A number of sources are reporting that GM and Chrysler’s new car sales are “better than analyst projections” – in the case of GM – only down 30% from last year, instead of the expected 39%. (See any “spin” there?)
So assuming that’s actually true, why the counterintuitive result of people returning to the showrooms of companies about to go into bankruptcy?
Here is my guess: One of the early companies that got the Tim Geithner “bailout treatment” was GMAC. GMAC makes car loans (mostly for GM cars). They borrow money using bonds and then use that money to fund car loans. GMAC got clobbered by the Federal Reserve forcing down interest rates – they had borrowed a -lot- of money for terms of up to 10 years and more (longer than a car load lasts).
When the Federal Reserve pushed down interest rates, GMAC ended up having to make loans for less than what they were having to pay for the money. The value of GMAC’s bonds began to drop, and as people started to worry that GMAC would never recover, the credit rating and price of the GMAC bonds became close to worthless, which then seriously hampered GM’s’ ability to sell new cars, to the point that GM was referring potential buyers to banks and other lenders instead of GMAC.
So one of the first things Paulson and Geithner did was to flood GMAC with cheap money, and combine the activities of GMAC with Chrysler’s financing company. In December 2008, The US Treasury injected $6 billion, and converted GMAC into a “bank” (GMAC having never paid into FDIC and not having any “deposits”). GMAC acquired a small bank to make that magic happen – it was named GMAC Bank, and now Ally Bank.
Remember the woman before the election who announced when Obama was elected that she would not have to pay her mortgage and would get a free car? People scoffed at how naive she must have been. The joke’s on us. Remember Oprah’s Free Chicken Dinner giveaway and how word spread so quickly within the community that there wasn’t enough free chicken to hand out?
Given Obama and Geithner’s obvious desire to manage failure, it seems very probable to me that they sent the word to GMAC to “just forget the credit scores” – we’ve got your backs – the same way the government “backstopped” Freddie Mac and Fannie Mae for home mortgages. So GM and Chrysler may be selling cars to people who can’t possibly qualify for the car loan in normal times, or at interest rates that don’t reflect the risk of repossession down the road.
Toyota’s sales were down 47% – they don’t have the luxury of ignoring credit risk. The more the government gets involved, the more they change the competitive environment. While they may not take over Ford, the competitive advantage that being financed by the government may ultimately drive you out of business – until a few years from now when GMAC is holding a worthless portfolio of uncollectible loans, and then we have a hole another trillion deeper.
Just like a woman can’t be half-pregnant, you can’t half-nationalize an industry.