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Jul. 22 2010 - 5:20 pm | 112 views | 0 recommendations | 12 comments

Watch out, G.M. — that’s a tightrope you’re walking

A General Motors dealer displays a banner prom...

Image by AFP/Getty Images via @daylife

General Motors just spent $3.5 billion to buy Americredit, a subprime lender. I guess it’s good news — first, that G.M. actually HAS $3.5 billion (probably from the huge revenues it’s been reaping in China), and second, that it can now give Americans an easier path to buying its cars.

But the news still sent a shiver down my spine. Subprime lending — isn’t that what toppled several once-stellar financial firms, and came close to toppling the entire economy?

G.M.’s motives, of course, are clear. This from today’s New York Times:

“Our dealers have been telling us that not having an in-house finance arm hurt our ability to finance certain loans and leases,” Edward E. Whitacre Jr., G.M.’s chief executive, said in a conference call. “It hurt our ability to meet rising customer demand for G.M. cars and trucks. Now we’re going to fix that.”

In fact, some experts say that the ability to extend financing could boost G.M.’s domestic sales by 20%. Hard to argue with that.

What worries me, though, is that dealers make money when they sell cars, so won’t they be monumentally tempted to extend credit to people with poor chances of paying it back? Is there a real difference between a sub-prime car loan and a sub-prime mortgage?

I’m probably over-reacting. If someone defaults on a $15,000 loan, it’s not as dangerous to the company — or to the economy — as when someone defaults on a $500,000 loan. Nor is repossessing and reselling a car as complicated as foreclosing on a mortgage. And there are an awful lot of people with low credit scores who, in fact, are safe bets for repaying loans. Jesse Toprak, the vice president of industry trends and insights at TrueCar.com, makes a good case for that:

Mr. Toprak said many consumers have low credit scores because of isolated negative events like late bill payments but otherwise pose a low risk of default. As a result, they are being turned away by lenders who tightened their credit standards after subprime mortgages helped cause the recession.

“They’re basically being ignored simply because of the paranoia. It used to be there was lending like drunken sailors, but now it’s the opposite,” Mr. Toprak said. “If G.M. can fill in that void, there’s a big potential for return for them.”

Fersure. But why would we believe that Americredit and GM dealers would be any better at filtering out the potential deadbeats from the safe bets? Are they really that much smarter — and that much more conservative — than the pre-recession mortage brokers? I have no reason to believe they are. And as I said above, a dealer will do most anything to make a sale.

Again, I hope I’m having an unwarranted, knee-jerk negative reaction. But I don’t feel good about this…


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  1. collapse expand

    ” Is there a real difference between a sub-prime car loan and a sub-prime mortgage?”

    You’re missing that fact that the mortgage crisis was perpetuated on the assumption that home prices would continue to rise. By default a car will lose value, never appreciating (maybe in the rare case of an antique, but a moot point here). You can’t really go wrong on this assumption, and if this is known then lenders will adjust their thresholds to this fact. So, cars and mortgages are quite different things, and that risk that brought on the mortgage crisis is virtually non-existant in this case.

    • collapse expand

      I’m not missing that fact at all — as I readily conceded in the post, the economy will not be brought down by car defaults. And few people will by a Chevrolet as an investment.
      But I still worry that GM, a company that was on the brink of bankruptcy, will be too zealous to pump up sales by extending credit too easily. Or, even if that isn’t the corporate policy, that commissioned salesfolks will act in the best interests of their wallets, not of their job security.

      In response to another comment. See in context »
  2. collapse expand

    Your point was car loans won’t bring down the economy because they are smaller. Valid, probably, but you still missed the big point.

    “What worries me, though, is that dealers make money when they sell cars, so won’t they be monumentally tempted to extend credit to people with poor chances of paying it back? Is there a real difference between a sub-prime car loan and a sub-prime mortgage?”

    Dealers don’t make loans, GMAC did (and would have been fine, minus mortgages) and Americredit will and hopefully be ok in doing so, granted they don’t start buying houses. You make valid points about overextending credit, but then again see my point above, and we have the biggest, however unlikely the smart people thought, risk evaporate.

    Your points are mostly valid. If they lend like idiots again it’s not a good thing. However to say subprime lending is subprime lending is flat wrong. The behavior of the asset is fundamentally different. Comparing cars to houses is comparing the cliche apple and orange.

    • collapse expand

      we probably agree more than we disagree. I’m not saying the assets are identical, and I readily admitted that I might be over-reacting. But what worries me is that I didn’t see any sign, in the Times piece or in wire service coverage, that GM is conscious that being too free with credit yields sales in the short run, repos in the long run, and is no way to (re)build a business. GM seems to be recovering from its near-death experience, but I don’t think it could easily withstand a slap upside the financial head.

      In response to another comment. See in context »
  3. collapse expand

    This whole argument can be made clearer by simplifying it to it’s most basic elements. People who cannot afford to borrow money to have things should not be lent to. It matter not what the effect is on the economy, financial institutions, or GM. As long as we continue to jawbone reasons to make loans where credit worthiness in at reasonably unacceptable levels, we will miss an opportunity for America to get it’s act together. Leverage, risk, debt, creative financing, even derivatives are good things if used wisely. The only way that “wisely” can be a reality is through thoughtful regulation and enforcement. We, as a nation, have proven to ourselves that market forces will not contain the predilection towards of reckless greed and gluttonously. Volker is right: Banking needs to get boring again. You are completely correct in worrying about this development.

  4. collapse expand

    “Avoiding debt at all costs” is a depression era rule. To my way of thinking, denying people credit because they are not “credit worthy” (however that is defined) is a humanitarian rule. People of limited means need to be protected from predatory lending. Taking away the credit card debt that is injurious to the citizenry will take a huge bite outa the big city bank’s profits. the idea that massive bank credit card profits came out of the real-world-level paychecks of Ned and Nancy Nascar is really a travesty (and an opportunity to correct and make America better). Excessive consumer debt is financial crack. Men and women who build roads, provide patient care, and run machinery deserve these protections. What would Thomas Jefferson do? Viva Elizabeth Warren!

    • collapse expand

      our only disagreement revolves around “however that is defined.” Remember, I posted because I was concerned that GM would let credit flow too freely. But I’d hate to see the pendulum swing too far the other way — i.e., if I missed one credit card payment, for whatever reason, I suddenly can’t get a mortgage or car loan.

      In response to another comment. See in context »
      • collapse expand

        I totally agree. Nowhere did I advocate for draconian restriction on consumer credit. if we went back to the depression ear rules from our grandparents, the nation’s economy and the people would suffer unnecessarily. One of the big problems Japanese policy makers faced in the post-war period were stubbornly high savings rates. Politicians and beltway bureaucrats often embrace the “financial services” industry and it’s profitability as a serious economic issue. When that profitability is connected to predatory lending and various forms of deceit, the nation as a whole suffers. Worse, it’s a form of class warfare where people who add value get their asses kicked by those who some times do not. It’s anti-American, I tell ya!

        In response to another comment. See in context »
  5. collapse expand

    Since the government owns GM, and Obama IS the government…Obama is the new owner of the suprime lender

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    I graduated from Cornell with a degree in child psychology, enough years ago so that all you needed to break into journalism was willingness to starve. I went into business journalism because, in the 60s, the business press was the crusading press, the ones that wrote about environment, race relations, etc. Since then I have worked for Business Week, Chemical Week and, from 1984 through May 2008, BizDay at the New York Times. I remain bored by and ignorant of esoteric financial instruments; I remain fascinated and pretty knowledgeable about management, marketing, environment, all the non-financial aspects of business. But my true passions? Tennis, both playing and watching, and food, both cooking and eating.

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