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Cantilever

GM gets back into the subprime loan business

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Here we go again.

 

Actually according to the article, it's not a guarenteed bad thing, the opposite actually.

 

You guys think this is a proper step for GM to make as a way to become fully private again?

 

SAN FRANCISCO (MarketWatch) -- General Motors is back in the subprime loan business.

 

That isn't as crazy as it sounds -- as long as the company stays disciplined and sticks to auto loans, rather than branching out into subprime mortgages again, analysts said Thursday. Indeed, some said the move is essential as GM prepares for an initial public offering that will cut the U.S. government's 61% stake in the company.

 

GM said Thursday that it agreed to buy subprime auto lender AmeriCredit Corp. (ACF 23.95, +0.04, +0.17%) for $3.5 billion in cash. Read about the transaction here.

 

The deal harks back to the previous decade, before the financial crisis, when GM owned GMAC, one of the largest lenders in the U.S. GMAC, now called Ally Financial, made auto loans that financed a lot of GM's car sales, but it also offered mortgages through its Residential Capital unit, which grew into a leading subprime mortgage player.

 

When the financial crisis hit, the mortgage side of GMAC suffered the most. Ford's (F 12.09, -0.02, -0.17%) huge financing unit,

 

Ford Motor Credit, didn't get into mortgage lending and survives to this day.

 

Defaulting mortgages, not souring auto loans, were also the source of the crisis. That was partly because of the different assumptions that went into making home loans versus car loans.

 

Lenders and investors assumed that house prices would keep going up -- or would at least not fall on a nationwide basis. In contrast, cars are widely known to lose value steadily. That meant auto lenders were inherently more conservative about the value of the assets backing their loans and about the behavior of borrowers in tough economic times.

 

"Historically homeowners had positive equity in their houses. So they would pay the mortgage first and default on other loans like auto loans," said Sean Egan, president of Egan-Jones Ratings, a rating agency that's paid by investors rather than issuers.

 

When house prices slumped, that pattern was turned on its head, with devastating consequences for mortgage lenders and investors that held securities backed by home loans.

 

For auto lenders the change may have even helped a little. Having defaulted on their mortgages, borrowers may have been more able to make their auto loan payments.

 

"There have been lots of home loan defaults before people defaulted on their auto loans," Egan said.

 

Balance

 

Still, this topsy-turvy situation may not last and Egan warned that it's possible to lose just as much money in the auto loan business as the mortgage sector.

 

For the AmeriCredit acquisition to work, GM has to maintain a balance between making cheap loans to boost car sales and avoiding big losses on those loans, Egan said.

 

"If it's properly managed it's a positive, but if it's driven into the ground it will be a large negative," Egan said. If the company starts offering car buyers 7 year, no-interest loans with nothing down, then it could get into trouble again, he added.

 

"Hopefully history is not a good indication of the future because the history has been miserable," Egan said. "GM's current management seems much more attuned to proper business practices than it used to be."

 

Essential

 

Some analysts said it's essential for GM to have its own auto lending business if it's going to succeed as an independent, publicly traded auto maker again.

 

"If you IPO this company without a captive auto lending business it will go out at a 20% discount to Ford," Christopher Whalen of Institutional Risk Analytics said in an interview.

 

When GMAC was hit by massive mortgage losses, it had to be bailed out by the U.S. government. Part of that involved becoming a bank holding company, while cutting back on riskier loans -- including subprime auto loans. GMAC also got out of financing auto leases because the recession had hit used car prices hard.

 

As GMAC pulled back, GM sales plummeted because lots of less-creditworthy customers could no longer get loans to buy the company's cars.

 

GM hopes AmeriCredit will bring some of those car buyers back.

 

"Not having subprime lending capability meant that GM was leaving a fair amount of car sales on the table," said Thomas Ferguson, an analyst at KDP Advisor, a fixed-income research firm. "This is a way to access to the lower end of the customer credit spectrum."

 

The acquisition should also help GM lease more cars too, Ferguson added.

 

"For companies like GM and Ford, working with captive finance companies is generally pretty profitable," the analyst said.

 

Alistair Barr is a reporter for MarketWatch in San Francisco.

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that was the first headline i read at 6am this morning - and I groaned outloud.

 

bad idea.

 

they need to build better, more efficient cars - not sell the same crap to those that can't afford it.

 

I hope they IPO it before it collapses again, and let it be someone elses problem frown.gif

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View Postthat was the first headline i read at 6am this morning - and I groaned outloud.

 

 

bad idea.

 

 

they need to build better, more efficient cars - not sell the same crap to those that can't afford it.

 

 

I hope they IPO it before it collapses again, and let it be someone elses problem frown.gif

 

How do you know they are not building better cars? I think they are building cars that people want and with good quality.

 

 

I think they had management issues as well as the recession that screwed them up. I do think their vehicles stand up to the others and have been for awhile now.

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View Postthat was the first headline i read at 6am this morning - and I groaned outloud.

 

bad idea.

 

they need to build better, more efficient cars - not sell the same crap to those that can't afford it.

 

I hope they IPO it before it collapses again, and let it be someone elses problem frown.gif

 

 

 

they still need to remain competitive with the sub-prime buyers, not having an inhouse lender puts them at a disadvantage

 

ACF appears to have a long history and managed well. They survived the credit crises and have good earnings.

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View PostHow do you know they are not building better cars? I think they are building cars that people want and with good quality.

 

I think they had management issues as well as the recession that screwed them up. I do think their vehicles stand up to the others and have been for awhile now.

 

How are their sales as compared to others?

 

I'm personally in no hurry to buy another GM.

 

In it's prime, GMAC made more money for GM than cars.

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View PostHow do you know they are not building better cars? I think they are building cars that people want and with good quality.

 

I think they had management issues as well as the recession that screwed them up. I do think their vehicles stand up to the others and have been for awhile now.

 

 

the long standing labor/management has been GMs biggest problem giving them the highest costs in the business. The banlruptcy was supposed to fix that.

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View PostHow are their sales as compared to others?

 

 

I'm personally in no hurry to buy another GM.

 

 

In it's prime, GMAC made more money for GM than cars.

 

They were the biggest in the world till not long ago.

 

 

I dont know their exact numbers, but they are up there.

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View PostHow are their sales as compared to others?

 

I'm personally in no hurry to buy another GM.

 

In it's prime, GMAC made more money for GM than cars.

 

 

 

from the WSj article

 

Leasing makes up 7% of GM's business compared to a car-industry average of 21%, Mr. Liddell said. Around 4% of GM vehicle buyers have what are considered nonprime credit scores, matching the industry average, but GM sees potential for growth in that market.

 

Boosting sales is a key mandate from Mr. Whitacre. Sales are up compared with a year ago despite GM's move last year to shed four of eight brands, but Ford has increased sales about twice as much

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View PostI dont know their exact numbers, but they are up there.

 

Earlier you countered a statement about the quality of thie vehicles and said they were building good cars that people wanted with good quality.

 

An indication of this would be sales higher than that of their competion, right.

 

So if you don't know what their sales are then what makes you think they are buildling good cars that people want with good quality? headscratch.gif

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View PostEarlier you countered a statement about the quality of thie vehicles and said they were building good cars that people wanted with good quality.

 

An indication of this would be sales higher than that of their competion, right.

 

So if you don't know what their sales are then what makes you think they are buildling good cars that people want with good quality? headscratch.gif

 

 

 

the shed 8 brands and closed too many dealerships.

 

frankly its a miracle their sales are up at all.

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View PostEarlier you countered a statement about the quality of thie vehicles and said they were building good cars that people wanted with good quality.

 

 

An indication of this would be sales higher than that of their competion, right.

 

 

So if you don't know what their sales are then what makes you think they are buildling good cars that people want with good quality? headscratch.gif

 

I said they were the biggest in the world not too long ago. Now they are 2nd. I dont know total sales numbers, but being number 2 in the whole world sounds pretty good to me.

 

 

Before that they were #1 for a long time.

 

 

That all tells me the cars they make are fine. Its the management and labor costs and other business issues that did them in. Not the quality of the cars.

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View Postthe shed 8 brands and closed too many dealerships.

 

 

frankly its a miracle their sales are up at all.

 

Right, that tells you the strength of the cars that are still around.

 

 

With all the BS they have gone through, they are still one of the elite car makers in the world.

 

 

Unfortunately you can have the best product in the world, but if youre managed like ****, youre going to hurt or even fail

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I have a 2002 Tahoe which runs and looks great considering it's 8 yrs old.

 

At the time it seemed pricey but considering the low maintenance, it's turned out to be a bargain.

 

I am impressed how well it was built.

 

 

If I had to replace it today, I would go right back to the Tahoe.

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I agree with Cantilever.... GM prior to 9/08 were number 1 in car and truck sales worldwide! Very difficult to say they were doing anything wrong with that performance. Sure the economy took a dump and before that gas prices were being manipulated which put a whoop'in on all the auto companies but essentially it was not their direct fault no matter how the media plays it.

 

I have heard the BS about fuel efficient vehicles till I wanted to puke... Fact is no one wants to buy fuel efficient vehicles before, during and after the fuel/economy crisis. Look around on the road. Trucks, vans, and SUV's still far out number all other vehicle types on the road. The hot item now is the renovated muscle cars from the past... the mustang, camaro, challenger. Nothing fuel efficient about any of these. Wave the economy car banners all you want the actual vehicle sales market says a much different reality.

 

Fortunately, I have been retired from the industry for awhile now. But this I can say from over 36 years in the auto industry.... auto sales are always the first indicator to a falling economy. The auto companies build what the consumers want to buy not what is always the best for the economy, nation, or consumer. This past economic drop (which we still are not even seeing the light at the end of the tunnel) was the worst in "worldwide" history and the auto business was one of the worst hit outside of the banking industries which had a major part in this problem.

 

I will always try to buy American built products from American based companies as much as possible to support our economy and the people who need to work in it. IMO any other actions are irresponsible and near suicidal for the American economy. I refuse to ultimately shoot myself in the foot and buy foreign product so my neighbors become unemployed and pay less taxes, SS, and draw from the economy with UE benefits. I want everyone here who can and wants to work to be able to have a good paying job.

 

You all can do what you want.... but my bets are your actions may come back and bite even "you" in the end!

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