Replies to This Discussion

Permalink Reply by David Ruggles on November 16, 2008 at 6:42pm

I wonder about the impact on GM Dealers. Many of them have other franchises, but there are many GM only dealerships. GM has historically pushed dealers into bigger and more expensive facilities even when today's Buyer views the Internet as their showroom, not the Dealer's bricks and mortar.

I suspect that many assets of GM will be picked up in the case of a total GM fold, but re-organizational bankruptcy is the most likely scenario.

I've written, in another thread, about how tricky organizational bankruptcy can be. I'm not an expert but I watched the United re-organizational bankruptcy and saw how the BK judge was in the position of authority. I saw the other legacy carriers struggle to compete with United in the face of United not having to pay its bills or pay market price for labor. The United BK pushed others over the brink. Its a miracle American Airlines has avoided bankruptcy so far. How could Ford compete with GM if GM's costs were greatly reduced through bankruptcy?

How did the geniuses at Cerberus get entangled with 2 of the Big 3. Someone over there is in the process of learning the true meaning of humility, although the fat cats will certainly escape with some nice "parachutes."

Permalink Reply by Secondarypro on November 16, 2008 at 10:17pm

I think at some point the overall greed of GM has brought them to this, not just the overall economy. Yes it is true that the financial market has stopped the never ending pot of gold that GM has drawn from , but maybe they thought that it would never end. At some point it was inevitable.

By GM filing for re -organization and stopping the constant hemorrhage of spending ,they may return as a leaner and more effective auto maker.

As far as GMAC goes, it would seem that they idea of 0% financing for 72 months made as much sense as a 125% home equity loan or the pay only interest mortgage. Lets put people in vehicles that gained no equity for the first 4 years of ownership, then ask them to trade them in in less than 2 years. On top of that lets finance the new vehicle at 135% of value for another 72 months at 0%.

Permalink Reply by Marcie Belles on November 17, 2008 at 12:14pm

Nicely put, Secondarypro. I think you hit the nail right on the head.

Permalink Reply by Norm on November 17, 2008 at 4:40pm

Secondarypro said:

I think at some point the overall greed of GM has brought them to this, not just the overall economy. Yes it is true that the financial market has stopped the never ending pot of gold that GM has drawn from , but maybe they thought that it would never end. At some point it was inevitable.

By GM filing for re -organization and stopping the constant hemorrhage of spending ,they may return as a leaner and more effective auto maker.

As far as GMAC goes, it would seem that they idea of 0% financing for 72 months made as much sense as a 125% home equity loan or the pay only interest mortgage. Lets put people in vehicles that gained no equity for the first 4 years of ownership, then ask them to trade them in in less than 2 years. On top of that lets finance the new vehicle at 135% of value for another 72 months at 0%.

Well put. However, lets not discount the impact of the UAW on the big 3. Unless the UAW is willing to renegotiate their contract then bankrupcty is the only viable option. How does any one of the big 3 compete with a $71.00 hour labor rate to Toyota's $47.00. Not to mention the pension payout. Unless the economy improves dramatically overnight and consumers begin to buy again, then the bailout seems to me to merely delay the obvious.

Permalink Reply by David Shevsky on November 17, 2008 at 6:16pm

Thinking that GM's problem is due to "greed" and GMAC's lending 0% at 72 months was stupid oversimplifies the current dilemma. GM's problems stem from their dominance of the U.S. auto market with greater than 50% market share in the mid-1960's which led to complacency and an inability to change quickly when the 1970's oil crisis hit and when foreign competition, especially from the Asian imports began in earnest. GM has been hurt by a perception problem that its vehicles are not as good as the imports which stems from the vehicles it produced in the 1970s and 1980s - they have not really recovered from this and it shows in their sales even though their vehicles today are some of the best they have ever built.

The fundamental issue today for GM is that their massive restructuring initiatives are being phased-in which is not quick enough in this environment, especially when considering their current market share is 20%. The health care provision of their 2007 UAW pact which will provide GM with enormous cost savings does not kick-in until January 1, 2010. Simply put, GM does not have enough capital or liquidity to weather a global economic and credit crisis that looks to be prolonged.

With respect to GMAC, to assume the 0% financing was underwritten like an exotic mortgage product is also a hasty generalization. GMAC's credit quality rises substantially when it underwrites incentivized business and the overall performance profile for that business, over a long period of time, has been exceptional.


Marcie Belles said:

Nicely put, Secondarypro. I think you hit the nail right on the head.

Permalink Reply by Marcie Belles on November 18, 2008 at 12:38am

I agree with your points about GM and the higher credit quality on the 0% loans. I think a major problem with financing these days is the negative equity that consumers have built up in their vehicles. To a degree, I think 0% financing contributed to that problem. You have people who trade in their financed vehicles after a year or two -- despite the fact that they've got tremendous outstanding balances -- just so they can take advantage of the "free" money in a 0%-interest loan.

Then, you couple the 0% interest with a 72-month term, which means the loan amortizes at a much slower pace. Should the consumer trade in the vehicle early, he becomes further upside-down in the loan.

In general, I think there are two ramifications of that scenario, neither of which is good for a captive. (1) The consumer actually keeps the car for six years, so he takes himself out of the car-buying market for that long, slowing the sales rebound. (2) He defaults on the loan, and the loss severity for the lender goes through the roof.

Certainly, in some cases, 72-month loans make sense. And 0% loans are a great way to jump-start a dragging economy. But I think, as an industry, we got too caught up in the momentum. Now the momentum has ground to a halt, and we're all feeling the consequences.