One obvious consequence of “sweeping” legislation is that nothing gets done while we wait for it to pass and go into effect. Now that it has passed, we will probably start to see a lot more activity in previously dead areas. Perceived uncertainty and the volatility of government actions has been reduced. As the various implementation periods in the bill roll off over the next 6-9 months, uncertainty will further diminish, which will lead to more activity.
Doubtless there will be further evidence of “unintended consequences” too.
Anyhow, a second big piece of post Dodd-Frank Act news (after the boycott by the rating agencies) is that GM is back – making deals and (umm, once that boycott by the ratings agencies is worked around, negotiated away, or whatever) securitizing.
AmeriCredit is a subprime auto lender dependent entirely on the securitization market for its existence; it’s flirted with bankruptcy a few times itself, over the years (hat tip: anonymous). At the moment it finances almost exclusively secondhand cars, any make.
GM needs a subprime lender so they can get someone to make loans to their potential buyers, otherwise GM won’t be able to sell so many cars, which would spoil GM’s planned IPO (which the administration and Geithner will be hailing as evidence of their successful plans, in time for the elections). Surely AmeriCredit will be a captive lender very soon after the merger is done.
The bailout funds are evidently being invested on Americans’ behalf, rather than simply returned, and there will be some strong opinions on that. Perhaps the move will be justified by success: let’s see what emerges from the subprime securitization pipeline this time, shall we, and how GM’s sales go? In the mean time there is enough private/public entanglement here to make holders of just about any political conviction feel decidedly queasy.
What about GMAC, you ask? Good question. GM sold a majority interest in GMAC, but still owns 6.7% direct and another 9.9% via a trust (and the US Treasury owns 56.3%). GMAC’s business is making loans on GM (and Chrysler) cars. It is worth noting that GMAC was not, and is not, a subprime auto lender. Their auto loans have always been prime, or nearly, apart from a post-crisis foray to prop up GM, when already in a ‘bailed out’ state. GMAC did make most of their auto loans interest-free for many years, to help sell autos (!), but maintained credit standards (for the most part). Nevertheless, GMAC went underwater to the tune of around $17Bn. It was subprime RE loans, plus the Crunch, that really did them in.
Why wasn’t GMAC (now Ally Bank) enough? One commenter speculated that GM needed a lender they could control, so they could make sure the loans get made. Ahem. WSJ’s report of AmeriCredits’s activity puts it like this:
But GMAC, which received roughly $20 billion in federal bailout funds, is still licking its wounds from the financial crisis. (Ironically, the most serious of GMAC’s wounds were not inflicted by auto loans, but by the company’s foray into risky mortgage and other real-estate-financing programs). That has left GMAC, now known as Ally Bank, badly hobbled.
Not so with AmeriCredit. The lender has been ramping up its loans to subprime borrowers at breakneck speed. The company said loan originations could total as much as $900 million for the fiscal fourth quarter ended June 30 up from $175 million a year earlier.
It has done three successful securitization deals this year alone, signaling the thaw in that market after it went into a deep freeze during the financial crisis. The company has increased its relationships with dealers to 8,100 in its fiscal third quarter from 3,000 in the depths of the financial crisis in 2008. Like other large lenders, credit losses in its AmeriCredit’s $9 billion loan portfolio have been steadily improving.
Breakneck. AmeriCredit’s shareholders must be very happy with the way it’s worked out; we will see how it looks when GM IPOs.
Perhaps this counts as a first sighting of an expected development in the credit markets in the early stages of a recovery cycle (if that’s what you think we’re in) – a lowering of credit standards to drive loan book expansion. But it is an oddball deal: of course it is all being done to drive GM sales, and it has huge political linkages. Not quite BAU, really…
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These sorts of measures were entirely predictable once the decision was made not to put GM into genuine bankruptcy proceedings, but rather to make it a ward of the state. (A decision which Yves largely supported, BTW.)
Of course they were going to turn GM into an engine of credit! Continuing to manufacture and extend credit to the most marginal of borrowers is basically the federal government’s explicit, number one policy priority at this point.
Aaaaaand auto dealers are going to be exempt from the CFPB.
Wondering what this new wave of securitizable loans might look like.
Does anyone find it odd that this deal was announced one day AFTER FinReg was passed. You know, the FinReg bill that excludes auto dealers from oversight under the new Consumer Protection Agency! Just sayin’…..this smells a little funny.
Having worked in the industry. Expect train wreck in forthcoming years from this purchase. Subprime lending in bubble years essentially wiped out many of those niche lenders. Average credit scores are down big for a reason, credit criminals don’t pay on time and rarely change their ways.
This is disgusting! Remember most people are buried in their loans, the LTV to sell more autos will be 140% to include negative carryover from trade in..Deeper and deeper we go..back to bubble lending. Buying paper that has holes in it will just saddle our children with more debt…
Call me angry!
But where would the poorer people in this country be if they couldn’t buy cars with borrowed money that they weren’t going to pay back? They wouldn’t have cars, that’s where. Instead, we have this wonderful system where people can buy cars without having the money to do so–seriously, isn’t that better than the alternative?
/not even sure if I’m being sarcastic
The headline is misleading.
This is not Wall Street but rather K Street at its worst.
How the hell else do you expect people making $8 an hour to be able to buy $30,000 cars?
And when the loans eventually default en masse, GM goes back to the US Treasury for “assistance”. Rinse and repeat.
This is just a clever, roundabout way of implementing a “car in every driveway” entitlement.
Sometimes, it really is stunning how dysfunctional our governance is. What an odd way to set up a human society and perpetuate the worst tendencies of our species.
The comments above really tease out how we have these back-door “entitlements” everywhere. Sad…
[As an aside, I know it says posted by Richard Smith twice above, but I would still like to see a byline. It makes it easier for me to know who the author is. Thanks.]
I agree with posts above re the apparent goal (and perhaps even the real need?) to enable low-income people to own cars that they can’t pay for.
My comment about exemption from the CFPB was more out of concern for the terms of the loans. “Rinse and repeat” may work economically speaking…sort of…but it doesn’t hold up ethically, IMO, in terms of what happens to some of the borrowers. The current mortgage scene is an illustration.
The “whole ship goes down” only after all the Treasury shorts have been carted away from their trading desks on stretchers.
Both the stock and bond markets in this country have already been de-facto nationalized. Thus, we will get true ‘price discovery’ only upon collapse of the entire Ponzi structure.
I would be very careful about shorting US Treasuries.
Poor people can’t afford to buy cars because the supply of used cars, which are perfectly adequate for their needs, was intentionally destroyed by the moronic Cash for Clunkers program. The rest of the auto supply is also having prices inflated by injections of easy government credit.
The objective of this program is not to help the poor afford cars but rather to put them into un-repayable debt by purchasing new cars they cannot afford.
Kudos, sir. I find your cynicism adequate to the task of explaining the situation.
And thank you again, Yves, for shouldering the burden of bringing us the ugly truth.
Being short US bonds is a no brainer. Its just a question of when the whole ship goes down.
I thought the US govt was still the majority owner of GM. The govt is doing this because the Congress would not pass another cash for clunkers program and this way all the bailout money goes to GM and not some foreign car companies.
The fiscal stimulus/MMT crowd should be happy I say.
A letter to America,
America, when and how can we stop this thievery? The thieves are getting braver and braver. We deserve to get robbed if we refuse see the outright criminality of this and not do something about it. There has got to be a conservative think tank out there somewhere who will challenge this in court. Come on America…no language in the financial reform addressing auto loans….no announcement of this purchase until a day after the financial bill passes….a subprime lender of all types of lenders. This will do nothing but end up creating a Fannie and Freddie of the Auto business. Maybe Obama plans to give everyone who can’t afford a car a car with a built in mobile phone.
America, please get out and vote this year. Tell everyone you know to vote. I don’t care if you vote Republican or Democrat. Just vote for the person who wants to shrink our government, reduce our government’s role in the private sector and who truly does care about you.
And they are the only industry exempt from FinReg. Please sign on dotted line suckers.
I think the phrase “The Botox Economy” is going to become a technical term in future econ textbooks.
My only disagreement with Mr. Das is that he believes there’s an atmosphere of gutless, self-deluded incompetence behind this game. Occam’s razor says go for the simplest explanation, and large-scale crime is the simplest explanation of all. Truly covers all the known facts.
http://www.minyanville.com/businessmarkets/articles/loans-lending-banks-citigroup-CRE-securities/2/3/2010/id/26658
http://www.eurointelligence.com/article.581+M5f00fe185e3.0.html
This makes me feel so “hopey changey”. But that feeling is like having something really creepy crawling up the back of my shirt and I can’t…quite…get…to…it….
How can we short the AmeriCredit securitized loans? This is an obvious pre-collapse Ponzi. How can the little guy play the Paulson gambit?