harlem–maybe they’re still there–from which poor people would rent-to-buy their furniture. They’d either end up with nothing having spent thousands or with a dining-room set worth $200 for which they’d paid $5,000…

    Leasing is a plague.

  • avatar
    CarnotCycle

    I hope when the mushroom cloud from Chrysler’s corporate detonation dissipates Jeep is still in American hands.

    It would be a cultural blow to have that brand slip over to some Chinese outfit, or become a division for Mahindra & Mahindra.

    If it could be taken public as it’s own company, Jeep could become a “lifestyle” brand with a loyal following and a classically evolving product that is a contemporary classic, kinda like Porsche or Harley-Davidson. A lot of value there with better management and no more UAW,

  • avatar
    Nicholas Weaver

    Not suprising. Chrysler’s leasing business went from “rather mild depreciation” to “OMFG WE ARE GOING OFF A CLIFF!!!!”.

    They are on track to lose their shirt, and if you priced leases with the current depreciation on Chrysler’s products, nobody would want the lease anyway.

  • avatar
    Conslaw

    Let’s see – sales are down 30% before leases are eliminated. Let’s say 20% of their customers are ONLY interested in leasing. .2 x .7 = 14. That means if sales were down 30% before, you’re now in the ballpark of a 44% reduction in sales. Ouch. As Dandy Don used to sing, “Turn out the lights, the party’s over.”

  • avatar
    John Horner

    “While it isn’t great news, it’s not entirely surprising and it may or may not be a sign of trouble.”

    It is without a doubt a sign of trouble. Do you think Toyota is going to stop offering leases anytime soon? For higher end vehicles in particular the lease is a very important sales tool.

    This has nothing to do with voodoo accounting like internal rates of return and everything to do with the sudden crash of lease residuals and the precarious financial position of Chrysler. One of Cerberus’ other companies, Mervyn’s (a west coast retailer) is widely expected to go into bankruptcy any day now http://www.nypost.com/seven/07192008/business/cerberus_burned_by_mervyns_credit_woe_120575.htm .

    Banks know very well that when one of these highly leverages hedge fund deals goes bad it is the banks and not the hedge funds which get hit with the majority of the losses.

  • avatar
    opfreak

    motownr, I agree with you. But if your cars/trucks are so terrible, that if you do lease, your residual is so bad, its cheaper to buy.

    or to make a magic lease payment possible, chrslyer has to loss billions.

    I can see the need to end leasing on crap

  • avatar
    hltguy

    As stated by poster John Horner, another Cerebrus company is Mervyn’s a large retailer her in California and western states. You walk in one of their stores now, you see signs all over the place “50% off” “60% off” etc, like they are trying to raise as much cash as fast as possible. I purchase clothing from there, have been nice shirts for under $15.00.

  • avatar
    Pch101

    This has nothing to do with voodoo accounting like internal rates of return

    You make this statement so definitely based upon what knowledge of private equity or finance?

    IRR is not a “voodoo accounting” term, it is a basic finance performance benchmark that is used by pretty much every PE fund in the country. It’s what investors rely upon to calculate the amount of their investment, and to determine whether they invest in the first place.

    Toyota is a public company, so there is no comparison. Private equity funds do not view the world in quite the same way that the stock markets do. Private equity funds have much higher demands for returns and are therefore more sensitive to the timing of cash flows than are public companies.

    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.

    An investor who wants a 25% return isn’t going to think much of a lease that generates a return of something less than 10%. The fund manager would rather take the cash upfront and let the dealer worry about the leasing. Chrysler will surely continue to feed those with generous rebates until the company either figures out how to make cars people like or else goes out of business.

  • avatar
    seoultrain

    Wow. Chrysler must be having some serious financial trouble. Basically, a lease is a bank buying a car and charging you to rent it at a rate (somewhat) equal to depreciation. So Chrysler doesn’t want to buy their own cars; why should you? Or worse, they can’t afford to buy them. This seems huge. Really huge.

    But why not just raise lease prices so far (by dropping residuals and incentives) that no one in their right mind would lease one? And if some sucker did, you’d gain a profit. It would be a lot quieter (less bad press) and achieve the same goal.

    I wish I could short Cerberus…

  • avatar
    Pch101

    another Cerebrus company is Mervyn’s a large retailer her in California and western states. You walk in one of their stores now, you see signs all over the place “50% off” “60% off” etc, like they are trying to raise as much cash as fast as possible.

    That’s business as usual for most department stores. You can go to Macy’s or a whole host of other stores and find very much the same thing.

    Clothes are seasonal and companies would rather move than hold inventory, so they blow it out. It is even worse today, because the loss of consumer confidence is causing a drop in discretionary spending.

    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.

  • avatar
    Robert Schwartz

    I guess you can’t offer leases if your product has no residual value.

  • avatar
    CSJohnston

    Chrylser Canada cut off leasing in all but name at the beginning of July by raising lease rates to “standard” (somewhere between 11.5-13%).

    This has really hurt sales volume for dealers and they are looking at third party lease providers as a way to offset that.

    Let’s assume for a moment that in addition to cash flow issues that Chryler has… a plan.

    Let’s assume for another moment that Chrysler is going to (A) survive and (B) alter its product portfolio significantly in the next six to twelve months.

    If this is the case, then killing lease support is a good idea.

    They need to find a way to raise the resale value of valuable/profitable model lines (Jeep, Ram, minivans (!) and maybe Caliber/300/Challenger). Limiting short-term lease returns on these lines could help.

    Models that Chrysler is killing or has to be thinking about killing (Compass, Daktoa, Durango/Aspen, Viper, Charger, Sebring/Avenger) need to find permanent homes, not lessees as they will be DOA when ALG gives them residual values.

    Lastly, if Chrysler is going to launch some new models (again assuming they can) in the small, midsize and large car segments then it is best that they start from clean slates and are not tarred with the resale value brush of older lease return models sitting right next to them on dealer lots.

    If so, then no leasing is pretty smart, very painful and near-suicidal share-wise but smart. Keep the financing, keep the cashback, keep the cheap gas just so long as interested Chrysler buyers keep the car.

  • avatar
    bluecon

    The Chrysler dealers here in Windsor, Ont already cut off the leases. There getting killed when the vehicles are returned and the resale is so low. Like a few hundred thousand full size trucks and SUV’s returned from the lease that you then need to dispose of.

  • avatar
    AGR

    When most manufacturers were making tons of money leasing was an additional sales lever to be exerted in acquiring additional customers.

    In the present business context of closed end / walk away leases in which manufacturer are content in setting residual values which are totally unrealistic from the moment the lease is signed. Subsequently playing the game of who will assume the residual risk the finance arm, the marketing arm, the manufacturing arm or all three.

    Subsequently inventing the CPO vehicle as a tool to alleviate residual losses, and temporarily tell franchised new vehicle dealers that they just got a new revenue/profit stream…the used car.

    Private equity might not be interested in carrying residual fiction on their books in light of the present economic / automotive climate.

    It might be the canary in the mine with other captive finance companies altering their lease portfolios in the near future.

    In Canada where leasing is extremely popular there is the real possibility that Chrysler will lose sales and their winning streak will come to an abrupt end.

  • avatar
    John Horner

    “Cerberus is having its issues, but you can’t use sales at Mervyn’s as an example.”

    OK, how about when vendors stop or reduce shipments due to worries about getting paid? That is not normal.

    http://www.thedeal.com/dealscape/2008/07/bankruptcy_watch_is_mervyns_th.php

  • avatar
    davey49

    I say good! Buy your damn car! keep it for 10-15-20 years.
    Leasing just makes you lose money.

  • avatar
    peteinsonj

    Current TV ads are offering a Camry lease, for about $2000 down and $199 a month. While Chrysler is advertising the Sebring for about $2k down and $219 a month.

    Who in their right mind would choose the Sebring over the Camry?

    I’m leasing a GM SUV right now. When my lease is up in about 2 years, I would imagine the market value will be drastically lower than the projected residual. I understand that GMAC won’t budge on buy-out prices, since GM has insurance on every lease to protect themselves.

    Perhaps the fools at Chrysler never bothered to buy similar insurance to protect themselves.

  • avatar
    poohbah

    As someone who was burned by a brand new 95 Plymouth Neon, I find this amusing. Not even CLLC wants to deal with 3 year old Chrysler POS.

  • avatar
    gamper

    I think this is very telling of Chrysler’s future. While other Detroit automakers may eventually follow suit, it will be as a measure of last resort, not as a sound business decision. That is exactly what we have, Chrysler could not get financial support to continue leasing operations, so they end them and claim it is part of a plan. Dealers must be flipping out right about now, especially in certain markets with acres of Rams and Durangos and no lease program to move them.

    Chrysler can say anything they want but this was definitely not the preferred outcome, but rather the only possible outcome.

  • avatar
    gamper

    On a side note, I dont think it is necessarily stupid to lease. Its true that financially you would come out ahead in the long run buying your vehicles. I buy my personal car because of the excessive miles I drive. But the last few cars I have driven have been 100K miles and out within 4-5 years. I lease my wife’s car. Here’s why:

    1) I dont want a 10 year old car.

    2) I love getting a new car every few years, love it.

    3) I can afford to lose a few bucks on cars. We all have things we waste money on, (Starbucks, cigarettes, dining out, kids, donations to the Democratic Party, etc.) For an auto enthusiast, it logically follows that you waste your money on cars.

    4) I much prefer paying for a new car than paying for maintenance of an old one.

    5) Improvements in fuel economy, safety, features.

    6) Bumper to Bumper warranty, Roadside assistance.

    7) You can dump the car near term if it gets in an accident or you decide you dont like it, or your dream car goes on sale, or new cars receive huge increases in fuel economy, etc., etc.

    So all you guys saying only a fool would lease, I must respectfully disagree. But, if driving a 10 year old beater to save a few bucks is your thing, more power to you.

  • avatar
    John Horner

    Leasing makes sense for quite a few people. If you are someone who really wants a new vehicle every few years then you are putting the burden of residual value on the shoulders of the company, rather than yourself. Anyone who leased a truck, SUV or other gas hog in the last several years is looking pretty smart right now. When the lease is up they turn in the vehicle and start with a clean slate.

    One aspect of a lease deal is that the “buyer” gets a put option to sell your vehicle back at a future date at a known price. If come that date you want to keep the vehicle, all you have to do is to pay that price. So, if the thing has depreciated much more slowly than expected then you might hold onto the thing at the end of the lease. All of the residual/trade-in value risk is on the lease company.

    I’ve never done the lease thing myself, but that is because I like to keep a vehicle for at least 100k miles after the purchase. My last new car is one I kept for seven years then sold to a friend. But, if I were doing the new every three years thing I might well go for a lease.

  • avatar
    AGR

    Interesting article from the National Post hinting that GMAC is getting out of leasing.

    Click

  • avatar
    NickR

    The IRR is much higher from a chunk of money received up front from a sale than it is from a stream of lease payments. Unless they could earn an effective interest rate of 20% or better from a lease, their numbers look much better with a sale.

    Care to elaborate on that? I hate to say it, but I don’t understand!

  • avatar
    jerry weber

    Every blog but a couple have stated the obvious, it is the automakers who have created the “cheap lease” as a way for buyers to get a car with as litte as half of the payment of a new one. The theory is simple you are leasing about half of the car’s value. The other half is the residual which the mfg. will get back usually at the auction where I saw these “fleet” cars go through lanes by the hundreds. I have said for the last couple of years that re-sale values is the un-sung factor in many sales. It creates the final number the “out money” the customer pays. The Japanese have been winning this fight for years by making up for Detroit’s discounts and rebates with a higher resale value on their used cars. Thus the Japanese mfg. makes profits without damaging the brands by dumping them at low values back into the sales stream as “cheap late model used cars”. Back to Chrysler, When you can’t discount enough to make the customers payment, the dealer would automatically talk lease. Thus the $499.00 a month Dodge could reappear in a lease at $249.00 per month. A figure in many more peoples budget and actually maybe less than the cost of paying off a used car. (since used cars always have high interest rates) If Chrysler cuts off this avenue entirely, they would literally have to take 50% off of the new iron (and maybe subsidize the payment rate) to sell a vehicle at the same price as the lease. They can’t do this trick for long if at all. Do I have to tell you who is and will still be advertising “cheap” lease rates since they take back their iron in three years at or near the residuals? Your best answers would begin with H & T.

  • avatar
    windswords

    Well, here we go again. I have been away the past couple of days (business) and I don’t know why but at the airport this morning I stopped and looked at the front page of the Wall Street Journal (after getting my coffee, or I wouldn’t understand what I was reading). There was the story on Cerberus stopping the leasing program.

    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.

  • avatar
    macarose

    (Steven Lang incognito)

    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.

  • avatar
    Pch101

    “Cerberus is having its issues, but you can’t use sales at Mervyn’s as an example.” OK, how about when vendors stop or reduce shipments due to worries about getting paid? That is not normal.

    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.

  • avatar

    from a reliable source…GMAC to announce Monday they are also done leasing.

  • avatar
    Pch101

    Care to elaborate on that (IRR)? I hate to say it, but I don’t understand!

    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.

  • avatar
    Kman

    [email protected]! “zero-residual lease”. Good one!

  • avatar
    minion444

    Let’s see…No lease deals for cheaper monthly payments. I can see it now.

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

  • avatar
    John Horner

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

    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.

  • avatar

    “…like the mad scientist gone awry, they have inadvertently created a monster that is angry, hungry and turning on its master”

    I love that analogy

  • avatar
    jerry weber

    After reading the Wall STreet Journal this morning, it becomes clear what happened to Chrysler’s leasing program. It is ending for the simple reason that they cannot renew the credit line they need to keep leasing with any major banks, who in the past were happy for this business. They are being forced out not opting out. Jim Press (chrysler vice chairman) saying that finance costs were one of the decicing factors is delusional. It was not a deciding factor. When the banks say no more money, you end the program, regardless of the long range implications good or bad.

  • avatar
    mel23

    From a WSJ article a few days ago about Mervyn’s & Cerberus: When they bought it, they threw in with four other partners and acquired the real estate as a separate entity, and then leased the space to Mervyn’s as well as other merchants. They’ve also sold off some. They’ve more than doubled their money from the real part. I wouldn’t be surprised to find they’ve gouged Mervyn’s on the rent. Plus, if Mervyn’s goes down, they’ll be in line for money as a creditor.

    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.

  • avatar
    motownr

    @pch101:

    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.

  • avatar
    John Horner

    “One thing that’s always puzzled me about Cerberus is the involvment of John Snow and Dan Quayle.”

    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.

  • avatar
    macarose

    “Capital One has an almost infinite number of choices about where to risk it’s money”

    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.

  • avatar
    guyincognito

    There is no way that this isn’t going to cost Chrysler a ton of sales. I can’t fathom why Cerberus bought Chrysler or what they are doing to make money off of it.

  • avatar
    mel23

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

    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.

  • avatar
    motownr

    Cerberus, like many top tier PE firms, has a number of sovereign nation wealth fund investors. The sheiks that make the ultimate decisions like to have former pols like Snow and Quayle take their calls.

  • avatar
    mel23

    The risks to Chrysler outlined in the Jan. 22 letter to investors include a “potent recession” or a “meltdown in the automotive market,” or the collapse of the automotive finance market, which could impact Chrysler.

    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

  • avatar
    davey49

    No leasing by the 2.8 will mean even more sales for Toyota. If people can’t afford the monthly payments for any midsize sedan to truck that they used to lease for under $400 a month they will all be buying Yaris 5 doors.
    I notice that a no money down 3 year lease on a Dodge Nitro is 410 per month
    5 year financing is 490 per month
    For a Charger RT its $500 lease $600 buy
    Jeep wrangler X base model $300 lease $400 buy
    Journey
    Not sure if leasing is worth it for anyone but it’s definitely not worth it for buying a Chrysler product.
    Leasing was against the law in NY for a few years I think.

  • avatar

    They actually started this a while ago.

    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.

  • avatar
    Pch101

    It is ending for the simple reason that they cannot renew the credit line they need to keep leasing with any major banks, who in the past were happy for this business.

    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.

  • avatar
    motownr

    Wait till customers get a load of their new pricing options.

    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.

  • avatar
    jcp2

    “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…”

    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).

  • avatar
    John Horner

    “That is, if they had any financial sense, which a perfect credit score might indicate.”

    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.

  • avatar
    Pch101

    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.

    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.


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