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

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]

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.

The automakers whining lobbying in Washington seems to be paying off. The Detroit Free Press reports that 71 members of the House of Representatives have said they'll support the Advanced Technology Vehicles Manufacturing Handout Initiative. The $25b program's meant to help the domestic automakers catch up with the transplants meet the 2020 CAFE standard of 35 mpg by giving loaning them money to engineer fuel-efficient vehicles or upgrade old plants. Rep. Sander Levin from Michigan explained, "Funding this new program is critical to the future of the U.S. auto industry, as well as our nation's efforts to reduce our dependence on foreign sources of oil. The federal government must be an active partner in the effort to create these jobs and technologies here in Michigan the United States." Several members of the Senate have also expressed support for the program, including Sen. Barak Obama (surprise!). But the chances of it (or anything else) being passed this year are slim. Congress will start their August vacation recess this week; they have no plans to convene after the election. That leaves only September for them to get anything done. As if. [thanks to carveman for the link]

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."

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.

Today's New York Times reveals the not-so-startling news that Wall Street's Big Swinging Dicks are not so big and not so pendulous this year. "A review of the latest statements from the largest financial companies based in the city shows that they intend to hand out about $18 billion less in pay and benefits in 2008 than in 2007… It would mean about $10 billion less in taxable income and several billion dollars less to be spent on apartments, furniture, cars, clothing and services. For many investment bankers and traders, year-end bonuses traditionally account for at least three-fourths of their income. But the downshifting of the Wall Street lifestyle has already begun." The general economic downturn is starting to take its toll luxury car sales, with Lexus down 29.8 percent in June, down 14.7 percent for the year. But is it possible? Could Porsche's $127k base Panamera land with a thud? Will Ferrari actually be heading for that moment in their history when they have, gulp, inventory?  

Bucking the tide, Honda announced an eight percent increase in profits for the April-May-June 2008 quarter. Profits would have been higher still were it not for the incredible shrinking US greenback. The Financial Times tells us that "the yen's sharp rise compared with early 2007 – it hit a 12-year high against the dollar in March – reduced the value of its overseas sales and turned what would have been a 7.1 percent first-quarter revenue increase into a 2.2 percent fall." With over 50 percent of its business in the stricken US market, higher raw materials costs and a mix-shift away from higher-priced large vehicles to low-cost cars Honda still pulled a profit increase out of the hat. Then, there is what being able to nix the cash-on-the-hood for your best sellers does for a business. Sure the Pilot, Ridgeline, Odyssey and MDX need incentives to move; but the Fit, Civic, Accord and CR-V are all selling with no rebates and no dealer "marketing support". Meanwhile, over at your friendly Saturn dealer there is cash on the hood of ANY 2008. Even with today's good news, financial analysts are spooked by Honda's warnings that the second half of the year is likely to be more difficult than the first half was and that total fiscal year profits are likely to be down by 18 percent. Honda stock swooned two percent today, but GM dropped eight percent.

Just when you thought it couldn't get any more miserable being one of Chrysler's Dealer "Partners" comes the news that the Chrysler Financial is out of the lease business! The Wall Street Journal reports the decision with a note that "Chrysler is expected to brief dealers formally later in the day in a conference call". Boy, it must suck to find this out in the news before getting word from corporate. Nardelli's previous claims that renegotiating bank loans is just a routine matter have been blown out of the water. That $30B revolving line of credit only runs through August, and IF Chrysler is able to get it extended the terms will surely be much more costly than before. Negotiations must be going very, very badly for Chrysler to take one of the most popular sales financing tools off the table. One has to wonder if come August any new lending will be of the Debtor in Possession variety.

Ford's PR folks are busy weaving their tangled web. Case in point: in the press release announcing the dismal Q2 results for Ford Motor Credit, The Blue Oval Boyz state the net loss is "$1,427 million." I guess that doesn't sound as  as bad as saying they lost $1.427 billion in one quarter. Compare that to last year's second quarter earnings of $62m and that's quite a deep hole they've dug. Anyway, let's blame the economy! Yes, U.S. consumer preferences shifted "from full-size trucks and traditional sport utility vehicles to smaller, more fuel-efficient vehicles… [which] caused a significant reduction in auction values for used full-size trucks and traditional sport utility vehicles." In other words, their parent company put all their eggs in the truck/SUV basket, gave credit where credit wasn't due, offered lease deals based on unrealistic residuals, and had nothing to offer in the subcompact market when the market shifted. But it sounds so much better to tell the stockholders "it's the economy, stupid" than to admit "we screwed up."

I don't know how we missed this, but we're not alone; Autoblog didn't find this story until this morning. Anyway, Michigan's Democrats are pushing for a $4b handout stimulus package for their floundering automakers. The Detroit Free Press quotes Presidential candidate Barak Obama pledging support for such aid, stating "America cannot truly prosper unless Michigan prospers" while speaking in Warren, Michigan last week. (Governors of about 49 other states might disagree with that statement.) In a letter pandering to the UAW, Obama promised he "will provide real solutions necessary to help this industry compete and win in the global economy." Of course, his "solutions" boil down to the only "solution" politicians have for any problem: taxpayer money. Barack and other Democrats are pushing for a $50b "stimulus plan" for the auto industry, including loans at "below-market interest rates." Republican candidate John McCain is opposed to the loan idea, but he does support a $300m prize for battery development, tax credits for fuel-efficient vehicles and strict goals for flex-fuel vehicles. Either way, it's going to costs a bundle to correct what fifty years of over-priced, under-performing executives and their yes-men have produced. Or, dare I say it, not.

With the "energy crisis" as the calamity of the moment, it's easy to forget that the credit crunch is still a long ways from resolution. Luckily, Chrysler is around to remind us. The Wall Street Journal reports ChryCo Financial has a $30b credit facility due for renewal next month, with its borrowing rates set to rise. The usual unnamed sources say the renewal deal is still being "worked out." And while the exact increases are not yet known, analysts are placing the spread at more than one point over LIBOR, currently 2.8 percent. JPMorganChase is said to be "pushing hard to persuade more than 20 banks to renew the facility — backed by car loans, leases and loans to dealers — that was issued by the auto-finance company last year when it was carved-out of the former DaimlerChrysler AG." Uh-oh. Investors have been running away from this exact sort of complex, structured debt since the credit crunch first hit. In contrast, Ford and GM typically use such "conduits" in one or two-month increments, keeping their borrowing costs below 0.5 percent above LIBOR. And the more expensive the borrowing, the less Chrysler can offer in financing terms to move its metal. Which is barely moving anyway. Not good.

Malcolm Bricklin is deeply regretting his plan to import Chinese Chery cars to the U.S. Automotive News (sub) reports that the man who brought Subaru to America is suing his erstwhile Chinese colleagues for corrupt practices. This after losing $26m (of someone's money) trying to bring Cherys to the US. The suit alleges Chery has "systematically broken contractual obligations, stolen plans for vehicles, made cars designed by Western companies without paying for their rights, and made deals without the slightest intention of carrying them out." In other words, business as usual. Bricklin once described his partnership with Chery in glowing terms: "I have never met a more cooperative, more intelligent, more aggressive group to do business with. We're working together as if we've been working together for 100 years." And now… "We're going to get them for everything they've done." Bricklin reckons Chery is legally vulnerable in the states; an American designer has successfully sued his overseas imitators. No matter how this shakes out, it's good news Chrysler's plan to import Cherys into the US.