Since the TARP has a very big checkbook and a very broad mandate (it can buy any kind of dud loan it chooses to, plus bona fide assets), it has become a magnet for industries that have belatedly recognized that it could provide a handout. The latest is the poster child for rust-belt hardship, the auto industry, which is looking for a place to dump less than stellar car loans.
As reader Steve, who sent us this item, wrote:
The pigs are racing to the trough — this time, there’s not even a pretense that the loans are good or that market liquidity is hurting pricing.
From Reuters, “Finance companies want US to buy bad auto loans“:
Finance companies are preparing to seek authority from the U.S. Treasury Department to sell bad auto loans to the government as part of Washington’s sweeping plan to restimulate credit markets and boost the flagging economy.
“The onus is now on us to make the case for our companies to be able to sell non-mortgage related assets to the government,” Bill Himpler, executive vice president of the American Financial Services Association, said late on Tuesday.
The group represents a range of finance companies, including major auto affiliates like Ford Motor Credit Co, the financial services arm of Ford Motor Co, and GMAC LLC, controlled by Chrysler owner Cerberus Capital Management…
The $700 billion rescue plan approved by Congress last month and now in the process of being implemented by the Bush administration enables the Treasury to buy up bad auto loans, if it deems that doing so is critical to the health of the U.S. economy.
“We’re in the process of putting together our case … that auto paper is key to financial market stability,” Himpler said.
Yves here. If you believe that, I have a bridge I’d like to sell you….
He said the association would try to “cast as wide a net as possible” to ensure that companies holding loans that consumers failed to pay back would be eligible to improve their books and extend credit to new borrowers.
Auto loans traditionally perform well but defaults are starting to pick up because of overall credit market turmoil, the financial services group said.
GMAC has begun giving car loans only to buyers with the best credit scores as the global financial crisis strains its access to capital.
Another priority of the association is to persuade the U.S. Federal Reserve to expand eligibility for short-term loans, called commercial paper, to auto financing companies.
A separate article, in Bloomberg (again via Steve), discusses how General Motors may reduce overseas production due to “limited access to funding.” One has to wonder whether the emphasis on funding is to support the message to the officialdom that Big Auto needs a helping hand, or whether one could just as easily attribute the cutbacks to a faltering economy and worries about high fuel prices.
From Bloomberg:
GMAC LLC, the financing arm of General Motors Corp., has “limited if any access to funding” for its mortgage and auto-lending units, Chief Executive Officer Al de Molina said in an e-mail today to employees.
GMAC may trim auto lending in some international markets, de Molina said in the e-mail. The Detroit-based company is considering “strategic initiatives” for insurance businesses, he said.
“We’ve pursued a `self-help’ approach that on some days is akin to hand-to-hand combat,” de Molina said in the e-mail. He said the lender’s Residential Capital LLC unit is “perhaps the most challenged operation.” …
GMAC said yesterday it’s restricting auto lending to buyers with credit scores of at least 700, who represent about 58 percent of U.S. consumers. The move added to the global credit squeeze that threatens to choke economic growth as companies and consumers find it harder and more expensive to borrow. Plummeting auto sales and record foreclosures have resulted in $5.4 billion in losses at GMAC over the past year and led credit agencies to reduce the debt to junk.
“It’s very difficult for a finance unit to exist very long at less than investment grade,” said Thomas Atteberry, who helps manage $3.5 billion in fixed-income assets at First Pacific Advisors in Los Angeles. “The cost of capital is just a killer.”
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What’s particularly worrisome about this is the rising cost of capital as said capital flees our shores. This can’t be good.
My question is, might this type of bailout be extended to all American companies that finance loans? For example, I believe Harley-Davidson does financing of its motorbikes. I’m bearish on HOG so I have some interest in how this plays out…
Besides GM and Ford, who else might have tons of toxic non-mortgage loans on their books?
What might be the basis for selecting companies to bail out? Any American company? Only American companies with lots of employees? Only American companies posing “systemic risk” to the economy? Or only American companies that’re politically connected?
By the way, we could do worse than bailing out a company, an American company, that actually makes stuff. The problem is, GM and Ford are stuck with myopic management and huge pension/healthcare liabilities…
This shows that what’s really happening everywhere is a mad scramble for cash, every man for himself. It’s the same on the international scale, What is being presented as coordinated global action, G7 getting it’s act together at the last moment, will likely be seen in retrospect as CGR – Competitive Guarantee and Recapitalisation, with every nation for itself.
The banks play a curious role in this. The strongest would rather cannibalise the weakest and stay free to do their own thing, taking taxpayers money when it’s without strings. But each government wants to make sure that its own banking SYSTEM has got the cash, so it has to kick a…
Is GMAC playing a game of chicken/blackmail with the government?
Where they threaten to not fund lower quality stuff unless the government pays them to?
Isn’t this the real moral hazard? Everyone demanding cheap money and backing that up with a refusal to play ball in the economy otherwise ? Hank Greenberg is now asking for AIG’s loan terms to be written down to that of the top 9 banks (ie. 5% interest, no rights).
They’re basically blackmailing the goverment for cheap financing (makes sense, it’s the right read on the situation, the government is handing out cheap money and they’re scared, why wouldn’t you ask?)
this is the worst of all worlds, privatized gains, socialized losses. the government is becoming the biggest wholesale bank in the world. it’s borrowing with its balance sheet, then lending the money out.
Does anyone recall that Goldman was involved in subprime auto loans, through a subsidiary? aahhh, probably not…
Anybody wanna bet that Goldmans sub will want bailed out by Uncle hank? Aaahhh, probably not…
Triad Financial, partly owned by Goldman Sachs Group, recently disclosed that 21.4 percent of the loans in its portfolio have been granted payment extensions to help borrowers experiencing financial troubles. That’s an 88 percent increase over the level reported at the end of June 2006.
Subprime auto loans probably do need help with LIBOR and TED spreads moving against them, but the bailout will probably help?
>> Triad Financial Corp · 10-K · For 12/31/07
Warehouse and Residual Facilities
In our contract origination process, we purchase auto finance contracts and make loans that bear fixed interest rates and are pledged to secure borrowings under our warehouse facilities. Amounts borrowed under our warehouse facilities will bear variable interest rates. We intend to utilize our warehouse facilities to fund receivables until we accumulate a portfolio of sufficient size to securitize. To mitigate the risk of fluctuations in interest rates prior to a securitization, we have utilized forward-starting swap agreements on a periodic basis. If interest rates are above the forward-starting swap rate on the pricing date of a securitization, the purchaser of the forward-starting swap agreement will pay us for the increase in interest rates.
Portfolio Losses in Factor Models: Term Structures and Intertemporal Loss Dependence Leif Andersen Bank of America First version: March 24, 2006
Complicating matters considerable here is the fact that some securities (such as leveraged super-senior tranches, depend on joint dynamics of credit spreads and portfolio losses, adding another layer of complexity. While abstract models offer a potential road map for model development, there will likely be room for pragmatic compromises.
http://www.moodys.com/cust/content/Content.ashx?source=staticcontent/Free%20Pages/CreditRiskConference/Conf07/conf07files/fact_new.pdf
re: Maurice Greenberg, had/has a huge planned sale of AIG stock. Cutting ones losses I guess
re: Finance subsidies. The Effective overnight Fed Funds rate is still out of control, this is worse than January right now. I don’t think the Fed can control it anymore because they accept such a broad class of assets as collateral. It is very safe to bet on at least a further 25bp cut at the Oct 28/29 meeting. This would only help the top rated financing companies, of which I don’t think there are any left.
I could never believe Cerberus actually bought Chrysler hoping to make money, I suppose they can still prove me wrong with superb lobbying and presidential connections. Paulson would be interested given that GMAC has a $14bn line of credit from Citigroup (renewed Sept 11 2008!, ~4 days before Lehman/AIG) and the CDS monster somewhere out there
A bailout of the big 3 would be a much better value per dollar than the financial system to date. ~$150bn could see them through the end of 2010 assuming steady cash burn. After that point plant upgrades, UAW contract transition complete, and efficiency improvements will let them stand on their own
If you believe that (about auto loans), I have a house mortgage I’d like to sell you….
It’s the interweave of the financial (dieing) empire, bad over leveraged paper throughout.
Enjoy this lull, it won’t last long.
There’s billions more to pumped into the system, it’s not enough.
I always wondered where those 0% for 60 month loans were going to end up.
What is the going price? How would it be figured? Credit risk, plus extreme interest rate risk. How do car loans behave over time?
Just as a jab, I would bet that more than a few “corporate executives” who would have to drive an american car(standard) were the recipients of these loans. Who had good enough credit to get them?
I wish to be heard on behalf of an independent businessman who finds himself temporarily the victim of a liquidity freeze–it appears that he had taken a position involving the outcome of certain athletic contests wherein he accepted the default side of a credit default swap indemnifying the buyer should the chicago cubs fail to defeat the brooklyn (ALWAYS!) dodgers. Well, he is, of course, embarassed, and would appreciate laying off these now losing positions with Hank “Hard Hustlin'” Paulson the made man in charge of this scam.
Yves,
It matters little if we believe Himpler or not that “auto paper is key to financial market stability.”
As silly as we know that claim to be, the whole idea of TARP as you well know is to sweep “all” trouble assets or non-performing loans underneath it.
Unfortunately, Himpler will not be casting a net wide enough to reach the taxpayer or the financially distressed consumer.
Perhaps what is needed here is to create an Americans Under Financial Distress Association. As an association, they would then be able to lobby the Treasury directly so that they could begin to service their non-performing debts. Of course there would be “no guarantee” that the funds would be used as intended by the gov’t. :-)
The beauty of this plan is that the auto associations, the mortgage lenders would no longer have any trouble assets on their balance sheets as most all of their loans would be performing again.
To wit, the banks and other lending arms would not need to borrow money from the taxpayer only to lend it back to him at a higher cost.
In the best of times GM, Ford, Chrysler, could not compete with Honda, Toyota, et al, building vehicles that get good gas milage and deliver lots of miles without excessive maintenence and at a competitive cost.
The big three turned to SUVs and trucks for their bread and butter. Now the big three are stuck with a biz model that is dysfunctional, so they run to the government for a bail out. How are bail outs going to fix poor management?
At some point the US Gov is going to wreck their own credit rating by continuous bail outs of poorly managed financial and manufacturing companies.
Capitalisim is supposed to allow mismanaged companies to fail and be replaced by better managed institutions.
What is happening now is insane and will fail in the mid to long term.
“JollyRoger” I hear ya man. Except I am in much, much worse shape. I am in a financial istrument betting against Chicago even making it to the playoffs – I mean, it unimaginable, right? Like, once in a century event.
Whats worse, I have 600 gazillion dollars in derivates…if Chicago wins the World series, The Universe is bankrupt for INFINITY!!!
Goldman Sachs Group Inc.'s Lloyd Blankfein, whose $70.3 million paycheck made him Wall Street's most highly compensated chief executive officer last year, could still earn tens of millions annually under the bank-rescue plan run by his former boss, Treasury Secretary Henry Paulson.
http://www.bloomberg.com/apps/news?pid=20601109&sid=ad.3V32NVlA0&refer=news
During the Senate Banking hearings I called one of the Senators and told him that the US should not buy:
Credit Card Debt
Student Load Debt
Auto Load Debt
The Dems will rewrite the bankruptcy laws so consumers can do a Chapter 7 again, When that happens all the above paper will be worthless.
The elite’s attitudes toward manufacturing in general have done
TREMENDOUS DAMAGE to the country. The auto industry is critical to any advanced economy. Are you just going to roll over and hand all of our manufacturing to others? Manufacturing is a very high tech industry and is a major form of tech breakthroughs.
People died to get you the 8 hour day and pension benefits. Now silly people spit in their faces.
We need decent jobs for people who are not white collar. That is why we are losing the middle class. The media used to champion the working classes. Now they laugh at them as they lose any decent jobs and feel superior. That is why they stopped voting Democratic.
Japan does not allow many car imports, thus they have a protected market to refine quality.
Every advanced country on earth but us is beefing up their auto industry with gov. help to compete.
This is group think. You! Out of the twilight zone!
The gov’t views the banking industry as the economy and wants to reinflate the leveraged credit creation as the answer to the current crisis. Makes sense given that is what they have been doing the past 15 years with their accounting,legal and oversight authority. Add to the only thing with know is leverage the phone is ringing off the hook from the politically connected that have funded them (politicans)in the past so the markers need to be paid.
“Japan does not allow many car imports, thus they have a protected market to refine quality.
Every advanced country on earth but us is beefing up their auto industry with gov. help to compete.”
But then it won’t be fair to us! Japanese will get nice japanese cars, Germans will get BMW and Mercedes, and what will we get? The garbage coming out of Detroit?
Unless of course, US car makers will be mandated to manufacture japanese or german cars. Then I’m fine with it.
Capitalisim is supposed to allow mismanaged companies to fail and be replaced by better managed institutions.
I’m having a hard time locating a good reference (so perhaps I am wrong), but an astonishing fraction — something like 5-10% — of the entire US economy is directly or indirectly linked to the making of cars. Is this something to be simply pushed off a cliff, in the name of ideological purity?
Perhaps a better way of asking the question: oxygen is supposed to recombine with the carbon in the wood of your house. Does this mean you will stand back and let it burn — permitting a new management to assert itself — or are you going to partake in some evil intervention in the completely natural market between oxygen and carbon and reach for a water hose?
Back to the original issue though with a question: cars are only about 1/10th the value of a typical house. Would it be unreasonable to expect a car loan problem to be about 1/10th the size of the toxic house loan problem?
American cars are much better now. We have owned Chevys for over 10 years. A Lumina first. We have had a new Chevy Venture Van for about three years. WE HAVE NOT HAD A SINGLE PROBLEMS WITH IT. NOT ONE.
The business and conservative elements made an effort to discredit the auto industry to destroy the unions. And it worked.
Many have made fortunes by getting unions out of the way. The money that used to flow to the American worker now flows directly to them by using slave labor, like in China.
The SF Chronicle has a handy list of the differences between the British and American approaches, link
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/10/15/BUO013H4SI.DTL
quote:
Brown is demanding a greater role for government in the banks Britain is investing in and more taxpayer protections than Paulson. Some of the differences:
— The British government is buying ordinary shares, which carry voting rights, along with preference shares, which carry no voting rights.
The U.S. government is purchasing preferred stock with no voting rights, although it is also getting warrants to buy common stock at a set price. If it bought the common stock, it presumably would get voting rights, although this is not the goal. Rather, the government hopes the common stock will rise in value and the government can sell it at a profit.
— The British government is getting representation on the banks’ boards of directors. The U.S. government is not.
— Britain demanded that the chairmen and chief executives of RBS and HBOS resign. Paulson did not demand resignations.
— The British government’s preference shares will earn the equivalent of a 12 percent dividend.
U.S. taxpayers will earn 5 percent on their preferred shares for the first five years and 9 percent thereafter.
— The British banks agreed to stop paying dividends on ordinary shares until the government’s preference shares are redeemed. This is angering small shareholders in the United Kingdom.
The Paulson plan allows banks to continue paying common-stock dividends, as long as dividends on the government’s preferred shares are being paid.
— The British banks promised to maintain, over the next three years, the availability of competitively priced lending to homeowners and small businesses at 2007 levels.
Paulson extracted no such promises.
— Brown has banned cash bonuses for directors at the three British banks. Banks taking the U.S. investment could not make golden parachute payments to senior executives, nor could they take a tax deduction for more than $500,000 per year in compensation for top executives.
Why has Brown demanded more concessions from banks it is investing in than Paulson? Part of it is philosophical.
“The British government is happier living with banks,” says UC Berkeley economist Brad DeLong. “Paulson believes there is public and private. The government shouldn’t own shares or intervene in corporations.”
Actually, what we are doing now, is fatally placing ourselves in debt to a status quo that is no longer viable.
The history of this financial crisis will show the pin that pricked the bubble was $4.50 a gallon gasoline. The era of cheap oil is over, the era of relying on the automobile for development is over, and every dollar we now place in our automobile infrastructure is more millstones around our collective neck.
Once the panic is over, reality is going to set in, and the change necessary is much bigger than everyone is contemplating. The problem is we may in this short period of time become so far indebted to the past, we will insure our decline.