“I want to compete with Ally, but I don’t want to be head-to-head,” Akerson said in a recent interview. “I want to be there when they’re not in a market, but I want them to know I can come in at any time.
With the above statement, which was clearly inspired by the chorus from Billy Idol’s “Flesh For Fantasy”, the bullet-headed madman at General Motors’ rickety helm has launched a new offensive. “GM Financial”, formerly known as the subprime lender “AmeriCredit”, has just sold $500 million worth of bonds with one objective in mind: the occasionally lucrative, and just as occasionally disastrous, dealer floorplan market.
As most TTAC readers surely know, the average dealership does not own any of the cars on its lot. Rather, they are financed through a revolving-credit scheme known as the “floorplan”. The bank buys cars from the manufacturer then receives payoffs when those vehicles are sold. Leaving cars which have already been sold “on the books” is one of those tired-but-superbly-profitable-in-the-short-term criminal schemes which pops up with depressing regularity in books, (Rabbit At Rest), movies (“Fargo”), and real life.
A more likely source of financial heartache for floorplanning banks, however, particularly in the modern era, is a dealership closure. When dealers fail, it takes a while to sell their floorplanned inventory to another dealer, and losses are part of the picture. When your humble author worked for Ford Credit nearly two decades ago, dealer failures were rarer than hen’s teeth. Today, they are as common as goose poop.
No wonder, then, that “GM Financial” wants to get involved in the business. The Detroit News reports that, under the direction of Dan Akerson, the company will compete directly (but not, apparently, “head-to-head”) with Ally Financial (formerly known as GMAC, and 9.9 percent owned by GM) for dealership floorplan business. Why they would do this is anybody’s guess.
Don’t worry, though: GM Financial is still working to shove subprime customers into GM vehicles.
“We were losing sales because we couldn’t provide the marketing,” Akerson said. “(Ally was) in the neighborhood, but they weren’t as aggressive and they weren’t where they needed to be.”
GM’s subprime lending in the first quarter slightly exceeded the industry average — 6.1 percent to 5.4 percent for the industry — but its leasing is moving closer to the industry average. First quarter GM leasing was 16.8 percent, compared to 23 percent for the industry, GM said…
GM Financial, he said, is being smart in boosting sub-prime lending. “We’re not taking bad credit risks,” Akerson said.
As Fargo’s Jerry Lundegaard would say, “Oh, You betcha.”
The entire point of having a finance arm of an automaker (GMAC, Ford Financial, whatever) is to provide car loans on better terms or to riskier customers than a normal bank, because they’re trying to make money on selling cars more than interest on loans.
In theory, anyway. In practice, this whole thing where GM gets rid of GMAC, then later creates a new division to do essentially the same thing as the division they just got rid of, and suddenly finds GMAC’s mouldering zombie corpse competing with GM, is pretty hilarious.
Interest on loans is money made on selling cars. Duh.
Right, but the point is that because it’s an arm of the automaker, the lender can get away with making less interest than a dedicated bank because they’re also making profit on the car itself, which a separate bank will not.
Duh.
GM doesn’t often make money on cars, as opposed to trucks. Sometimes they don’t make much money on trucks. They want to finance their sales internally because they want the finance income. Many years, you have the relationship between Ford Credit and Ford, between GM Financial and GM, exactly backwards. Thats the beauty of vertigal integration. The other beauty is being able to play on the ignorance of customers through misdirection.
CjinSD
GM is making money on cars now as well. Just so you know.
But, aristurtle is right about this as well. While floorplan lending does provide a nice stream of revenue, moving the inventory also helps floorplan lending. One way to do that… offer better financing than banks do. If people are paying higher interest rates, it doesn’t take a math genius to figure out that the monthly payments will be higher given the same purchase price. Being able to compete better in this arena helps GM in many ways.
GM got rid of GMAC because of ResCap, the mortgage lender that had brutal losses when the mortgage market fiasco finally crashed. Smartest thing GM ever did!
Wasn’t GM required to get rid of GMAC to get taxpayer dollars?
Other way around, if I recall: GMAC wanted some of that sweet sweet TARP cash, back in the Bush administration before the automaker bailouts were a thing, and they needed to look like a real grown-up bank and not an automaker’s lender of last resort if they wanted to get it. I think that was around the time Cerberus wanted to get ahold of them, too.
You’re right.
GMAC had to be a bank holding company which required less ownership on the behalf of GM and Cerebus so that GMAC could get TARP money.
A year ago, the government grumbled (anonymously) about the fundamental conflict between GM and GMAC/Ally, saying:
“Everyone tries to draw you into it. . . . For us, it’s like choosing between your children… We have to keep an eye on what’s going on, for the sake of the taxpayer. But this is exactly why the government shouldn’t be in private-sector business”
Then, in January, a Congressional Oversight Panel report bashed Treasury for making no effort to prevent the conflict. Since then, the conflict has only accelerated due to Ally’s IPO buildup. Oh, and by the way, Ally is the only bank to not have paid back TARP completely… which puts it in the august company of AIG, Freddy Mac, Fanny Mae, and oh yeah, GM and Chrysler.
I disagree with your branding of subprime loans as “junk.” Not all are created equal.
You’re arguing over semantics. Junk is an accepted term to catagorize subprime loans. It is used and accepted throughout the industry. It does not mean however that every loan will fail and Ed has never said that. Like junk bonds, the failure rate is low but the term is used to refer to non-investment grade bonds. When GMAC and other securitized car loans, the subprime loans were put into lower rated tranches and sold at lower prices and higher yields.
I have not seen any statistics that indicate “dealer failure is as common as goose poop” nor have I seen any recent dealer failures in my area, SE MI. Quite to the contrary, the vast majority of franchised new car dealers are still well capitalized. The manufacturer receives a monthly dealer statement indicating the dealer’s financial health and the floorplan entity physically counts the inventory monthly. Certainly not to say there are zero dealer failures but both the manufacturer and the floorplan source know immediately when a dealer is in financial difficulty. Floorplan is not a high risk financial venture.
Subprime vehicle financing gets a negative vibe simply because of the word subprime. Many automatically correlate it with subprime real estate lending and it’s not at all the same. In fact there’s no similarity. To call it junk financing is flat out wrong. Technically subprime automotive lending is defined as any borrower with a FICO score below the upper 600’s. That accounts for the majority of car buyers, something on the order of 60%+ IIRC. The higher risk is completely mitigated by the much higher rates. Most people will forgo paying everything else they owe on before they stop paying for their vehicle because obviously most must have a vehicle to go to work, buy groceries etc. Automobile subprime lending has a long established track record and all mainstream brand captive finance arms do it.
GM Financial is not engaging in a high stakes crapshoot with either floorplanning or subprime financing.
If I remember right, GMAC was almost killed by residential mortgages back in 08. The car financing alone wouldn’t have shut it down, it would have just been a drag on earnings.
I read GM described back before the bankruptcy as a finance company that made cars as a sideline. That is the concern now, I’d think. Keep GM focused on the car business, don’t let the bank side become the driver of the company again. Anyway, I wouldn’t really want to be getting in the subprime business now with the economy headed for a double dip.
Whether the economy is headed for a double dip or not subprime financing is a fact of automobile retailing. As I stated in my original post, the much higher interest rates completely mitigate the higher risk. Subprime vehicle financing has a long established track record of profitability no matter what the state of the economy. Any mainstream manufacturer has to have subprime financing availability or they will lose a considerable amount of sales to all the other brands that have subprime financing.
Higher rates do not completely mitigate risk. There is no such thing as an optimum rate that removes risk completely from any loan. Cars are mobile and easly damaged so complete recovery isn’t always possible. That sort of financing works better at small weekly payment used dealers. Know your customer and all.
GMAC was hurt by too high residuals on leases in the time before the crisis. Hopefully they learned from this.
You’re mistaking what a captive financial arm classifies as subprime with what you’re calling subprime. A typical buy here pay here customer would not qualify for captive arm subprime financing. (Which is why that customer is buying a low priced higher mileage older vehicle at the buy here pay here lot.) Captive arm subprime financing is primarily for new vehicles. It is not available to severely credit challenged buyers (i.e. dirtbags in auto retail parlance). Captive arm subprime financing has been proven to be profitable for decades which is why all the mainstream brands offer it. Jack Baruth is wrong when he calls it junk financing.
I do know the difference but subprime is still subprime. There are more losses there than prime and with a perhaps weakening economy subprime is still riskier. I don’t look for much of a drag on earnings from subprime auto loans only but combined with mispriced leases and residential mortgages, the whole mix was toxic for GM before. I don’t think they have learned the right lessons from their bailout so I would rather they not repeat what they did before.
It would cost GM far more in lost sales and lost subprime finance profits not to be fully competitive. Not offering a subprime vehicle financing program is simply not an option for GM.
Subprime loans in themselves aren’t the main reason I object to GM getting back into the business. Competing for the bottom isn’t usually a good strategy anyway but the primary reason I gave a couple posts up. GM hasn’t shown that they have learned anything from the bailout except that if they screw up again, they’ll be bailed out again. I don’t want to go through all that again. GM won’t be bailed out again I hope but there are lots of people who seem to want to try it again.
I want them to do good clean business and if they fail again stay out of my pocket.
MikeAR,
What you are calling the bottom isn’t the bottom. And GM isn’t alone in this. Toyota, Honda, Ford, BMW, MB… all of them have this, do this, and make a ton of money doing this. GM isn’t trying to aim for the bottom. This is about competing on a level playing field. I would have to find the link, but there was a quote on TTAC not long ago that said about 20% of Honda’s buyers were subprime. They are not alone in that percentage.
There are tiers to subprime credit and every company does have some subprime exposure. But have you done any research as to the percentage of subprime loans GMAC had before the crisis? I don’t remember for sure but I think it was a pretty high number, much higher than 20%. I think that the FICO scores are overrated as a measure of creditworthiness but they definately are more risky.
My major point though is that GM has yet to demonstrate than they can make cars profitably for any extended period of time without an unlevel playing field. Let them demonstrate that before they get back into the finance business in a big way. My personal opinion is that they should stick to cars, that way when they fail again it will be cheaper to shut it down for good.
@mtymsi
Higher rates will mitigate risk somewhat…but not completely.
What I meant by mitigating the risk completely is that after the losses (repos) subprime lending is still very profitable. Yes there is still risk, there will be losses and slow pays.
Good credit borrowers pay about 5% or less down to 0 right now, subprime borrowers pay 15-28%. Not hard to figure out why subprime auto lending is very profitable overall.
Not hard to figure out why no mainstream manufacturer can not afford not to be in the subprime business.
GM needs to ditch Ally completely. There is a lot of money to be made here. Just ask Toyota, Honda, BMW, MB, Ford, etc etc. They are all in this business. They all make a ton of money doing it.
GMAC got too greedy and got into housing loans as well. With the housing bubble burst, it was in a world of trouble. Then came high gas prices and the leasing it had done for large trucks was a big problem because residuals were well below what was expected.
If GM can keep its financial arm in floor plan and auto loans, it should be fine.
GMAC has been a house of cards ever since they loaned 6 billion dollars to John McNamara.
GMAC only lost $400M on McNamara. That hurts, but it’s hardly going to sink a bank with a hundred and seventy billion dollars in assets.
By assets, do you mean titles of rapidly depreciating GM vehicles, or does it count hopelessly upside down abandoned homes too? I guess it is funny to think that 436 million dollars was real money less than 20 years ago. Now, we’ve got big government totalitarians who think 36 million dollars is rounding error.
In 2011 dollars, that would be around $700 million.
No amount of sarcasm is going to disguise the fact that John McNamara’s fraud, while certainly regrettable, didn’t fundamentally destabilize the company.
they lost $400 Million, Lovejoy got transferred to SPO, and life went on with Deloitte still whistling Dixie.
Damnit Jack, you had to go and spoil Updike in a GM article?
(I’m about to finish Rabbit Run.)
I’m reading this as well, coincidentally. At least he’s referring to the fourth book and not ruining the middle two.
Mitsubishi.
Every other car maker has a substantial in house finance arm, and the vast majority of the time those operations are nicely profitable.
GM cannot compete without a strong in house finance arm.
Dealership closings in the here and now are once again fairly rare, and floor plan financing can be a very profitable business.
GM would be remiss not to get back into this in a serious way.
The funny thing is, GM under Sloan pretty much invented the car loan, floor planning and the in house finance/credit division. Henry Ford fought car loans for a long time, but eventually had to relent under competitive pressure from GM.
John,
to be specific, it was Billy who started GMAC…
http://www.articleclick.com/Article/A-Brief-History-of-Loans/1068887
Subprime isn’t necessarily analogous to a bad loan. The biggest problem with subprime, as it was associated with the mortgage biz, wasn’t that it was aimed at borrowers with shaky credit – it was that too many subprime outfits lent to these shaky borrowers WITH NO VERIFICATION OF INCOME AND ASSETS, and then to make matters worse, these folks were allowed to take out riskier mortgages (i.e., interest-onlys, negative amortization, ARMS, etc). That was the crux of the problem. Just because someone has a bad credit score doesn’t mean he or she won’t pay the mortgage.
If the lending process involves a holistic review of the borrower – i.e., doesn’t just consist of some clerk who approves everything with a FICO greater than a certain number – then even riskier buyers can be financed with acceptable risk.
Given this economy, there’s probably a huge pent up demand for new (or new-ish) cars from people who have been hit by the hard times. These folks might not necessarily fit the standard mold a lender would want, but they shouldn’t be dismissed out of hand. Many are actually looking to re-establish themselves. The question is whether lenders will dig deeper into these borrowers’ finances and make a balanced decision.
Your second paragraph is the key to good lending. Do that and you will make money and have fewer problems.
I think FICO scores are overrated too. All it takes to turn a score of 750 into a 680 is a late payment or a medical collection. Even good borrowers screw up sometimes. Then we have the folks like the guy I just looked at yesterday, who is refinancing his loan currently held by the lender I work for…looked at his bank statements, and the guy has written us two rubber checks the last two months. Because it was recent, it never appeared on credit. I’m a lot more reluctant to lend to that guy than someone who just forgot to make his freakin’ Macy’s payment one month. But if all you’re looking at is a credit score, his is just dandy, thanks. Never mind that a guy who makes half a mil a year and is bouncing his mortgage payments should raise every red flag there is…
Sometimes you have to look a bit deeper with people for the REAL risk factors.