Does Washington's GMAC bailout hurt Ford?
The Wall Street Journal puts forth the case that the government's $5 billion lifeline to GMAC has given GMAC a competitive advantage compared to its rivals. After the taxpayer cash was received, GMAC dropped the required credit score to get a loan and began offering 0% financing on several models, and rates from about 1% to 6% on a host of others. While doing so, it admitted that "without this [loan] . . . we would not be able to do this today."The Journal cries foul, saying that because GMAC is essentially doing this with -- or at least, because of -- government money, "the feds have now put the muscle of the state behind one company's products." The Journal also considers that the government might do what it can to make sure the horses it bet on win the race, saying "the Washington temptation will be to take other steps to help the two companies gain market share at the expense of their private competitors."
As to the issue of granting the loan to GMAC at all, the government didn't have much choice unless it wanted its previous investment in GM to potentially get flushed by a GMAC bankruptcy. As to 0% fiancing, it's being offered on SUVs and Saabs, none of which are making the cash register overheat. A quick comparison between financing in Southern California through GMAC or Ford Credit found similar rates on other cars: the 2009 Malibu gets 4.9% APR, the same as the 2009 Ford Taurus SEL AWD.
Will the government try to otherwise help GM and Chrysler (beyond pushing more money their way)? The airlines got $15 billion after 9/11, yet would anyone accuse the government of otherwise aiding the industry? As to intervention in the free market... well, when was the last time the market was truly free? And Does GMAC's ability to offer the new incentives give it a competitive advantage over the other companies? It only lasted until January 5th, and some GM dealers did say they were moving metal -- but if the benefit really was that lopsided, we're sure those competitors will let us know about it soon enough.
[Source: Wall Street Journal]
As to the issue of granting the loan to GMAC at all, the government didn't have much choice unless it wanted its previous investment in GM to potentially get flushed by a GMAC bankruptcy. Regarding the 0% fiancing, it's being offered on SUVs and Saabs, none of which are making the cash register overheat. A quick comparison between financing in Southern California through GMAC or Ford Credit found similar rates on other cars: the 2009 Malibu gets 4.9% APR, the same as the 2009 Ford Taurus SEL AWD.
Will the government try to otherwise help GM and Chrysler (beyond pushing more taxpayer money their way)? The airlines got $15 billion after 9/11, yet would anyone accuse the government of otherwise aiding the industry? As to intervention in the free market... well, when was the last time the market was truly free? And does GMAC's ability to offer the new incentives give it a competitive advantage over the other companies? It only lasted until January 5th, and some GM dealers did say they were moving metal -- but if the benefit really was that lopsided, we're sure those competitors will let us know about it soon enough.
[Source: Wall Street Journal]
Reader Comments (Page 1 of 2)
AZMike 7:49PM (1/04/2009)
sounds like a crock to me for several reasons.
-first, GMAC had raised credit granting scores because they were short of cash, now they have money to lend again. their average buyer had a 621 FICO; that's the minimum they have now. a mystery here? by the way, that 621 FICO is pretty much the average for all captive lending companies, whether domestic or import.
the terms of the loan and the movement of GMAC from a holding company to bank status required both GM and Cerberus to take a much-diminished stake in GMAC than they had before. this is very important, because it reduced the stranglehold that Cerberus had over GM. it's gone now.
-second, Chrysler just got their loan money, too. will Chrysler Financial now get their captive credit company funding auto loans again? if so, why not a story here of "Chrysler and GM against Ford"?
Ford chose to not participate in any government loans at this point, as they felt they were well-funded at this time.
so where is the story?
AZMike
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Noidor 8:25PM (1/04/2009)
Well Ford has already borrowed $20bil against their assets, so they were ahead of the curve. So question is, will Ford shove volume down taxpayers' throats like GM and Chrysler, or will they do it the logical way of making products that a fragmented market wants, use coherent lending standards, and reduce overall cost-per-unit. $70/hr is not a myth despite what some UAW buffoons want others to think.
Lending? People who buy GM products tend to have lower credit scores, and I still find it to be absolutely absurd to be lending at 100% LTV when someone's score is 620. It's absolutely irresponsible, and further drives those people to financial disarray. Problem is they will be upside down on their future payments, ON TOP of the upside down payments from trade-ins they are getting rid off right now!
Cars will be worthless, loans will be defaulted on, but hey dealers will be quite happy because by time "Cement Bubba" defaults on his Cobalt, GMAC will run to government for more money and ask them to buy more toxic debt.
But it's okay because in America no one believes in personal responsibility, savings and using borrowing as a last resort.
AZMIke 8:44PM (1/04/2009)
ah, Noidor,
we're going down the same silly road as last week, huh? as it was then, I'm glad you're such an expert on credit, with the silly belief that for some reason domestic buyers have lower credit scores that all of those well-educated and more intelligent buyers of imports.
you're wrong.
Nissan Motor Acceptance Corp, Infiniti Financial, Toyota Motor Credit Corp, it's Lexus arm, BMW Financial, and Mercedes-Benz Credit all go all the way back to a 600 FICO. does this then mean that GMAC's customers are better credit risks with their higher scores?
who do you think got hurt more in this crisis; the guy who works for the city and lives in a $500 apartment, or the "rich guy" who was totally leveraged, and lost everything in the stock market, and has a $6,000 per month house payment? who's losing the BMW, and who's keeping the Cavalier?
you also have absolutely no clue about loan-to-value ratios, either. the captive credit companies I've mentioned above give dealers a 130% advance. translated, this means the sales price of the vehicle+tax+license+doc fees+warranty, and 30% more above that to unbury them from their trade, and bury it in the new loan.
looks like the 100% LTV you speak of with GMAC is very sound lending in comparison!
you'd do a lot better with this if you even had a remote clue of how the business works. you don't.
AZMike
Noidor 9:34PM (1/04/2009)
Don't turn my comment into something that it is not.
1) My point from get go was that people with lower credit scores must be required to put a down payment which would prevent them from going upside down on their car later on in the future. Because let's face it they'll chase the lowest monthly payment possible, take a 5yr loan and there will be a $2-3k difference by time they'll want a new car because of the so called "hot-deals" we have being promoted by government. They want people to borrow until they're dead. Our economy is a Madoff scheme.
2) As for who bought what, yes there are some rich people who got hurt in stock market, but guess what, most have college degrees, they have a solid income they can rely on, and most of them will be able to afford continuing making payments on their cars. Those people tend to buy imports.
3) It were lower-class middle class people who were not renting, but having a mortgage on largest house they could afford with a teaser rate (Option ARM, IO ARM, etc etc). They should have rented, but they listened to people like you and decided it would be wise to borrow and buy a house, buy a new car, etc etc. Those are the ones who are hurting right now with high utility costs, children about to go to college, soon to be retired parents, and so forth. Are you seriously going to tell me that lower middle class went the common sense 15-30yr fixed route on mortgage? Or 24-36mths on their car? Really?
Those were the ones who were buying short-sighted "deals" from people like you, they were the ones who bought American cars on payments of which they are now upside down. Why do you think Toyota is hurting so much at the moment? Because they bought into GMs game of chasing volume with absurd deals with lax lending standards, and they got into a very crappy and unstable lower middle-class status market.
And I do know how loan-to-value concept works.
AZMike 10:13PM (1/04/2009)
Noidor,
your self-important attitude is unbelievable. the "lower middle class" comments are truly precious. what is "lower middle class", those who make less than $150K? shall we just poetically refer to them as "huddled masses"?
"deals from people like me?" I haven't owned a dealership since 1993. what deals am I giving?
get over the college degrees. in most job markets, they are absolutely worthless. a college degree doesn't guarantee anything anymore. know anyone looking for any financial analysts, or mortgage bankers? perhaps a stellar career at Washington Mutual?
...and getting back to that $2-$3k they'll be buried; where, on Mars? get real, if you're trading in something you've had for three years (and I don't care WHAT it is), you might want to think along the lines of $10-$12K buried, not the low number you're talking about. check the KBB guide; book out like vehicles, like a Nissan Titan and a Chevrolet Silverado. guess what? they have the same value. check out the Prius; book that out, and call a dealer; they'll be taking another $2-$3K from that number on a real trade. loved your comments on the 24-36 month car loans; they are selected by less than 5% of borrowers.
I wasn't aware I was in the mortgage business, either; I don't recall recommending silly things like ARMs. however, crazy "experts" like Alan Greenspan did, saying in 2006 "that only a fool wouldn't get an ARM". wasn't he considered a God in the financial world for what, the last 30 years? you should have shown up at some time, and I'm sure your great financial knowledge would have obviously eclipsed his.
AZMike
Kaptain75329 10:55PM (1/04/2009)
"first, GMAC had raised credit granting scores because they were short of cash, now they have money to lend again." - AZMike
Which is what the banks on Wall Street were supposed to be doing with their own bailouts - where's the WSJ with the story on that one?? I'm no fan of any of these bailouts, but at least GMAC is playing by the administration's rules here. I don't see the problem with using the bailout cash for consumer lending - wasn't that the point of all this in the first place? Why are these journalists complaining now?
Maybe because this is still socialism any way it's cut. This gesture is basically the Government picking winners and losers as far as I'm concerned. Even so, at this point, THAT debate is pretty much over. Time to move on - to the ballot box.
"Ford chose to not participate in any government loans at this point, as they felt they were well-funded at this time. so where is the story?" - AZMike
This looks to me a lot like the media doing what it does best - whacking a bee hive and then printing a story about the increased risk of stings.
AZMike 12:14AM (1/05/2009)
Kaptain,
I believe that is the point I was making; there is absolutely no story here concerning the automaker's captive credit companies. there can be no recovery without someone buying vehicles, and granting the credit to do so.
it's the banks that received the bailout money that is the real issue. money that businesses routinely use for day to day operations come from banks, not the captive credit automobile finance companies. and without the routine loans constantly provided to business, the economy can't get moving. I'm sure this will be one of the first orders of business for President Obama.
and don't forget to see the difference between what the banks received, and what the automakers received. the banks received bailout money, and the automakers have loans that will be repaid.
a very big difference.
AZMike
Kaptain75329 11:00AM (1/05/2009)
Yes Mike, I was agreeing with you here, so what's your problem this time? Right.. must have forgotten to kiss your ass in the process. Go figure.
Updated post just for you:
"@ AZMike!
Whoa man - like totally with you all the way!
Even a broken clock is right twice a day!!"
Oh, and that little nugget about GMAC one-upping Wall Street by doing the right thing with the bailout cash? Yea, that was my point. Which is kinda why I bothered to post in the first place. To, you know, contribute some of my own thoughts while I was agreeing with you and stuff.
Don't be so sensitive. It's just a car blog. :)
KAveh 7:50PM (1/04/2009)
The GMAC bailout hurts all the other car companies, but shouldn't the CEO get a cap on his pay if the goverment is paying to bail them out?
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notYou 10:11PM (1/04/2009)
Can we get pay-caps, firings, and perp-walks for congress too, since we tax payers are perpetually bailing them out?
In other words - be a private industry, get fscked by government stoked market forces, need a fed loan and everyone screams for the CEOs head.
But, be a member of Congress charged with oversight (Dodd, Frank, etc.) over federally created institutions and PC regulations (Fanny, Freddie, CRA, Sarbanes-Oxley, etc.) during the greatest financial theft, err meltdown, in our countries' existence and you get to demand that private institutions "come back with a plan!".
Sickening
I have no doubt that any and every one of those domestic automakers will do 10x more with whatever meager funds Congress deigns to loan them than Congress ever could or would (see: NO/Katrina, war-on-poverty, education, etc.) - Congress literally pisses away _bazillions_ every single day and nobody cares.
KAveh 10:15PM (1/04/2009)
I am with you NotYou, congress seems to be giving all the money to the big companies, GM needs to make better cars, because it really doesn't matter how much money they get if nobody is buying the cars.
KT 7:52PM (1/04/2009)
If the economy continues to deteriorate Ford Credit would be able to apply for bank holding status (I think that's what it's called), like GMAC did, and would then be eligible for TARP funds.
Will the gov't "back the horses" they bet on? You know they will do whatever they can to make sure their investment isn't squandered. However, I think Ford will keep a close eye out for that type or preferrential treatment. And as soon as they think they see it, they will scream it from the roof tops! As they should.
One thing about GMAC and their LOAN, at least you can see them putting it to work unlike the financial institutions who are out right refusing to disclose what they have done with their HANDOUTS.
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Robert 8:22PM (1/04/2009)
Ford has actually applied for a type of bank status and it is provisionally granted. But they don't have any "toxic" assets like GMAC, so they wouldn't get any TARP funding anyway. Ford's application does allow for Ford Credit to accept deposits. Which means they can offer CDs, IMMAs, etc to bolster their cash flow and protect against the rough credit markets. I believe Toyota has bank status for its financial arm as well.
Richard 7:58PM (1/04/2009)
GMAC - one finance arm of the car companies (GM and Cerberus) owned by the US Government is extending 0% financing because of the loan they got from American taxpayers.
I'd say that the ability to offer that 0% financing puts GM at a distinct advantage over Ford. Wouldn't you?
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why not the LS2LS7? 8:17PM (1/04/2009)
The 0% isn't that good a deal. You have to give up the roughly 10% "red tag" discount to get the 0% anyway.
But I agree it does seem like an unfair advantage for GMAC over Ford credit.
Noidor 8:30PM (1/04/2009)
It does seem like an unfair advantage in short-term, but in longer term I think Ford will have less crap products and less crap loans on their hands. Let GM do what it has always done and what led to its near-collapse, which is chase volume anyway they can!
Richard 8:51PM (1/04/2009)
Noidor,
But now that Bawney Fwank et.al. are in with American Taxpayers money, they'll leverage it. Ford will never be on an even footing again.
firstplace 8:50PM (1/04/2009)
It is all about the short term gain, and yes giving them money is a competitive advantage.... I think they will go bankrupt anyway as people are still not buying, they are just draging this out with loans they will never be able to pay back.... inflation for everyone else.
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Scott 9:21PM (1/04/2009)
There certainly is a pro-bailout slant to many of the recent articles in Autoblog. Quite frankly, why aren't you writing about the business decisions that got the big three into the position they are today? The leadership of those companies over the past two or three decades has put these companies in the position they are in now. Why do they deserve my taxpayer money? Everyone said that the world would end if the financial institutions didn't receive a bailout. Guess what? The bailout money isn't being used for loans in most cases. That bailout has done nothing good for this country. The auto bailout will also do nothing good for the country or the auto industry as a whole.
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RayJ 10:06PM (1/04/2009)
Sure it will hurt Ford but it is their own fault. They took the gamble of trying to seem stronger than the other two. It is a gamble that may not pay off and has already hurt them. They just should have taken the money or tried to to the same thing with Ford Motor Credit but they will just have to tuff it out.
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