Thread: U.S. Treasury Starts to Make Subprime Auto Loans

U.S. Treasury Starts to Make Subprime Auto Loans

Politics / Credit Crisis Bailouts
Dec 30, 2008 - 02:50 PM

By: Mike_Shedlock

One day after the treasury (taxpayers) injected $6 billion into the failing auto industry GM, GMAC ease lending rules to entice car buyers .
General Motors Corp and its GMAC funding affiliate launched programs on Tuesday to lure U.S. car and truck buyers back into showrooms as the largest U.S. automaker tries to revive its sagging fortunes.

GM began offering zero-percent financing on some models, and GMAC resumed lending to a wider range of potential customers, after the government said it will inject billions of dollars to help ensure that both survive.

Through January 5, GM will offer zero percent to 4.9 percent financing on loans of up to five years on some 2008 model-year vehicles, and 3.9 to 5.9 percent on some 2009 vehicles. Many of the vehicles also carry cash discounts of $500 to $4,250.

GMAC, meanwhile, will extend loans to retail buyers with credit scores, known as FICO, of 621 or higher. In October, it had restricted loans to borrowers with scores of 700 or higher.

Many analysts consider borrowers with credit scores of 620 or lower to be "subprime." The median U.S. credit score is 723, according to Fair Isaac Corp's myFICO unit.

"The bottom line is much better access to funding," said Mark LaNeve, GM's vice president for North American sales, on a conference call with reporters. He said GMAC may now be able to fund 75 to 80 percent of new vehicle purchases, up from 40 percent since October.

The bottom line is more taxpayer risk. Of course GM will proclaim those are "prime" loans because they are 1 FICO point above the minimum. This is the lipstick on a pig play once again.

Elephant In the Room

I discussed the bailout yesterday in Paulson's $6 Billion Foot In The Door Play . Today the Treasury upped the taxpayer ante by offering subprime auto loans with our money. But only so many cars will be sold, period. And with the massive overcapacity issue, and near-subprime lending, taxpayers are further at risk.

Kevin Depew on Minyanville discusses this situation today in Automakers, Banks Ignore Elephant In the Room .

Ordinarily, when a business/industry fails from poor management and/or (in the case of the banks) overleveraging, what happens?

You know what happens intuitively, even if you've never opened an economics textbook. It is very simple. Entrepreneurs, seeing the mistakes made by those business/industry operators, rush in to start competing businesses to 1) take advantage of the weakened competition, and 2) operate the business better than the competition having the benefit of seeing their mistakes.

Under normal circumstances, this process happens in every industry. It is the normal cycle of capitalism.

But look at what is happening now. Are there any entrepreneurs setting out to start automotive manufacturing businesses? What about entrepreneurs setting out to charter new banks? You already know the answer to that. The question, then, is why?

First, and most important, it is because the business models within those industries have failed. Second, because the government (taxpayer) has now stepped in to prop up those businesses with their failed business models, it is no longer economically viable for an entrepreneur to try and compete with the government even if the entrepreneur has a better business model. Third, even if it were economically viable, the government is installing roadblocks via the FDIC and other agencies to purposefully make it difficult for entrepreneurs to compete against the failed businesses in those two industries.

Make no mistake, the inevitable outcome will be failure. What is taking place is the extension of that failure to a decade or more. That is what the government is purchasing with the bailout monies; an extension, life support, even though death is inevitable. Why? Why would government do this? Because those who are demanding the monies and the extensions have more political clout than you do.

The more money wasted on stupidity like this, the longer the recession, and the slower the recovery. There is only so much capital, and using that capital to keep failed business models alive is sickening.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

http://www.marketoracle.co.uk/Article8013.html

They return to doing exactly what got us into this...loaning money to people who can't pay it back.

Do we need any further proof that our "government" is purposely driving this country into a Depression, the likes of which will make what happened in the 30's look like a minor inconvenience

Do we need any further proof that our "government" is purposely driving this country into a Depression, the likes of which will make what happened in the 30's look like a minor inconvenience

No lie......it's not like this is secret or anything.....it's so blatent a little kid with a piggy bank can see how this doesn't work.

I heard today on CNBC that GM is pushing consumers toward the huge SUVs and trucks that no one with a right mind can afford to drive when gas prices go back up, which they will, either due to OPEC or raising of usage taxes. It is beginning to sound like Paulson is trying to take back his scream that without taxpayer dollars, the economy will collapse.