For this year.
"The company said it won’t finance “higher-risk transactions,” instead concentrating on prime customers who are more likely to repay using “responsible credit standards.” The relaxed policy “will allow us to return to more normal levels of financing volume, and should help in efforts to stabilize the U.S. auto industry,” GMAC President Bill Muir said in today’s statement."
Ok.
What constitutes a "prime" customer? This means that only the best credit risks will get financed at a reasonable rate, right?
Uh, no.
GMAC reduced the credit score necessary to get a loan from 700 (very good) to 621 (not very good.)
The median (average) FICO score in the United States is (according to myfico.com) 723. That makes 621 quite crappy.
Worse, here was what GMAC did:
"Within hours, GM was offering no-interest loans for as long as five years to counter this year’s 22 percent drop in sales, caused in part by the inability of its customers to get financing."
Oh, and the terms?
"GMAC will pay an 8 percent dividend on the Treasury’s $5 billion of senior preferred equity. The company will also issue warrants in the form of additional preferred equity that will equal 5 percent of the preferred-stock purchase and pay a 9 percent dividend if exercised."
So let me see if I understand this.
The government "buys" preferred equity that pays an 8% coupon. GMAC must pay that 8% coupon (9% if the government exercises the warrants)
GMAC turns around and loans out money at 0% which it has to pay 8% to acquire, and at the same time decides that it will make loans to people with credit scores significantly worse than average, when before they would make loans only to people with scores that were slightly better than average.
And we wonder how we got into this mess?
Loaning money out at a lower rate of return than it costs you to acquire - isn't that kind of like "we'll lose something on each sale, but make it up on volume?"
Oh, and then while we're at it, let's make lots of loans to people who have credit significantly worse than the average credit score in the United States, instead of just making loans to those who are at least average in their handling of credit.
The Federal Reserve approved GMAC's bank holding company application with this as the background and without constraint to prevent this intentionally-losing strategy from being conducted.
In one sentence:
The Federal Reserve and Treasury approved an application that contained as it's essence an intentional money-losing business strategy, enabling the literal looting of the public treasury under the false pretense of an "investment".
If you wonder why our nation is absolutely, totally screwed, and why we will see 2009 bring us ever-closer to an economic collapse as the pyramid of bad debt, intentionally taken on with the full knowledge and complicity of Treasury and The Federal Reserve collapses, you need look no further than this announcement.
Bernanke and the entire Federal Reserve Board of Governors, along with Paulson, need to be removed from office for intentional dereliction of duty.
PS: I thought TARP V1 was out of money..... Is Treasury kiting checks?
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