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GM's subprime solution
Posted By Dan Mangru On 08/12/2010 @ 8:04 pm In Commentary,Money | Comments Disabled
As human beings, we try to see the innate good in each other. We try to give others the benefit of the doubt. We believe that everyone deserves a second chance.
They say that an honest man has nothing to fear. So I guess Government Motors CEO Ed Whitacre is doing his best not to be afraid.
We saw the first signs back in April, when GM’s Whitacre launched a massive commercial campaign advertising that the taxpayers had been paid back in full with interest 7 years ahead of schedule because more customers are buying GM vehicles.
This sounded fantastic, almost too good to be true.
Upon further review, it was.
With the administration’s help, GM took out a new TARP loan in order to pay back an old TARP loan that was only worth some $6.7 billion, and then used millions of taxpayer money to advertise the lie.
Officially, the U.S. government has a $49 billion equity stake (stock) in GM. Unofficially, propping up GM has cost us far more.
You have to factor in the $25 billion in loan guarantees extended to GM and Chrysler under the Bush administration. Throw in about another $25 billion in “Green Loans” that the Department of Energy has extended to carmakers like GM to build fuel efficient cars such as the new Chevy Volt.
Then sprinkle in about $4 billion that the government used in Cash for Clunkers. Add on top of that about $17.2 billion in total bailout expense of GM’s financing arm, GMAC, and top it off with government bailouts of all of the major part manufacturers for car companies like GM and Chrysler.
Now you have a clearer picture of what it’s costing us to bailout GM.
With all of that money that the government is on the hook for, Whitacre is under tremendous pressure to bring GM to the public markets via an IPO and have the government sell its shares on the open market.
But let’s face it. The economy is sluggish at best. The United States is looking at official unemployment at 9.5 percent and broad unemployment at 18 percent. GDP recently has been cut in half after revised statistics came out (originally reported at 2.4 percent for Q2 now at 1.3 percent).
With the economy starting to slow down and with Americans out of work, does anyone really think that people will go out and buy a $41,000 matchbox-sized Chevy Volt?
Of course not. People don’t have jobs, banks aren’t lending, and people are less willing to overspend on consumer goods and luxury items.
So how does GM launch the biggest IPO in the U.S. amidst one of the worst consumer markets in history?
Back in 1999, a man by the name of Franklin Raines was given a directive by President Bill Clinton to increase home ownership. The problem was that people couldn’t afford the homes. The solution: give them the homes anyway.
Thus the subprime solution came under way.
Now a similar solution is being played out at GM. The government bailed out GM’s financing arm GMAC and made it into a bank with strict lending standards. But you can’t do subprime with strict lending standards.
That’s why GM decided to take about $3.5 billion of its taxpayer cash and acquire AmeriCredit, one of the nation’s largest subprime lenders.
GM’s plan is to boost sales of its vehicles by lending to people who otherwise couldn’t get a traditional car loan.
See, GM doesn’t care whether people can pay for the cars or not. They have a mission of padding the balance sheet so that they can launch the largest IPO in U.S. history. It’s said to be somewhere between $50 billion and $75 billion.
To give you an idea of how big that is, Visa’s IPO was only $17 billion.
Once the IPO is launched the government and GM executives can cash out their stock while the value is still high.
Eventually, people will either have to pay for the car loans or GM will sustain massive losses, like it did during 2005-2009 when it lost over $88 billion, about $25 billion to $35 billion more than the entire company is worth today.
By the time that happens guys like Obama and Whitacre will have cashed out and once again it will be individual shareholders who will be left holding the bag with GM.
When that happens, guess what?
GM already has been declared too big to fail. So when the you-know-what hits the fan again, after GM pumps its balance sheet full of subprime auto loans, guess who’s in line for a bailout?
That’s right. Once GM launches a huge new IPO just wait a couple of years.
You’ll see the new CEO of GM (because I assure you Whitacre will be long gone by that time) taking the private jet of shame all the way to Washington, D.C., to beg for bailout cash after the company was pressured by the government to make risky loans to pad its balance sheet. GM will say that the government made them make bad decisions that caused them to go in heavily into the subprime auto market.
What the government and GM don’t know is that those who fail to learn the lessons of history are doomed to repeat its mistakes.
GM is trying to create an auto bubble to boost its sales and get out of government debt. The last time that we tried to create a bubble to stimulate a slumping economy was when we tried to create a housing bubble, and we all know how well that turned out.
I wonder when the IPO will come out. Will it come out before the mid-term elections this November?
Will it be just in time for Democrats who will try and ride the Obama coattails touting that its GM investment was a huge success?
Just like politicians used free homes to get votes, it seems like they will start using free cars to get votes. If history serves us right, GM will be the right vehicle for politicians to win an election, and once those politicians get elected, they will have to deal with the problem that they created.
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