Patricide At GMAC (GM)

GMAC was set up decades ago so that GM car customers could get inexpensive loans to buy their new vehicles. It made so much sense that most other auto firms set up similar operations.

When GM needed cash two years back, it seemed only logical that it sold a majority interest in GMAC to hedge fund Cerberus which has been humiliated by its foray into the car business including the purchase of 80% of failing American auto company Chrysler.

GMAC has decided it cannot make car loans to anyone who is not fabulously wealthy. It has been losing so much money on its mortgage business and auto loan defaults that it is going into a cocoon to try to save itself.

GM is already having trouble selling cars because people feel poor or, in many cases, are poor. The firm still has too many SUVs and pick-ups in its product line. No one can afford the gas to run those. The government has set up a $25 billion loan guarantee facility to help US car companies convert their factories to make more fuel-efficient cars.

The federal loan guarantee won’t do much if GM cannot stay afloat for two more years. If it could sell its vehicles to anyone with even modest credit, it might have a chance. Once people who habitually make their notes can’t borrow money to get a car, GM’s odds of extending its run until it can build a lot of hybrids and electric cars are pretty much kaput.

The problem does suggest its own solution. The government may be making loans to the wrong end of the car-buying process. By helping manufactures, it may create demand several quarters out. That assumes that new autos from the Big Three are better than the junk they ship now. Underwriting car loans to consumers is a much faster way to get money into auto companies. It stimulates buying today and lifts current demand out of the flat spin which is taking industry sales down 25% from what they were last year.

Car buyers may not be as creditworthy as home buyers. In this day and age, that is not saying much. Even if default rates are 5% per year, the government can always hire repo men to get back the used vehicles. It can then put them into pools and sell car-default futures to banks.

Douglas A. McIntyre