GMAC is giving your money to subprime buyers
Posted
Dec 31 2008, 07:51 AM
by
Andrew Horowitz
Rating:
GMAC, the main source of auto loans for General Motors, was recently approved as a bank holding company allowing them to access funds from the Federal government. Within days after the approval, taxpayers provided the lender with $6 billion of funds through the TARP in an effort to help stimulate auto sales. That could be helpful as during November sales were down a whopping 37%. What's more, as record layoffs persist, vehicle sales are not seeing any chance of returning to normal levels anytime soon.
You would think that the record number of auto loan defaults and delinquencies seen during 2008 that GMAC would look to a conservative approach when lending this money in a time of great economic distress. But, NOOOOOOOOOO. Instead they believe they have to relax lending standards and provide ridiculously low interest rates that will assuredly have them lose on every deal. Here is how they are about to spend your money...
First, they are planning on providing 5-year, zero interest loans on some of the slowest selling cars from the 2008 and 2009 product lines. Essentially, all the time that sales have been slowing, they kept on producing cars and were increasing inventory to record levels. Now with this new lending facility, they have been given the ability to sell those cars with FREE loans from money provided by you and me. That is what I call a bad investment.
But wait, there is more! Not only are we giving money away in the form of FREE loans, GMAC has decided that lowering the lending standards will be a real benefit to GM's bottom line.
"Credit is the lifeblood of the auto industry, both for consumers at the retail level and dealers at the wholesale level," says Annette Sykora, NADA chairman and owner of two domestic-brand dealerships near Lubbock, Texas. "Lowering minimum credit scores from 700 to 621 will expand credit availability to thousands of potential car buyers and further increase consumer confidence at this critical time in the auto industry."
Wasn't this the same kind of lending practices that got us all into big trouble in the first place?
One more follow up question: It was clearly indicated that the last of the TARP money was used to provide upwards of $17 billion of temporary assistance for General Motors, Ford and Chrysler. Then, where did this money come from?
Related Reading:
Andrew on Fox Business: Union Busting
Auto Industry Promises: Can we trust them?
Podcast: Auto Industry at a Crossroads
Do Auto workers really earn $73 per hour?
Auto sales crash and burn
Andrew Horowitz is a money manager and the founder of Horowitz & Company. He is also the author of the bestselling book, The Disciplined Investor . Check out his latest investment idea or listen in as he hosts, The Disciplined Investor Podcast.
