By on December 22, 2008

Credit is at the heart of the current auto crisis, a fact agreed to by all sides of the debate. But while the pro-bailout crowd wails about needing a 700 FICO score to get a car loan, the fact of the matter is that cheap credit allowed Detroit to create this problem in the first place. Mother Jones correctly points out that Detroit has been redlining the American auto market for years, by finding the easiest profits possible. And no, they’re not talking about SUVs. The thesis is that with car pricing easily available online, dealerships relied on financing offers to lure consumers into the store. Loans were loaded with extras, interest rates would be bumped for kickbacks, and upside-down trade-ins were rolled into the new loan which often stretched to six or seven year terms. These tactics, which MJ calls “endemic,” have left a US market where 85 percent of Americans with a car loan have negative equity. On average upside-down Americans owe $4,400 more than their car is worth. And all the while congress has played right along, from including a provision in the 2005 bankruptcy “reform” which forces filers to repay the entirety of a car loan, even if they owed substantially more than their car was worth, to engaging in fraud themselves. Now, as Rosemary Shahan of Consumers for Auto Reliability and Safety puts it “no matter how much money Congress throws at the automakers, it’s car buyers who will rescue them or not.” With 85 percent of American car owners looking at an average of $4,400 negative equity on their vehicles, Mother Jones is absolutely correct in assuming that the $17.4b bailout band-aid won’t bring back the business Detroit needs. Which proves that even when their main product was financing, the Detroit Three still just couldn’t get it right.

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33 Comments on “Credit Where It Isn’t Due...”


  • avatar
    no_slushbox

    Despite all of the whining from special interests wanting to be bailed out indefinitely, the Detroit automakers are co-conspirators in the financial crisis, not victims of it.

    It takes a lot of self righteous blindness for the Detroit automakers’ apologists to claim that the problem is with how loans are being made now, not with how loans were made in the past.

    The past sales numbers were not real, and will not come back.

    It’s not about punishing the Detroit automakers, but about not giving them special privileges. Last year 850,912 people and 28,322 businesses went bankrupt*. None of them had the privilege of whining, moaning and lying in front of Congress.

    The restructuring that the Detroit automakers need is not the dedication/excellence/perfection strategic consulting key-phrase crap that they claim to have done, but the hard core dropping of dealers, brands, union employees and debt that can only be done under bankruptcy protection.

    When a company like Chrysler whines that 25 percent of its potential customers cannot get loans its literally sickening. No business would every fail if magic pixie dust financing was available to every potential customer.

    Demand, in the economic, “demand curve”, sense is not the number of people that want a product; it is the number of people that want a product and have the ability to pay for it.

    * http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&CONTENTID=51718&TEMPLATE=/CM/ContentDisplay.cfm

  • avatar
    RetardedSparks

    NOW it all makes sense!

    Anyone who CAUSED the financial crisis please line up to the right for a bailout. Anyone who is a VICTIM of the financial crisis please line up to the left for…nothing.

  • avatar
    Casual Observer

    I just got through filing Ch 7. Not true that I would have been forced to re-pay the entire car loan to keep the vehicle. I could have negotiated a market rate to purchase the car outright (of course, if I had $12K to buy a car outright, I would not have been filing bankruptcy in the first place – but that besides the point).

    I also have not seen this credit dry-up being bantied about. I have been beating banks off with a stick who are trying to give me a car loan. One bank offered 8.9% for 48 months if I went to their Ford-dealing partner and bought a new or used vehicle. Not a bad rate for someone who just filed Ch 7; and I’m not even looking for a car.

    The credit is out there.

  • avatar
    Pch101

    Part of this problem comes from the terrible residuals of Detroit products. Dealers routinely deal with upside down car buyers, no matter what, but the poor values of the 2.8 products make it a bigger problem for domestic dealers taking trades from loyal customers. They also can’t use cut rate financing to move metal as they once did, so sales will naturally decline and incentives will increase to make up for the lack of cut-rate financing.

    Detroit has spent so many years selling deals instead of cars that the lack of credit makes their problems that much worse. A risk adverse buyer is more likely to avoid the car with the poor resale value, while import owners trading in their cars can more easily qualify because their more valuable trade-ins allow them to borrow less money.

    The credit crunch is real, but the extent of the problem is self inflicted. Had they built better cars that could retain their value, things wouldn’t be as dismal for the automakers or those who bought the vehicles as they are now.

  • avatar
    bleach

    The other thing hammering those residuals are all the endless employee pricing and toe tag sales. Just more examples of running with the short term thinking.

  • avatar

    Perhaps if engineers were in charge of the Detroit companies instead of money men like Rick Wagoner, things might be different. I think that’s a factor in the success that Alan Mulally has had in restructuring Ford. In engineering, something either works or doesn’t work. No amount of accounting legerdemain can hide the fact of mechanical failure.

  • avatar
    Prado

    “…a US market where 85 percent of Americans with a car loan have negative equity”

    “…With 85 percent of American car owners looking at an average of $4,400 negative equity on their vehicles”

    The two quotes above from the news blog do not add up. Regardless, it’s hard to feel much sympathy for the car makers who have been selling
    people cars they can not afford for years. No credit available…my ass.

  • avatar
    psarhjinian

    Perhaps if engineers were in charge of the Detroit companies instead of money men like Rick Wagoner, things might be different.

    Maybe.

    The problem with engineers is that they often think they know better. Sometimes they do, sometimes they don’t; the problem getting them to distinguish between what they should know better about (mechanicals) from what they don’t (sales, marketing, accounting, etc). Many engineers I’ve met suffer from incredible professional arrogance.

    GM has engineering and marketing done by accountants. That’s bad. Have you seen accounting or marketing done by engineers? It’s almost worse.

  • avatar
    Blobinski

    How many guys have you seen driving new $50K Chevy trucks who should probably be driving a ’78 Chevy pickup? Likewise for the other makes and models. Conversely, I have a credit score above 740 with a good paying job, yet the Honda dealer was scrutinzing me heavily on my purchase of a 2 year old Manvan. This was 3 years ago.

    This credit thang is a symptom of GM’s sickness. At some point you will almost do anything to get people into that tan Lucerne, including financing people that have no business being financed and selling cars at a loss.

  • avatar

    Hey, maybe W will throw a shoe full of money their way.

    I also have not seen this credit dry-up being bantied about. I have been beating banks off with a stick who are trying to give me a car loan.

    Absolutely! I’ve had banks practically begging me to borrow money. What credit crisis?

    John

  • avatar

    As a former employee of Ford Credit and BMW Financial who has written credit for pretty much every mainstream brand in the country, I can confidently say that these practices are neither unique to nor even particularly characteristic of domestic dealers and financing vis-a-vis “import” shops.

    Anything that’s going on now is candy-ass stuff compared to the excesses of the Voluntary Restraint Agreement era, when every Accord on the lot carried 20% ADP markup and even Subarus were selling for sticker. How about the fact that TMCC regularly writes deals for used Corollas at or near new MSRP, just because there are some people out there who are so fixated on buying a “slightly used Japanese car” that they don’t even bother to look across the lot?

    Car dealerships are pretty shady places, but the biggest thieves don’t sell for the Big Three. Let’s take a look at the JD Power dealer satisfaction index… and see who’s BELOW average?

    Mitsubishi
    Subaru
    Toyota
    Nissan
    Mazda
    Suzuki
    Scion
    Isuzu

    Heck, Isuzu even performed the insanely difficult task of keeping VW out of last place!

  • avatar
    M1EK

    GM has engineering and marketing done by accountants. That’s bad. Have you seen accounting or marketing done by engineers? It’s almost worse.

    Not even close. Engineers can do accounting, and a good product can sell itself to a certain extent.

    This is typical US B-school crap – the fact is that accounting and sales are support positions for any business that’s not an accounting or sales service provider. In precisely zero cases should a CEO have more experience in accounting or sales than in the actual development of the product they sell – yet our B-school mythos teaches MBA people that the process of making widgets is so simple that the real skill is in management, based on accounting and sales.

    US companies should be sending wreaths to the Western European governments for forcing bad labor practices on their industries, because without those, our big companies would be getting our asses whooped by their big companies – who mostly get it – that the engineering is the real job of the company, not something you try to cheap out on or outsource to save money for sales meetings.

  • avatar
    Robstar

    Just out of curiosity here, would anyone admit owing $4400 more than their car is worth? If so, how much do you owe on your vehicles? I owe $0 over 3…all paid off = nice feeling.

  • avatar
    racebeer

    +1 for M1EK

    I am a ME who, after about 4 years in the field, went back and got my MBA in Finance. When my friends ask why the hell did you, as an Engineer, get that MBA, I looked them square in eye and stated, without cracking a smile, “In order to tell the Finance folks that they are full of sh*t in language they’ll understand.” That is even more true today than it was back in 1983.

  • avatar
    Pch101

    Have you seen accounting or marketing done by engineers?

    Anecdotally, I’d say that engineers can often be rigid, in-the-box thinkers who design stuff that they like, rather than products that people want. The pomposity can be something to behold.

    Historically, General Motors was almost destroyed by William Durant, who focused on his engineering dreams at the expense of the business. Ford was surpassed by GM because Henry Ford was so devoted to his process and his vision of the product that he forgot to adapt to the changing demands of the customer. The Wankel would have destroyed Mazda had someone not figured out that installing it in everything for the sake of it was not an elegant solution, particularly before they had figured out how to make it work properly.

    It’s not wise for any one discipline to dominate a business. Accountants are probably the worst of the lot, because they confuse their ability to do arithmetic and label things with the ability to actually run a business, but you do need a few of them to keep the books. Just a few, though.

  • avatar

    Gotta say that the number of businesses lining up at the trough seems to be increasing with the number of MBAs running them.

    I worked at a small division of a corporation where they brought in a freshly minted MBA to run our group. This person stayed about 2 years, driving out the top talent, clients, and profit.

    That situation and the current state of the economy makes me wonder what are they teaching people in B-schools. What ever it is, time to do a 180.

  • avatar
    TaurusGT500

    Prado :

    “…… 85 percent of Americans with a car loan have negative equity”

    “……With 85 percent of American car owners looking at an average of $4,400 negative equity on their vehicles”

    …. The two quotes above from the news blog do not add up.

    I’ll play devil’s advocate. I agree that the quotes at 1st glance seem not to make sense. But I’m not sure their math is necessarily wrong.

    To wit: the reality is that most people that buy a new vehicle have negative equity the moment they drive off the lot if they’ve put down the bare minimum downstroke.

    Secondly, if $4,400 is the average neg equity, that average will be pushed upward by the folks that are way upside down on large, expensive SUVs, with very long (5-6 years) notes.

  • avatar
    bodayguy

    My car is a little less than two years old. I’m probably $3,000 in the negative if I tried to sell it, being realistic.

  • avatar
    RetardedSparks

    pch101 has it right. The engineers you want are ones who can free up their thinking and get creative, THEN back it up with science. The one place you DON’T want creative people is in the accounting office!
    Engineers fall victim to engineering for engineering’s sake. It is not the answer to everything. And well-engineered cars are not necessarily “good” cars in the sense that really good cars need to possess some un-engineerable qualities, sush as cuteness, soul, sex appeal (of one sort or another), etc. It took the Japanese decades to learn this.
    A good company needs all types, doing what they do best, pulling in the same direction. Not substituting one tyranny for another.

  • avatar
    dzwax

    “And well-engineered cars … cuteness, soul, sex appeal (of one sort or another), etc.

    Kinda like the Caliber, eh?

  • avatar

    GM has engineering and marketing done by accountants. That’s bad. Have you seen accounting or marketing done by engineers? It’s almost worse.

    Perhaps, but my guess is that engineers have the math skills to understand accounting. I also think that engineers are more likely to have a passion for the product and think it’s vital for business success.

    Remember that Apple and Microsoft are headed by techies.

  • avatar

    Ford was surpassed by GM because Henry Ford was so devoted to his process and his vision of the product that he forgot to adapt to the changing demands of the customer.

    Ford refused to admit that the Model T was not the sine qua non of automobiles. One of the cool things about the NAIAS is watching the engineers look over their competitors’ products. Smart engineers recognize smart engineering wherever it is and don’t fall for the “not invented here” syndrome.

    The customer is always right, except about technical things in which case they are usually wrong. Otherwise, who’d need engineers?

  • avatar

    And well-engineered cars are not necessarily “good” cars in the sense that really good cars need to possess some un-engineerable qualities, sush as cuteness, soul, sex appeal (of one sort or another), etc.

    That’s why you need talented designers working alongside the engineers.

  • avatar
    johnny ro

    If its a business then you need accountants, since money is the blood of the business. Gotta know if you are making money and have to do all that financial reporting. Especially investor relations.

    Bean counters, rejecting quality for a few pennies a unit and alienating the market, well thats always sad. Its not always accountants that are the bean counters. Anyone can make horrible decisions. GM and Ford purchasing, are they run by accountants? Henry and Durant were not accountants.

    Projecting IRR on a major initiative, well that takes a variety of mental disciplines. Engineers can do it as well as anyone else.

  • avatar
    psarhjinian

    Not even close. Engineers can do accounting, and a good product can sell itself to a certain extent.

    I think people need to understand the difference between the different types of accountants–it’s not just “being good at math” as engineers are wont to think.

    For example: I can understand the basic principles, or as much as I need to in order to bootstrap an ERP, but that doesn’t make me an accountant, just as being able to do CPR doesn’t make me a doctor. There’s whole realms of accounting (tax laws, GAAP, modelling, audit and control) that’s far out of my league. Some–not all–of the engineers I’ve met fail to distinguish the requirements to be a bookkeeper from those required to be a CFO.

    This is typical US B-school crap – the fact is that accounting and sales are support positions for any business that’s not an accounting or sales service provider. In precisely zero cases should a CEO have more experience in accounting or sales than in the actual development of the product they sell

    A CEO needs to be a leader, and most importantly a strategist. I can think of exactly one automotive CEO who fits that profile: Katusaki Watanabe, who came up from Planning and holds a Business degree. His predecessor, by the way, was a lawyer by trade.

    A CEO should care about the product he/she sells, but they shouldn’t be so involved in it that they develop myopia. Witness the Germans automakers and how their intercompany engineering cockfights took their eyes off the ball just long enough to Lexus to eat their lunch.

    – yet our B-school mythos teaches MBA people that the process of making widgets is so simple that the real skill is in management, based on accounting and sales.

    Spoken like someone who’s only had experience with bad business schools. Good ones say nothing of the sort: the concentration is on strategy, planning and leadership, not bean-counting or glad-handing. MBA schools don’t teach the primacy of accounting; it’s that most accountants of any stature in industry have MBAs because, quite frankly, you’re either a bookkeeper or a manager. Outside of the Big Four, there’s no middle ground.

    I tried to go this route but gave up, quite frankly because a) I was a better tactically than I was strategically and b) I didn’t want to abstract myself from operational matters sufficiently to really be a good leader. But that doesn’t mean that those qualities are bad or good, just that they’re applicable to certain situations. I make a good consultant or operational manager, but a very bad senior manager. Again, the professional designation doesn’t matter a whit.

    Rick Wagoner isn’t a bad CEO because he’s an accountant instead of an engineer. He’s a bad CEO because he lacks vision, leadership skills and any semblance of a spine. He’d still be shitty if he had P.Eng after his name.

  • avatar
    psarhjinian

    Remember that Apple and Microsoft are headed by techies.

    Not true. Gates had an early love of technology, but is generally cited more for his business acumen. Ballmer is a mathematician and economist, and definitely is not a techie.

    Jobs is different, and almost unique among upper management-types in his focus on product. By the standard set by Pch101, he’s probably the closest the to the “Bad Engineer” type as it gets: he’s more likely to fall victim to thinking what he wants is what everyone does, and he’s more often than not saved by the fact that even if the products developed under his watch aren’t perfectly targeted, they’re so well-executed and so focused that it doesn’t matter. The closest he comes to a professional trade is probably design and marketing. He’s certainly not a techie.

    Rather like Bob Lutz, but with better speaking skills and less anarchronistic tendencies.

    I think the lesson is that you, as a President or CEO, can’t abstract yourself from the business. Jack Welch started this nonsense, and people have taken it to heart not realizing that not every company has General Electric’s maddening breadth (you can’t be a product obsessive and run a company like GE; you’d go insane trying).

    GM is not GE. It needs someone who a) cares about product, b) can comnmand it’s legions and c) has a long-term vision. No one since Sloan has had that; Wagoner certainly does not.

  • avatar
    ttilley

    Back to the credit topic…

    GM’s executives should have to spend the rest of their lives explaining, through Bart Simpson-like blackboard sentences, how it is they came to own a mortgage company in the midst of an epic housing bubble. Selling a controlling interest to Cerberus has caused a number of problems, but I suspect it’s transferred a number of other problems over to The Dog. Whether GM survives the problems caused by losing GMAC is separate from the question of whether the problems caused by ResCap were worse. So score one for the decision to unload the toxic waste, and score more than one against the decision to have acquired the toxic waste to begin with.

    I think the real question is one that Farago has posted about before…GM rolling it’s upside-down customers into new loans that start with hopeless balances. Coupled with the crappy residuals caused by GM’s “brand equity” destruction. A problem the current economic meltdown exacerbates, but which was caused during the bubble.

    If GM didn’t want it’s dealers causing such problems then, when it owned GMAC, it could have simply not allowed this nonsense, and took its knocks from the accountants at the time rather than kicking the can down the road. So blame the dealers, responsible people wouldn’t put people into loans they can’t pay regardless of what someone else is willing to buy. But first blame GM for pushing the kool-aid.

  • avatar
    CopperCountry

    No sympathy needed for those who are “upside down” on auto loans – a little research and some simple math would’ve shown you (for certain brands/models) how quickly you’d get there. If you planned on keeping the pile forever, and you got it cheap, who cares? But if you were expecting to waltz back into Krebsbach Chev in 4 years use the ‘equity’ in your ride as a downpayment on a new car, well, that scenario hasn’t been realistic for a long, long time. And for that, we can all thank the OEMs and their own “sub-prime mortgage scheme” (e.g. cheap, OEM-underwritten lease deals).

    It never did make sense to me how they could offer you a new car for $200/month when it’s easily depreciating a 2-3x that amount (“we’ll make it up on volume, son!”) Sorry, with car loans, home mortages, Las Vegas casinos, and State Lotteries, a poor understanding of math will burn you every time.

  • avatar
    Mark MacInnis

    Interesting set of double standards. The other day, in a comment directed towards a review of the Nissan 370Z, I made comments about a vehicle’s horsepower being the be-all-and-end-all measurement to a certain class of the B&B…not with any derogatory or abusive language, and not directed at any particular writer, or poster, on the site….my comments were directed at an attitude. RF deemed it a flame, and duly scolded me via e-mail. Tsk Tsk.

    Here we have an article where accountants are denigrated as a group, roundly and with venom which I would consider worthy of a flame warning, to the apparent tacit agreement of the editorial board of this site.

    Full disclosure: I am an accountant who has worked in this industry for 17 years.

    I agree with the premise organizations such as GM, who seem to place too much emphasis on finance and accounting and not enough on product engineering court trouble.

    But these articles which slam the profession of accounting, and its practitioners as the seemingly the root of all evil in American business today, well, I take exception.

    Accounting is only boring when it is done correctly, as it said on a coffee mug I broke a long time ago.

    And, I’d like to see anyone try to start, run, or grow a business without the aid and advice of an accountant.

    As an earlier poster wrote, the best run organizations function when there is a balance of the talents of finance/accounting, engineering, marketing, and management working together in harmony toward a common goal.

  • avatar
    walkwalkfast

    How many guys have you seen driving new $50K Chevy trucks who should probably be driving a ‘78 Chevy pickup? Likewise for the other makes and models. Conversely, I have a credit score above 740 with a good paying job, yet the Honda dealer was scrutinzing me heavily on my purchase of a 2 year old Manvan. This was 3 years ago.

    This credit thang is a symptom of GM’s sickness. At some point you will almost do anything to get people into that tan Lucerne, including financing people that have no business being financed and selling cars at a loss.

    I recall the tax credits that put Hummers and Navigators with tiny URL decals for consultants or what-not and wondering why someone who probably never shed their pajamas needed an H2 for work. I laughed at the time. Now I’m not coming down on either political side here, the piece does seem to lean one way; this is the only reference I could readily find.

    http://www.ens-newswire.com/ens/jan2003/2003-01-21-09.asp

    Can anyone say how much over-reaching people did to qualify for these credits? It had to contribute.

    /first post

  • avatar
    ronin

    >>”…The other thing hammering those residuals are all the endless employee pricing and toe tag sales….”

    Used car sales sell at the price of a willing seller and buyer.

    New car prices are similar, except that the allowable range is set by the seller. When no one buys, the seller must lower the price. If the seller didn’t lower the price, no one would buy. In other words, the seller doesn’t control the market long term.

    The seller has no ability long term to prop up the price of new cars. Hence they could not have held off red tag sales if they wanted to sell cars. They could not have tried to artifically prop up the new car price in an effort to prop up used car prices. The market does that.

    Oh sure, the sellers could try to hold up new car prices in an effort to prop up used car prices. But no one would buy, and new cars would overflow the lots.

    Which is exactly where we are now. Not only is the market forcing sellers to use red tag or employee pricing- fake sales which anyone could have negotiated in the past anyway- but the seller will be forced to offer real, true, non-fake discounts to move merchandise. Or the taxpayer throwaways can keep the sellers afloat indefinitely without a discount, hence without a unit selling.

    And used cars will quickly find their own price level, which is a flight or two down from where they are today. You can’t manipulate the market forever, or the Soviet Union would be the richest, happiest country on the planet today.

  • avatar
    bunkie

    Engineering is about tradeoffs. Any given project can be optimized for a set of desired results at the expense of those parameters that are less important. When the optimizations chosen serve the business purpose, good things can happen.

    Since Apple has been mentioned, let’s talk about the Apple II, the first PC that was really successful with business users. This was largely due to a combination of Visicalc and a cheap floppy disk drive. Visicalc was available for the TRS-80 and Commodore Pet as well, but Apple had a major advantage in that their floppy disk drive was half the price. This was a result of Wozniak’s brilliant design. Everyone else used off-the-shelf disk-interface chips from Western Digital. Woz designed his own peripheral interfaces using the Apple II’s CPU (a 6502) as the controller. This allowed Apple to radically undercut their competitors on pricing. The best word to describe the Apple II’s design was elegant.

    Of course, Apple also serves up a lesson (one of many) in how to go wrong. The Apple 3 (Woz had almost nothing to do with this turkey) was an expensive, over-engineered disaster. Being designed to serve both the intended audience of business users and the legions of Apple II customer base as well, it failed at both. It almost killed the company.

    The point is that to reinforce what others have said about success being a combination of talents and skills. When all are working toward definable and reachable goals, most often set by leaders with vision, good things happen.

  • avatar
    Geotpf

    If you own a one month old car, especially a vehicle made by anybody but Honda or Toyota, you probably have several thousand dollars in negative equity unless you made a large down payment (that is, the car loses thousands of dollars the moment you drove it off the lot). Saying that the average person with a car loan has negative equity is a “duh” statement, IMHO.

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