Taxpayers have already bailed out General Motors to the tune of $50 billion. What did we get for that? A car company that, unlike Ford, Toyota, Honda, Nissan, Hyundai and many others, still can’t stand on its own two feet. We also got a car company that is now being used by the Obama administration to make a political point: that government knows how to run a business better than the private sector. The problem for the president and his statist cohort is that the reality of the free market surpasses their fiction of a state-run economy. GM still has problems making money, and is now trying to boost its bottom line loans to people with poor credit:
The Obama administration in 2009 bailed out GM to the tune of $50 billion as it went into a managed bankruptcy. Near the end of 2010, GM acquired a new captive lending arm, subprime specialist AmeriCredit. Renamed GM Financial, it has played a significant role in GM’s growth. The automaker is relying increasingly on subprime loans, 10-Q financial reports shows. Potential borrowers of car loans are rated on FICO scores that range from 300 to 850. Anything under 660 is generally deemed subprime. GM Financial auto loans to customers with FICO scores below 660 rose from 87% of total loans in Q4 2010 to 93% in Q1 2012. The worse the FICO score, the bigger the increase.
Let’s pause and think for a moment what this means. The credit rating system is there to help creditors balance their exposure to risk. In good times when your profits are soaring you can afford to take on customers with bad credit, but when times are tough and your margins on good credit loans are slim, it is a bad idea to expand your exposure to bad credit loans. This is an even worse idea if you are a business recovering from your own credit problems.
The Obama administration does not seem to worry too much about such sound business practices. On the other hand, perhaps we should not expect anything else from an administration whose fiscal policy has caused a downgrade of America’s credit rating.
Back to Investors.com:
From Q4 2010 to Q1 2012, GM Financial loans to customers with the worst FICO scores — below 540 — shot up 79% to more than $2.3 billion. The second worst category, 540-599, rose 28% from about $3.4 billion to $4.3 billion. Prime loans, those above 660, dropped 42% to $676 million. GM Financial provides just over 8% of GM’s financing.
That makes the use of GM Financial for subprime lending even more troubling. It shows that the government-run auto company is desperately trying to defy the market forces and bring its cars out to people who really cannot afford them.
Can you say Fannie Mae?
[Since] it acquired GM Financial, GM has seen its subprime loans grow from about 4.8% of sales in Q4 2010 to 8.2% in Q1 2012. The industry average is about 6%.
This artificial boost of GM auto sales comes on top of the Obama administration’s use of taxpayers’ money to roll more vehicles out of GM factories. In June the National Legal and Policy Center reported that the federal government was using taxpayer money to boost Government Motors sales figures:
It looks like General Motors will be throwing everything in but the kitchen sink to help fluff its second quarter earnings numbers. Taxpayers continue to help with the cause as President Obama campaigns on the “success” of GM following the manipulated bankruptcy process that cost taxpayers $50 billion and another $45 billion of tax credits gifted to GM to help protect powerful UAW interests. We now learn that government purchases of GM vehicles rose a whopping 79% in June. The discovery of the pick-up in government fleet purchases at the taxpayers’ expense comes just weeks before GM announces its second quarter earnings. Overall fleet sales (which are typically less profitable than retail sales) at Government Motors rose a full 36% for the month, helping to drive decent sales improvements year over year.
So not only did the Obama administration force us all to bail out GM, and not only does the Obama administration force us all to buy GM cars, but they also force us all to be on the hook for an auto financing policy that has the architecture of a mortgage credit meltdown written all over it.
The president is setting us all up for yet another GM bailout – ostensibly just so he can pretend that government is better at doing business than the private sector.
By the way, in case anyone wonders why GM is having such a hard time selling its cars, let me repeat a point I made in November last year:
In the latest car review issue of Consumer Report, once-highly ranked GM vehicles have taken a reliability tumble … Not since the 1990s has GM suffered from such poor reliability in its products. Even Buick, a long-standing hallmark of quality within GM, now struggles with reliability problems. But what is most interesting about the reliability report is the contrast between the Volt and the Cruze. In essence, the Cruze is a Volt with a traditional, though admittedly anemic, gasoline engine. While the Volt is at the top for first-year reliability – giving Toyota a run for the money – the Cruze is at the bottom of the scale. No car company today can afford to release a model that gets poor reliability ratings in its first year. GM only needs to go back in its own history (Cadillac Allante, anyone?) to learn that lesson all over again. Yet that is precisely what Government Motors has done with the Cruze, which competes against quality masters like Toyota Corolla and Honda Civic and serious quality contenders like Hyundai Elantra and Ford Focus. … The fact that the Volt is getting first-rate reliability ratings shows that the company has not lost the know-how on reliability – but the fact that other cars from the same manufacturer are losing reliability indicates that Government Motors has re-allocated resources to meet political product demands, not the demands from the market.
Hopefully, Government Motors will either go quietly into the night before it costs taxpayers any more money. If that does not happen, then at least let’s hope a Romney administration will have the good sense to chop up the remains and sell them off to real car companies.
Either better happen fast, or else GM will sooner or later embarrass itself the same way the East Germans did when their laughable attempt at building cars was eventually exposed to the reality of the free market.