At one point, GMAC was the tail that wagged the dog. The captive finance company dumped billions in profit into GM's corporate coffers. As the American automaker's decline gathered pace, GM CEO Rick Wagoner sold 51 percent of GMAC to Cerberus (current owners of Chrysler). The finance company immediately hit the rocks. Today, the gash in the hull widened. GMAC reported a net loss of $2.48b. In the second quarter. "A soft economic environment and continued volatility in the mortgage and credit markets have significantly affected results," GMAC Chief Executive Alvaro de Molina told Reuters. "Higher fuel prices and weaker consumer credit prove to be headwinds." That's a bit like calling a tornado a light breeze. We repeat: GMAC's NA leasing is heading for termination. The results included a $716m write-down of vehicle leases. And… "GMAC said it ended June with about $18 billion of SUV and truck leases in those countries on its books, out of a total $32.8 billion of leases." Expect GM to have to write-off at least three billion of lost residual values on those leases [blog coming] when it reports its financial results on, of course, Friday. Oh and ResCap, GMAC's mortgage arm, lost $1.86b in its seventh straight unprofitable quarter. If ResCap fails, it's all over bar the filing. Whether GM would be dragged under is an open question. Dark days.

ChryCo NA Sales Veep Steven Landry tells the media not to worry about the company's exit from the lease business. Cause every little thing's gonna be all right. Here are his four little birdies, verbatim [TTAC comments in brackets].

1) Chrysler's dealers are still able to offer customers lease financing arrangements with other financial institutions, separate from Chrysler Financial. [ED: This on the very same day Chase Auto Finance announced it's withdrawing financing for Chrysler vehicles.]

2) Current vehicle owners, Chrysler employees and retirees with leased vehicles through Chrysler Financial will not be affected by this shift, and the terms of their contract will remain in force. Chrysler Financial will continue to support and service current Chrysler, Jeep and Dodge lease and balloon-contract holders. [So no repo man… yet]

3) Should current lessees purchase their existing lease vehicle, or a new Chrysler, Jeep or Dodge vehicle at the end of their existing lease, Chrysler Financial will waive the disposition fee. Chrysler is also offering a loyalty bonus of up to $750 incremental to most other incentives with the purchase of a new vehicle. Chrysler wants to keep these customers in our family! [when a press release throws a spear (!) you know they're desperate]

4) Chrysler employee lease/company car programs for current and retired salary Chrysler employees, in which vehicles are obtained through the company, are not affected. [translation: our execs will continue to get cheap cars]

To all U.S. Dealers:

The announcement last week that Chrysler was discontinuing all leasing in the United States was big news and widely covered. You may also be aware that Chrysler had previously announced the discontinuation of incentivized leasing in Canada.  Yesterday, GMAC in Canada announced it will exit incentivized leasing on August 1. Further, it is worth noting Ford Motor Company and Honda Motor Company recently announced they were taking an impairment against their lease portfolios. Suffice it to say, numerous factors are driving up the risks and costs of leasing and therefore, it is coming under increased scrutiny across the industry.

All of this has prompted numerous inquiries from our dealers regarding GM vehicle lease business in the United States.

Obviously, current financial pressures will continue to affect our perspective on leasing. That said, while we obviously can't make guarantees, we are in the market today with competitive programs to make GMAC leasing more affordable and plan on continuing to offer this financing alternative as part of our August incentive play on '08 and '09 models (with some adjustments and exceptions).

Over the last few years and months, lease vehicles have become a smaller percentage of our sales, and we do see this trend continuing due to the relative high cost and risk compared to traditional cash or APR business. This is why we offer a balanced menu of cash incentives, APR and leasing programs to make GMAC financing an affordable alternative on almost every product in our lineup.

Rest assured we will make every effort to stay aggressive in this hypercompetitive market.
Thanks for your support.

Mark LaNeve
Vice President
Vehicle Sales, Service and Marketing

Breaking news from TTAC contributor Samir Syed, who just finished lunch with Canadian Auto Workers President Basil "Buzz" Hargrove. In a stunning admission, the union boss said he told GM CEO Rick Wagoner that a bankruptcy filing was inevitable. But wait! There's more. Buzz reckons ALL of Detroit's automakers are going down. "I don't see how they can survive in their current form." Samir's full report on his chin wag with the outgoing union boss will appear on Wednesday's TTAC editorial page.

Fitch Ratings has access to information about Chrysler's finances that neither you nor I nor a whole bunch of really powerful people can access. Now that Chrysler's eliminated leasing, Fitch doesn't like what they see. They've downgraded Chrysler from B- to CCC, with a negative outlook. Not to get too technical, it's yet another indication that Chrysler has one foot in the grave. Or, if you prefer, MarketWatch reports that "The downgrade reflects Chrysler's restricted access to economic retail financing for its vehicles, which is expected to result in a further step-down in retail volumes. Lack of competitive financing is also expected to result in more costly subvention payments and other forms of sales incentives. Fitch is also concerned with the state of the securitization market and the ability of the automakers to access this market on an economic basis over the near term, given the steep drop in residual values (particularly in SUVs and pickup trucks), higher default rates, higher loss severity being experienced and jittery capital markets." Cash burn? Oh yeah, cash burn. "Fitch expects that Chrysler could reach minimum required levels to finance ongoing operations in the second half of 2009. This could be accelerated in the event that suppliers or retail customers become concerned with Chrysler's financial condition and restrict trade credit or reduce retail purchases." 

You may be wondering why the mainstream automotive press hasn't carried our story about GMAC's exit from the GM leasing biz. I've re-checked with my sources. Although there's a lot of confusion out there– at the corporate and dealer level– we stand by our story. In Canada, GMAC leases are dead. In the U.S., GM and GMAC will avoid a media shitstorm by "refocusing" its dealer finance products away from leasing. In that regard, GM will do whatever it takes to keep monthly payments roughly even on a finance versus a lease contract. They will promote longer term finance contracts with subvented rates on most lines, and combine that with "finance cash." Or they will offer customers cashbacks for use in cash deals or financing/leasing by third party sources such as a bank or finance company. (For example, a GM half-ton truck will receive zero percent financing for up to 72 months plus finance cash of $3K or a cashback incentive of $5,000.) We hear that GM will support leasing until Thursday night; the full changeover of finance/cash incentives will not hit until first thing Friday morning. (Just in time to get lost over the weekend, as usual.) Dealers speculate there will be a lot of fiddling with the incentive programs over the next few months to see what has the most customer appeal. But incentives there will be, and LOTS of them. [hat tip to you-know-who-you-are]

The WTF factor out of GM simply knows no bounds. The AP reports Saab's decision to reduce warranties for 2009 and later model year vehicles. Saab already is in a sales tailspin and is losing GMAC lease support. It seems to me that if a vehicle is designed, built and maintained properly there should be very few powertrain failures between the four year, 50,000 mile "new" Saab warranty and the five year, 100,000 mile warranty in effect for 2008 model year vehicles. True enough, most of Saab's competitors offer warranties similar to the new Saab plan… but Saab is very much the underdog is this market and needs some kind of persuasive selling point. Why exactly does ANYONE buy a Saab instead of a Lexus, Infiniti, Acura, Audi, BMW, Mercedes or even Volvo? GM spokesperson Joanne Krell "said lower costs and a more competitive edge over other importers were factors in the decision." Apparently Saab expects a lot of powertrain failures between years four and five, otherwise there wouldn't be much cost savings to be had. As to the "competitive edge", WTF indeed.

To loan money to its lease customers, GMAC borrows the bucks from large-scale institutional investors. The money is backed by assets: the leased vehicles. GMAC "investors" are scared shitless [parphrasing] by the huge drop in Chrysler and GM products' residual values. But as bad as that is, the REAL fear is that Chrysler or GM will go belly-up. Once an automaker files for Chapter 11, the value of the leased vehicles craters deeply and completely, leaving the bankers exposed to billions and billions of dollars of EXTRA losses. There are lots of implications to this announcement. For one, as reported yesterday, GM stands to write-off over a billion dollars in lost residuals– which they paid up front to GMAC. For another, GM owns 49 percent of GMAC. (Chrysler's owners Cerberus own the other 51 percent.) GMAC's exposure to the gap in residual values is around $3.5b. And another: Cadillac/Saab's inability to lease their vehicles is going to cost them BIG in sales and market share (GM's other higher dollar rigs will be hurt by a lesser but not inconsiderable extent). It's highly unlikely a third party lessor will step into the breach for GM, and Toyota/Honda/Nissan or any of the premium marques are not about to exit leasing. The key takeaway: GM's going to lose a ton of deals without leasing. Their decline and fall continues.

While some of TTAC's Best and Brightest adopt a "rot in Hell" stance regarding HUMMER's imminent demise, pity the poor dealers. Speaking with Automotive News [sub], HUMMER Sacramento store owner Mike Daugherty said $4-a-gallon gasoline took away about half his biz. The other half disappeared after GM announced it might sell the brand. Yup. In June, Hummer sales fell 59.3 percent to 2,072 units. Obviously, GM CEO Rick Wagoner knew his "strategic review" proclamation– and subsequent withdrawal of all corporate support– would scupper HUMMER. But underhanded bastard clever man that he is, Wagoner also realized that dangling hopes of a HUMMER buyer would keep the dealer payoff price down. Wagoner mentioned a mystery buyer at the time of the first knife thrust. Since then, GM's paying HUMMER dealers "advanced sales bonuses" and buying them out, hoping to avoid the blizzard of lawsuits that accompanied Oldsmobile's termination. On Friday, Rick twisted the knife again, repeating the HUMMER sales rumor. "We have some interested buyers," Rick said [via Reuters]. "And I can't tell you anything beyond that right now, but we are moving as fast as we can." Believe it or don't.

When it comes to government-mandated corporate average fuel economy (CAFE) regs, I'm with GM Car Czar Bob Lutz. It's like forcing a clothing maker to sell smaller shirts to get people to lose weight. If you want to reduce obesity, just raise the price of food. [My add; even MB knows you can't threaten to starve people for their own good.] In any case, no matter what MB and his employer's representatives say, they have a consistent record of gaming the system. Flex-fuel credits anyone? The U.S. "light truck" CAFE exemption is/was The Mother of All Loopholes. (Who says there's no such thing as karma?) And now GM's playing the angles in Europe. The Times reports that UK PM Gordon Brown's entourage arrived at the London Auto show in some Indian sedans and SUVs and dangled £90m of UK taxpayer money for electric automobile development. Over five years. Available to someone. Depending on something. To which GM Europe Prez Carl-Peter Forster responded fuck that shit [paraphrasing]. GM's wants a national sponsor for a "super credit" scheme that would allow ultra-low carbon-dioxide vehicles (below 50g/km) to offset larger and more polluting models. "If Britain was prepared to champion this idea within the EU, GM would consider making its electric vehicles at the Ellesmere Port plant on Merseyside." Sweet.

From GM's 10k filing… "Under the residual support program, the customers’ contractual residual value is adjusted above GMAC’s standard residual values. We reimburse GMAC to the extent that sales proceeds are less than the customers’ contractual residual value, limited to GMAC’s standard residual value. As it relates to U.S. lease originations and U.S. balloon retail contract originations occurring after April 30, 2006 that GMAC retained after the consummation of the GMAC sale, we agreed to begin payment of the present value of the expected residual support owed to GMAC at the time of contract origination as opposed to after contract termination when the related used vehicle is sold. The residual support amount owed to GMAC is adjusted as the contracts terminate and, in cases where the estimate is adjusted, we may be obligated to pay each other the difference. As of December 31, 2007 and 2006, the maximum additional amount that could be paid by us under the U.S. residual support program was $1.1 billion and $276 million, respectively… We will also pay GMAC a quarterly leasing payment in connection with the agreement beginning in the first quarter of 2009 and ending in the fourth quarter of 2014. At December 31, 2007 and 2006, the maximum amount guaranteed under the U.S. risk sharing arrangement was $1.1 billion and $339 million, respectively. The maximum amount would only be paid in the unlikely event that the proceeds from all outstanding lease vehicles would be lower than GMAC’s standard residual rates, subject to the limitation. As of December 31, 2007 and 2006, we had a total reserve recorded on our consolidated balance sheet of $144 million and $50 million, respectively, based on our estimated future payments to GMAC associated with the maximum amount guaranteed under the U.S. risk sharing arrangement."

We hear from various sources that GM is about to follow Chrysler's lead and stop leasing its vehicles in the North American market. The move is not entirely unexpected; the company that owns the now non-leasing Chrysler Financial– Cerberus– also owns 51 percent of GM's vehicle financing arm, GMAC. Canada's Windsor Star reports GM's no-deal as a done deal. "The financial arms of Chrysler LLC and General Motors Corp. are getting out of the business of leasing vehicles as credit tightens and resale prices for gas-quaffing trucks fall, according to company executives and independent sources." Quaffing? Don't all ICE vehicles quaff? Anyway, the lease cessation is bad news for ChryCo and GM dealers north of the border. "In Canada, an estimated 43% of drivers lease their vehicles, double the U.S. rate of 20%." Ouch. You know residuals are in free fall when a financing company walks away from that kind of action. Meanwhile… "Geoff Helby, an analyst with J.D. Power & Associates in Toronto, said Toyota Motor Corp. and other automakers that offer attractive lease rates and decent residual values could win more business from the Detroit automakers as a result of the move. 'It would definitely put Chrysler and GM at a serious disadvantage.'" Make that "will."

Ignorance is a bankable commodity. When Bear Stearns stepped-up to the federal begging bowl, the average U.S. taxpayer had no idea who the Hell they were, why they needed money, and whether or not they should get it. Still doesn't. But if/when Ford eventually asks Uncle Sam to open your purse, it may not have what you'd call a winning plot line. Ford's good will with the public has often gone up in smoke (Pinto) or rolled over and died (Explorer). There's another PR debacle looming over the horizon: Flash of Genius. The movie paints a bleak moral picture of the artist once known as the inventor of the working class hero-mobile. We'll be sure to explore whether or not it's accurate in future posts. Meanwhile, make no mistake: it doesn't matter. Except that it does. And will. [thanks to katiepuckrick for the tip]

In General Motors Death Watch 182, I reported on GM's decision to squeeze a little more blood from the stone known as U.S. sales, by raising their product prices by 3.5 percent across the board. I pointed-out that Toyota could eat some more of GM's market share simply by NOT raising their prices or, God help Motown, lowering them. I predicted that ToMoCo would raise their prices, to maintain profitability and avoid any possibility of an anti-transplant backlash. And so they have. The AP [via The International Herald Tribune] reports that Toyota will up prices by a little over one percent– except for the hot-selling Prius (up 2.2 percent or $500). The timing is curious; the news arrived on the same day that GM lowered and extended its employee pricing. In any case, it's clear that Toyota is treading carefully, refraining from delivering the killer blow that's well within their power. They're leaving that for The Big 2.8 themselves.

GM's June sales stats were on the catastrophic side of dire. But they would have been a lot worse if not for the automaker's end-of-the-month zero percent fire sale. So… July. Now what? This time Marketing Maven Mark LaNeve is going all Amway on us (minus the multi-level marketing). He's hoping the automaker's [remaining] workers will spread some octo-branded love to a family member, friend, casual acquaintance or anyone with a pulse, really. The Wall Street Journal reports that GM employees can give one employee discount away between now and the end of July. "During this challenging period for people across the country, there's no better time than to talk up our great products and give someone you know an additional incentive to buy GM," LaNeve's intercepted email opined. The current shitty challenging U.S. new car market is "the perfect opportunity to pass this on" an unnamed (what is it with the WSJ and anonymous sources?) GM spokesfolk added. Yes, OK, but HOW MUCH? Seems the Journal forgot to mention this little factoid. We reckon it's about three percent off dealer invoice. Anyone? Bueller?