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Sunday, July 29, 2012

GM's Predatory Lending

"Predatory lending tricked people into taking out loans that they couldn't pay back. The banks did that, don't you know. These banks, they targeted these poor people and they targeted these minorities." That may not be an exact quote but we have all heard Obama express this cant ad nauseam. Guess what? Predatory lending is back and we are all to blame, at least all of us who still pay income tax. It's not the banks this time it's General Motors in which the taxpayers still have stake. The Treasury owns 26.5% of the automaker, or 500 million shares. The stock price would need to be $53 to recoup those taxpayer costs. Presently the price is $19.67 per share and there is a matter of $24 billion in unfunded pension liabilities but we can cover that in another post.
Normally one would think, as GM's largest shareholder, the administration would be breaking kneecaps but no. The auto industry was exempted in Dodd-Frank. Rules that would result in hundreds of million of dollars in fines for banks do not apply to GM. About a year ago GM acquired a new captive lending arm, subprime specialist AmeriCredit. Renamed GM Financial, it has played a significant role in GM's growth.
Credit ratings or FICO scores range from 300 to 850. A score less than 660 is considered sub prime. 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. In other word, almost all the consumer debt GM Financial holds is subprime which amounts to about $6.5 billion. Luckily for the taxpayer GM Financial finances only about 8% of GM loans. The remainder of the loans are run through Ally Financial, formerly known as GMAC.
Suffice it to say GM has bigger problems that the subprime loans on it books but the hypocrisy of the double standard for the auto industry and everyone else really an outrage. Personally, I subscribe to a laissez-faire philosophy on money lending. If the borrower and the creditor are happy when the loan is made that good enough for me. If someone wants to loan money to deadbeats good! Just don't come crying to me when things go wrong. On the other hand, GM by contemporary standards is a moral deviant and increasingly a risk to what is left of the taxpayers' bailout cash.
In the meantime, bad credit no problem, Bankruptcy no problem, no job no problem and if that's not enough we'll throw in a set of low profile tires.

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