http://www.statesman.com/business/gm-to-...18459.html

Hmm. A government owned business buying a financing company to give sub-prime loans to people who can't otherwise buy a car?

I think this will also be Bush's fault.

(08-01-2010 06:55 PM)OptimisticOwl Wrote:  http://www.statesman.com/business/gm-to-...18459.html

Hmm. A government owned business buying a financing company to give sub-prime loans to people who can't otherwise buy a car?

I think this will also be Bush's fault.

It doesn't seem that these people can't otherwise buy a car, unless you honestly believe 40% of the US population only takes buses, trains, or walks.

More likely they are making their financial situations worse by leasing cars (nearly always a bad deal).

Maybe I'm missing something, but why the outrage here?

(08-02-2010 07:25 AM)emmiesix Wrote:  

(08-01-2010 06:55 PM)OptimisticOwl Wrote:  http://www.statesman.com/business/gm-to-...18459.html

Hmm. A government owned business buying a financing company to give sub-prime loans to people who can't otherwise buy a car?

I think this will also be Bush's fault.

It doesn't seem that these people can't otherwise buy a car, unless you honestly believe 40% of the US population only takes buses, trains, or walks.

More likely they are making their financial situations worse by leasing cars (nearly always a bad deal).

Maybe I'm missing something, but why the outrage here?

Maybe I'M missing something. Why not any outrage? Wasn't the granting to loans to people who could not/should not qualify the genesis of the financial crash and the bailouts that ensued? Now we are going down the same path once again? I need someone to explain to me why this is good when the housing loans to sub prime borrowers were bad.

People with bad credit "making their financial situations worse" by being talked into a car they can't afford by a governmental unit?

"GM executives have said for months that they were missing sales opportunities due to lack of credit for lease deals and financing for subprime buyers, those with credit scores below 620 on a scale ranging from 300 to 850 points. About 40 percent of U.S. customers have subprime credit scores, said Chris Liddell, GM's chief financial officer."

Ham or 69, clear this up for me, please.

I can't speak as to whether this is a particularly good or bad investment for GM, but as far as how is this different:

Subprime mortgage market of the 1997ish-2008 era: inscrutable, long-term, variable-rate, often interest-only initially, loans backed up by assets of subjective value expected (but not guaranteed) to increase in value over term of the loan using unreliable and often unrealistic expectations and which have high costs of repossession and resell (extensive legal proceedings required, plus the costs generally associated with selling a house). Further, such loans allowed for the repeated renewal (accompanied by depletion of accumulated owner equity through cash-out refinance).

Subprime auto loans: easy to understand (an important aspect of keeping a consumer out of trouble), short-term, fixed-rate loans backed up by assets known to decrease in value at a rate well established and easily predictable and which are easy and relatively inexpensive to repossess and resell. Such predicted depreciation prevents cash-out refinancing and decreases likelihood of loan going underwater.

The subjectivity of mortgages allow much wider latitude for underwriters to make massive mistakes in predictive models and a much larger window for such mistakes to become apparent.

Point being, it's a lot easier to value a subprime car loan than a subprime mortgage, and as a result it's a lot easier to value a company making subprime car loans than subprime mortgages.

As far as the reason for it, as I understand it, it has a lot to do with the problems GMAC (now Ally Bank) has had getting access to credit since the credit crunch began. GMAC went heavy into home loans starting in the late 1990s, starting their own mortgage arm and buying up subprime players such as DiTech. GMAC has always been the largest financial player for both customers buying GM cars as well as GM dealers holding inventory. Thus, if they don't have access to credit to facilitate such financing, GM can't sell any cars beyond very highly rated and cash customers and thus has to look to other financial firms to help their customers.

One strongly suspects that in the long run, it would have been better for all concerned (including the taxpayers) to simply let GM cease to exist, and to place every GM employee on government-paid leave for the rest of their working lives, rather than create the bizarre, Byzantine entity we have now.

(08-02-2010 02:06 PM)texd Wrote:  I can't speak as to whether this is a particularly good or bad investment for GM, but as far as how is this different:

Subprime mortgage market of the 1997ish-2008 era: inscrutable, long-term, variable-rate, often interest-only initially, loans backed up by assets of subjective value expected (but not guaranteed) to increase in value over term of the loan using unreliable and often unrealistic expectations and which have high costs of repossession and resell (extensive legal proceedings required, plus the costs generally associated with selling a house).

Isn't that the truth! But much of what you're saying applies to all home mortgages, not just sub-prime ones. The problem is not that sub-prime mortgages are confusing; it's that all mortgages (and everything else about the process) are so packed in opacity that it's hard to tell the difference.

The opacity and hassle of home-buying is undoubtedly a racket set up by the middlemen to protect their role as middlemen. The process lacks one of the essential conditions of a genuine market: full information about what is being bought and sold. Lack of information is almost always the result not of competition, but of oligopoly at some stage in the process. I have a strong general skepticism of regulation (not least because the more government involves itself in money, the more money involves itself in government), but policies which promote rather than retard the functioning of markets are generally good things.

Of course, even buying a car strikes me as unnecessarily complicated. I could go to a bike shop and charge a ridiculously expensive custom-made bike on my AmEx, with no bizarre forms, no going to see the "special man", no seemingly-redundant surcharges, licenses, and fees tacked on by various entities. It seems odd that I can't do the same for a car that costs the same amount.

(08-02-2010 02:06 PM)texd Wrote:  I can't speak as to whether this is a particularly good or bad investment for GM, but as far as how is this different:

Subprime mortgage market of the 1997ish-2008 era: inscrutable, long-term, variable-rate, often interest-only initially, loans backed up by assets of subjective value expected (but not guaranteed) to increase in value over term of the loan using unreliable and often unrealistic expectations and which have high costs of repossession and resell (extensive legal proceedings required, plus the costs generally associated with selling a house). Further, such loans allowed for the repeated renewal (accompanied by depletion of accumulated owner equity through cash-out refinance).

Subprime auto loans: easy to understand (an important aspect of keeping a consumer out of trouble), short-term, fixed-rate loans backed up by assets known to decrease in value at a rate well established and easily predictable and which are easy and relatively inexpensive to repossess and resell. Such predicted depreciation prevents cash-out refinancing and decreases likelihood of loan going underwater.

The subjectivity of mortgages allow much wider latitude for underwriters to make massive mistakes in predictive models and a much larger window for such mistakes to become apparent.

Point being, it's a lot easier to value a subprime car loan than a subprime mortgage, and as a result it's a lot easier to value a company making subprime car loans than subprime mortgages.

As far as the reason for it, as I understand it, it has a lot to do with the problems GMAC (now Ally Bank) has had getting access to credit since the credit crunch began. GMAC went heavy into home loans starting in the late 1990s, starting their own mortgage arm and buying up subprime players such as DiTech. GMAC has always been the largest financial player for both customers buying GM cars as well as GM dealers holding inventory. Thus, if they don't have access to credit to facilitate such financing, GM can't sell any cars beyond very highly rated and cash customers and thus has to look to other financial firms to help their customers.

Thank you, Tex.

This is hardly the worst aspect of the auto bailout.

(08-02-2010 03:42 PM)georgewebb Wrote:  Of course, even buying a car strikes me as unnecessarily complicated. I could go to a bike shop and charge a ridiculously expensive custom-made bike on my AmEx, with no bizarre forms, no going to see the "special man", no seemingly-redundant surcharges, licenses, and fees tacked on by various entities. It seems odd that I can't do the same for a car that costs the same amount.

I (perhaps naively) would imagine part of that extra expense/hassle is due to the increased environmental impact a motor vehicle has versus a human-powered bike. Not in the "green" sense (though, I would have no problem if it were) but in the sense that the local government, particularly, has to put quite a bit of resources into building and patrolling roads. Driving is, after all, one of the most dangerous and potentially destructive things we do every day. :)

(08-02-2010 03:20 PM)georgewebb Wrote:  One strongly suspects that in the long run, it would have been better for all concerned (including the taxpayers) to simply let GM cease to exist, and to place every GM employee on government-paid leave for the rest of their working lives, rather than create the bizarre, Byzantine entity we have now.

This is what they make Bankruptcy Courts for. But still, both the GM and Chrysler Reorganizations broke new ground in that the Absolute Priority Rule got tossed out the window for the sake of politics. Had the Bankruptcy Code been followed, it would have been a Liquidation which would have been very bad news for Obama's UAW buddies.