By Alex Daley, Senior Editor, Casey’s Extraordinary Technology (more)
If you thought the Government Motors saga of automotive bailouts was bad already, just wait until you hear this. Ally Bank (formerly GMAC), the failed and now also government-owned credit arm of General Motors – and the financing arm of mandate for both government-owned GM and government-owned Chrysler – has been increasing the percentage of leases in its portfolio by 2 to 3x over the last few months. In fact, the company reports that in the first quarter, it had 12% of its loans in leases, up from 4% just a quarter earlier.
Why is that worrying? Because it seems from comments by General Motors executives that many of these new leases have been the subsidized types with known inflated residuals that encourages lessees to drive cars off the lot in droves but nearly guarantee losses for the lender.
As such, Ally is acting like a loss leader captive finance arm, basically moving the crappy inventory from GM's balance sheet onto Ally’s crappy receivables, making GM look a lot healthier in the interim. This scam will hit the wall when the leases start to expire in 36-48 months and Ally is left holding a bunch of cars it can’t sell for nearly what it paid for them.
But by then GM will have IPO'd again and, courtesy of the mutual funds and other institutional investors, individuals will own more of the failed/failing car company in their 401(k)s. Meanwhile, the government will have sold most of its stake (at a massive loss most likely, unless GM miraculously trades at 2 or 3 times the valuation of its competitors right through the dumping of more than half its market equity) and left the big banks as the first lenders in line to get paid before any equity holders. By virtue of its guarantees, the government will use Ally to absorb all of GM's would-be losses, and GM will be right back where it started... making lousy cars and losing money doing it.
Eventually Ally will hiccup, though, and GM’s sales will plummet without the deep discounts, forcing it back into losing billions a month. Or Ally will become a GSE like Freddie/Fannie, and all auto loans will be government backed for decades to come, effectively destroying any chance for innovation in the industry in the wake of a failure (rapid removal of supply from a market with known multi-billion-dollar demand is a great way to spur new entrants). Way to save that auto industry, government.
David again. Speaking of car sales, over the weekend I drove, twice, through the ubiquitous “car dealer alley” in the nearest large city. As has become the custom on this holiday weekend, all the many dealers were holding Memorial Day sales, complete with balloons and colorful large banners enthusiastically offering all manner of discounts and enticements.
As I drove past one large car lot after another, two things became immediately apparent. First, the dealers have rebuilt their inventories from the depths of last year. Encouraged, perhaps, by earlier stimulus sales and a steady stream of encouraging news about the recovery, the dealers have once again stuffed their lots with new cars.
The second thing was that there was not a single customer in sight. There was literally no one, not a soul, perusing the automotive offerings, kicking the tires or fending off solicitous salespeople. Falling back on hyperbole, but without the slightest exaggeration, a fire hose sprayed from a hovering helicopter would have dampened no happy families eager to snap up a bargain.
If this is a recovery, I hate to see what the depths of the Greater Depression will look like. Unfortunately, I fear I shall find out.