Bailout 2: Electric Car Boogaloo

The following comes to me from a trusted source. And it certainly helps to confirm my belief that GM would be in much better shape today had it gone through an honest Chapter 11. But mostly I want you to keep your eye on the politics in this piece. My source is a sharp one.

It’s time to stake out a “we won’t stand for another auto company bailout” position in conservative media, because if you add up what’s going on, another one is coming. Details below, but it looks something like this:

• At this point, taxpayers have largely written off ever getting paid back by GM (or, Obama has written off ever asking them to pay back, since he doesn’t want to hurt his hand-picked cronies or the union members they employ).

• GM is back to its old ways (see below): subprime auto loans, asking for special tax benefits, making cars nobody wants, etc.

• Fine — let them; but they better not come knocking on Congress’s or the White House’s door again….
Here’s the story: GM Financial is apparently back in the subprime auto lending game:

But as financial institutions recover from the losses on loans made to troubled borrowers, some of the largest lenders to the less than creditworthy,including Capital One and GM Financial, are trying to woo them back, while HSBC and JPMorgan Chase are among those tiptoeing again into subprime lending.

Auto loans are particularly attractive for lenders since they were largely untouched by many of the new regulations. The new Consumer Financial Protection Bureau said it had not yet decided whether it would oversee the largest nonbank auto lenders.

At the same time, the market for securities made up of bundles of auto loans is heating up. Last year, investors scooped up $11.7 billion in auto loan securities, up from $2.17 billion in 2008. The pace of securitization in credit cards is slower, with lenders selling roughly 30 percent of their card portfolios to investors, down from 60 percent before the financial crisis, according to S&P.

Steve Bowman, the chief credit and risk officer for GM Financial, an auto lender, said he expected subprime auto loans to continue to grow. Unlike mortgage lenders, Mr. Bowman argued, auto lenders understand how to manage risk while still making loans to borrowers with poor credit.

This is coming from the Times, so of course their chief concern is that the CFPB isn’t involved, and that a financial lending institution isn’t being punished for eating stupid people whole. Or something. But as you’d expect, they completely miss the point.

The point is to say that “New GM” is behaving exactly like “Old GM,” and just like we found out with the housing market, people who are buying cars they can’t afford will wind up finding it more profitable to walk away from their auto loans (like they did from their mortgages) and let the repo man take their cars. All the meanwhile, the car note-backed securities investors will come calling to GM Financial for a return on their investments (which, as the Times story notes, are five times larger in number than they were when the economy tanked), and GM won’t have anything in the tank because all their debtors will have defaulted….meaning they’ll come to Uncle Sam for another taxpayer bailout.

This is textbook moral hazard.

Replace the word “lending” in the passage below (from the Times story) with “debt”:

In fact, an increase in lending is a sign that the economy is improving, economists say. While unemployment remains high, consumers have been reducing their debts. Delinquencies on credit card accounts and auto loans are down sharply from their heights in the crisis. “This is a natural loosening of credit standards because the banks feel they can expand again,” said Michael Binz, a managing director at Standard & Poors

So people buying stuff they can’t afford that will sink them later is a sign that the economy is improving? Are these people out of their minds? Did they learn nothing from 2008-2009? You can’t have a functioning economy where 70 percent of GDP is driven by consumption rather than production (which is where we are today). GM is simply creating an auto bubble (another credit-fueled bubble like the housing bubble), and all their victory laps for being a rebounded/restored company are a total fiction — and the White House should be held to account for that, since Obama and Biden have been GM’s biggest cheerleaders — but a bubble for which taxpayers will be on the hook when it pops again.