GM's purchase of subprime lender AmeriCredit may have been encouraged by a government-inspired reliance on bailouts

Andrew Ross Sorkin has a very interesting column this week examining the signal sent by GM’s purchase of AmeriCredit. The short answer: GM looks like it’s trying to revive the old patterns of demand before the recession. It’s doing so by following some of the same business practices that led to its bankruptcy filing last summer.

AmeriCredit currently serves 11,000 dealerships, but only 4,000 of those are associated with GM. The company has plans to expand across all auto companies: It recently announced to investors that loan originations could total as much as $900 million over the last quarter (ending June 30), up from $175 million over the same period one year earlier.

GM’s recent purchase of AmeriCredit was designed to put the company on a level playing field with its competitors (Ford and Toyota) ahead of a planned I.P.O. filing later this year. AmeriCredit is an auto finance company with a specialty in subprime lending. With AmeriCredit as part of its portfolio, GM has control of a lender (once again) that can reach all types of auto buyers who need credit, including those with FICO scores in the 300-600 range (which also just happens to be AmeriCredit’s focus). Private analysts of the acquisition have predicted that AmeriCredit will juice GM’s sales by 10-20 percent a year moving forward.

According to Sorkin, “G.M. plans to prod sales of its vehicles by using AmeriCredit to extend loans and leases to automobile customers with questionable credit. These are the same customers who could very well be denied a loan by other lenders. But prudent lending is not at the top of G.M.’s to-do list: it needs to move its vehicles off the lot and it needs to do so quickly.”

Sorkin asks the right question: “did we really spend $50 billion of our money just to revive the kinds of practices that led to the credit crisis?”

On the upside, a successful deal for GM’s auto financing arm could help the taxpayer. Since the government still owns 61 percent of GM, a successful I.P.O. is vital if U.S. taxpayers are going to get back at least a portion of the money that was invested in the firm over the last two years. On the downside, a GM that increasingly depends on more risky loans (through AmeriCredit) may come at the cost of a long-term recovery. Is GM heading down the same path that ultimately led to a government take-over?

The strategic calculus that ensured this deal may have been influenced by the possibility of a future bailout (a textbook example of “moral hazard”). If GM’s bet with AmeriCredit proves wise, the company will reap private profits. If the deal turns sour, GM will likely turn again to the government for additional taxpayer assistance. The same logic that ensured the first bailout – that GM is a crucial part of the Rust Belt economy, including many swing states – will also underpin a future bailout. Put another way, the opportunity to pursue private profits backstopped by an implicit government guarantee is an invitation to take on excessive risk.

U.S. likely to lose most of $23 billion bailout of GM and Chrysler

"Taxpayers face losses on a significant portion of the $81 billion in government aid provided to the auto industry, an oversight panel said in a report to be released Wednesday.

The Congressional Oversight Panel did not provide an estimate of the projected loss in its latest monthly report on the $700 billion Troubled Asset Relief Program. But it said most of the $23 billion initially provided to General Motors Corp. and Chrysler LLC late last year is unlikely to be repaid.

"I think they drove a very hard bargain," said Elizabeth Warren, the panel's chairwoman and a law professor at Harvard University, referring to the Obama administration's Treasury Department. "But it may not be enough."

The prospect of recovering the government's assistance to GM and Chrysler is heavily dependent on shares of the two companies rising to unprecedented levels, the report said. The government owns 10 percent of Chrysler and 61 percent of GM. The two companies are currently private but are expected to issue stock, in GM's case by next year."

Is China more capitalist than the United States?

From American Thinker

"Why is GM, a capitalist firm, so successful in Communist China and a failure in Capitalist USA? Apparently, the Chinese learned from the economic failures of socialism while the US Congress learned nothing and actively intervenes in the decision-making of American capitalist firms, imposing environmental restrictions few of which would pass the economic test that benefits should be equal to or greater than cost. It subsidizes energy-saving activities like insulating buildings, buying energy-saving autos and even light bulbs, none of which would survive the light of day as producers of net benefits. It orders banks to make bad loans, e.g., the Community Reinvestment Act. Through the EPA, it regulates factory emissions. It proposes a socialist solution to health care. It has declared its policy to replace fossil fuels with renewable alternative fuels. It pays a large portion of the costs of wind turbines and solar panels."

(snip)

"We have urged China to join us in our quixotic attempt to prevent global warming. She has refused, arguing that her per capita consumption of energy is the lowest of any industrial country. Except for the leftist economists, economics tells us that we should let the prices of different energy sources determine when a new source is ready for development. No subsidy would be required if we let the market make the decision. Totalitarian China accepts this approach; free market U.S. takes the Soviet prescription."

(snip)

"Then, to top it off, we invite foreign governments to socialize our economic system in order to serve their purposes. We let the Chinese government fix the price at which the dollar is exchanged for the yuan at a rate that allows their producers to steal market share from ours. And we give foreign governments a tax break (no tax on interest or dividends earned) when they buy ownership in American businesses and thus turn our businesses into socialist enterprises serving foreign governments.

China learned the lessons of socialism's failure in Russia and is prospering. Congress did not."

Audi honcho slams GM Volt: "for the intellectual elite who want to show how enlightened they are"

"He (Audi of America President Johan de Nysschen) dismissed GM’s upcoming plug-in hybrid as “a car for idiots,” saying that few consumers will be willing to pay $40,000 -- the Volt’s estimated base price -- for a car that competes against $25,000 sedans and conventional hybrids. Nor, he noted, is the Volt a luxury car whose green-technology costs will be excused because it also delivers prestige or performance.

“No one is going to pay a $15,000 premium for a car that competes with a (Toyota) Corolla,” he said. “So there are not enough idiots who will buy it.”

He did add that plug-in hybrids are good in concept and hold advantages over diesels in stop-and-go driving. But for the moment, de Nysschen noted, electric vehicles (EVs) are more about making a statement.

“They’re for the intellectual elite who want to show what enlightened souls they are,” he said."

Americans prefer unbailed-out Ford over GM and C

"Forty-six percent (46%) of Americans say they’re more likely to buy a Ford because it did not take a federal bailout. Two-thirds of Americans (66%) have a favorable opinion of Ford. Ratings for GM and Chrysler are much lower."

http://www.rasmussenreports.com/public_content/politics/obama_administration/daily_presidential_tracking_poll

Out-of-office Democrats get rich quickly in Chicago

DON'T BE HARD ON GM'S NEW CHAIRMAN EDWARD WHITACRE for confessing during an interview last week that he knows nothing about cars. He simply suffered a Joe Biden moment. Texans often tumble over their tongues when taking a stab at humility. In fact, few car companies, let alone their CEOs, know how to build cars, which is why so many of them are conking out. The Obama administration, in my view, picked Whitacre to run General Motors (ticker: GM) because he has a more important talent: He knows how to play Chicago-style politics.

http://online.barrons.com/article/
SB124484666794611291.html#mod=BOL_hps_dc

Obama's hand is on GM's steering wheel

"The administration is determined to prop up GM as a jobs program for the UAW and Midwestern states rich in electoral votes. This frenzy will intensify as the administration's decisions deepen the debacle."

http://townhall.com/columnists/GeorgeWill/2009/06/
07/have_we_got_a_deal_for_you?page=2

GM bailout drives down Obama's poll numbers

A promising harbinger hove into view on Friday, but was largely ignored by the Obama Adoration Society, also known as the mainsteam media.

Voters who strongly oppose Obama's policies have grown to even strength with voters who strongly approve, according to Rasmussen Reports. For me, the sight of the trend lines meeting on the chart was tantmount to watching the Tigers tie the White Sox with a home run in the eighth inning.

it ain't over yet, but things are finally starting to look better.

"The President’s ratings have slipped since General Motors filed for bankruptcy to initiate a new government bailout and takeover," the polling agency reports. "Just 26% of Americans believe the GM bailout was a good idea and nearly as many support a boycott of GM products. It remains to be seen whether the dip in the President’s numbers is a temporary reaction to recent news or something more substantive."

Thirty-four percent of the sample strongly approve of Obama's performance while 34 perent strongly disapprove, reducing Obama's Presidential Approval Index to zero.

White House blundered in GM bankruptcy

"...the Obama administration overtly played favourites to get the United Auto Workers protection it would not have received under Section 1113, probably elevating costs in a way that will damage prospects for a successful reorganisation. It made and imposed business judgments on GM about what cars to make and what plants to close (and perhaps about suppliers and distribution) that no one in the government or on the task force had the experience to make and for which no one would be financially accountable. Worst of all, despite Sunday’s desperate attempt to distance itself from GM’s future decisions, it left its fingerprints all over the new plan. Inevitably the White House will take political and hence financial responsibility for its success, relieving pressure on management and labour to succeed. Ultimately it elected to adopt an industrial policy toward the industry that failed utterly in the UK, and has worked out badly and expensively in France and Italy.

Finally, in the process, it disturbed the security of expectation that has made lenders willing to provide capital as secured credit, thus handicapping all US industry and undermining what has been, for all its flaws, one of the best financial reorganisation processes in the world, now emulated elsewhere.

The administration took a tragic situation and turned it into an expensive mess to pay a political debt. It wasted billions of dollars over many months delaying GM’s filing and then implicitly put itself on the hook for many billions more. The financial, political and social echoes of that decision will be with us for a long time. In short, they blew it."

http://www.ft.com/cms/s/0/cd00d2c6-4ee2-11de
-8c10-00144feabdc0.html?nclick_check=1

GM bankruptcy follows "decades of dumb decisions"

"The year was 1998, and the United Auto Workers was striking at two factories in Flint, Mich., that made components critical to every GM assembly plant in the country. The union was defending production quotas that workers could fill in five or six hours, after which they would get overtime pay or just, you know, go home.

Most strikes are forbidden during the life of a labor contract, so to provide legal cover the union started filing grievances. GM lawyers contended the walkouts violated the contract anyway and drafted a lawsuit -- the first by the company against the UAW in more than 60 years. But GM's labor-relations department freaked out because the lawsuit would antagonize the union.

Just think about that. The union had shut down virtually all of GM, costing the company and its shareholders billions of dollars, and yet the company's labor negotiators were afraid of giving offense. After heated internal arguments, the suit was filed and GM seemed on the verge of winning. But the company settled just before the judge ruled.

UAW members marched victoriously through downtown Flint. GM executives who advocated a tougher stand got pushed out of the company.

The picture of a heedless union and a feckless management says a lot about what went wrong at GM. There were many more mistakes, of course -- look-alike cars, lapses in quality, misguided acquisitions, and betting on big SUVs just before gas prices soared. They were all born of a uniquely insular corporate culture."

http://online.wsj.com/article/SB124389995447074461.html

Ford's refusal of bailout may become marketing hit

Ford Motor Co's. rejection of government handouts may turn out to be a shrewd marketing decision.

Already, Michiganders are telling talk radio hosts they will buy Ford next time round, rejecting bailed-out Government Motors and Chrysler. In effect, they say they will cast proxy votes against President Obama instead of waiting until 2012 to oppose him through the ballot box.

Millions of Americans might line up to apply for Ford advertising jobs, where the potential for snappy slogans appears limitless:

Buy Nobama. Restore America. Liberty, not fascism. Why would you think a GM car would actually run? Buy one that takes us to freedom, not fascism. Serve yourself, not the government. Drive yourself to liberty, not to servitude. Sock it to the government. Government-made cars have no brakes. GM and Chrysler: it's all about the hood ornament. If you buy GM or Chrysler, check first to see if anyone will insure it.

This won't ensure the survival of American capitalism and free markets but it'll give us another chance to vote against Obama.

Wagoner firing is sideshow to cover for mistakes

"Firing Rick Wagoner is a sideshow to distract us from the fact that the administration has no progress to announce today. The administration is hoping the media and the public will stay focused on Wagoner and fail to notice that negotiations have not progressed since December.

The administration is pursuing much of what we pushed for in December, but the delay of several months has increased the severity and sent billions of taxpayer dollars down the drain. Now any investment is likely unrecoverable and we are putting more and more jobs at the OEMs (original equipment manufacturers) and the supply chain at risk in a politically charged environment.

With sweeping new power the White House will be deciding which plants will survive and which won't, so in essence, this administration has decided they know better than our courts and our free market process how to deal with these companies."

http://www.realclearpolitics.com/articles/2009/03/wagoner_firing_is_a_sideshow_i.html

Obama the narcissist launches command economy

The narcissist in the White House is hitting his stride. Having peddled the credit collapse as a cataclysmic event, he bull-rushed Congress into enactment of a multi-trillion rescue plan, some of it unread. Then he fired Rick Wagoner as chairman and CEO of General Motors. Shortly, he will embark to the G20 conference in London, accompanied by 500 coconspirators in the Adoration-of-Obama administration.

All eyes are on Obama, which is exactly what Obama seeks.

We can't say we weren't warned. As a state senator in Illinois, Obama used "present," instead of yea or nay, as his default position on run-of-the-mill legislation. Narcissists have no interest in legislation or events that do not help them achieve their personal objectives.

Al Sina, a pen name, has written that Obama's election as the first black president of the Harvard Law Review "led to a contract and an advance to write a book about race relations.

"Instead of writing a scholarly paper focusing on race relations, for which he had been paid, Obama could not resist writng about his most sublime self. He titled the book, "Dreams from my Father."

Traditionally, GM and other car makers have tailored their cars to the desires of the buyers. From now on, General Motors will attempt to achieve by propaganda what the climate change fanatics have failed to achieve by argument.

GM plants will build small "green" cars; it will be up to the revamped sales and advertising forces to sell those cars.

The consumer economy is out. The command economy is riding into view, with Barack (Alexander the Great) Obama in the lead.

Sina: "Narcissists project a grandiose, but false, image of themselves. Jim Jones, the charismatic leader of People's Temple, the man who led over 900 of his followers to cheerfully commit mass suicide and even murder their own children was also a narcissist. Charles Manson, Joseph Koni,, Shoko Asahara, Joe Stalin, Saddam, Mao Zedong, Kim Jon Il, and Adolph Hitler are a few examples of narcissists of our time."

"One must never underestimate the manipulative genius of pathological narcissists. They project such an imposing personality that it overwhelsm those around them. Charmed by the charisma of the narcisist, people become like clay in his hands. They cheerfully do his bidding and delight to be at his service. The narcissist shapes the world around him and reduces others in his own inverted image. He creates a cult of personality; his admirers become his co-dependents."

Al Sina is the pseudonym of the founder of Faith Freedom International, a secular website that is critical of Islam.