Tuesday, December 30, 2008

GMAC - They'll Make up for it in VOLUME!

Even if you lived in a cave, you probably heard that GMAC will be receiving some (and by "some" I mean "six billion dollars") money from the government. Of course, this is on top of the $13+ billion that GM was promised already, but I want to talk about the math behind GMAC.

GMAC has to pay the government an 8% dividend on this injection of capital (in the form of preferred equity shares) it received. GMAC is turning around and lending this money to would be car buyers at 0% . Now, you may have heard the old maxim regarding the rule of thumb for bankers: 3-6-3: they borrow money at 3% (ie, take in deposits, and pay 3% interest), they lend money at 6% (ie, a mortgage) and they're on the golf course by 3 o'clock. I'm not a math major - no wait - in fact, I AM a math major, and I can tell you that GMAC's 8-0-6 plan won't work... what it will translate to is: borrow money at 8%, lend it out at 0%, and be bankrupt in 6 months. Anyone want to set an over/under on the total amount of money we (the taxpayers) will dump on GM and GMAC before all is said and done? I'd say it's a toss-up between the GM/GMAC total, and the Miami Dolphins vs Baltimore Ravens total for the AFC wildcard playoff game this weekend, which is 37 1/2 points. In GMAC's case, that's 37.5 Billion.

GMAC's most recent move should put to rest any question as to if this is an "investment" or not: I know of no business that makes money borrowing at 8% and lending at zero percent... I guess they'll make up for it in VOLUME! Perhaps the model would stand a chance if they made money on the cars they sold, which they don't.

Reading the Bloomberg article on the subject today left me with another head-scratcher:

"GMAC will now lend to vehicle buyers with credit scores of 621 or higher, compared with a previous standard of at least 700, according to a company statement. The higher threshold had excluded about 42 percent of U.S. consumers."

The company said it won’t finance “higher-risk transactions,” instead concentrating on prime customers who are more likely to repay using “responsible credit standards.”

Wow. Go back and read that again. The standards GMAC were using before this latest bailout meant they were ONLY (note: SARCASM!) lending to 58% of all U.S. consumers! Holy fuck! That doesn't exactly sound like they were only lending to the Rockefellers and Buffets of the world! You're telling me that 58% of U.S. consumers was too narrow a market? As I've said before, the problem isn't a lack of available money to lend, the problem is a lack of qualified borrowers, given that lenders have re-adopted NORMAL, REASONABLE lending standards. GMAC proved this today, by immediately lowering their lending standards so that they could lend more money.

update: I just read Karl Denninger's post from today, where he basically has the exact same line of thought I enunciated above. Denninger also points out that the median FICO credit score in the U.S. is 723. That means that 1/2 of all Americans have a credit score above 723. Thus, 621 cannot possibly considered "prime" as GMAC claims.

happy f'n new year.



Anonymous said...

A great year of sick poasts. Thanks for the good read.

Anonymous said...

Yo...The bailouts suck, no doubt, but I don't think this paints the whole picture. It's unlikely that the 621 buyer gets 0% financing. Next, the FICO mid-score is misleading, at best. The algorithm used to calculate a FICO requested by a consumer differs from that used by a car company, mortgage company, etc. It's entirely possible that the average score reported by myfico mirrors the 621 pulled by GMAC.

What will Theo do to counteract Cashman's spending?

Fuel55 said...

Well said, Sir.

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