To big to fail, GM enters "high risk" loan business alongside Fannie & Freddie
Below is a small portion of an interesting article about business.
People don't really want to buy GM's cars so now GM is, through its credit division, offering leases and loans to people who have questionable credit and would not otherwise be able to obtain credit from traditional lending sources.
This is, at best, a questionable business practice. Fannie May and Freddie Mac did this with home mortgages, as mandated by the Clinton era directives under the Community Reinvestment Act, which was supercharged and pushed under his tenure, leading to the housing collapse a few years ago. Cars don't last as long as homes, its likely the consequences would be similarly dire.
Below is a small portion of an interesting article about business.
People don't really want to buy GM's cars so now GM is, through its credit division, offering leases and loans to people who have questionable credit and would not otherwise be able to obtain credit from traditional lending sources.
This is, at best, a questionable business practice. Fannie May and Freddie Mac did this with home mortgages, as mandated by the Clinton era directives under the Community Reinvestment Act, which was supercharged and pushed under his tenure, leading to the housing collapse a few years ago. Cars don't last as long as homes, its likely the consequences would be similarly dire.
For the complete article see link => http://www.weeklystandard.com/blogs/gm-joins-fannie-and-freddie
GM Joins Fannie and Freddie
The opportunity to pursue private profits backstopped by an implicit government guarantee is an invitation to take on excessive risk.
BY CHRISTOPHER PAPAGIANIS
August 13, 2010 4:30 PM
Andrew Ross Sorkin has a very interesting column this week examining the signal sent by GM’s purchase of AmeriCredit. The short answer: GM looks like it’s trying to revive the old patterns of demand before the recession. It’s doing so by following some of the same business practices that led to its bankruptcy filing last summer. . .
According to Sorkin, “G.M. plans to prod sales of its vehicles by using AmeriCredit to extend loans and leases to automobile customers with questionable credit. These are the same customers who could very well be denied a loan by other lenders. But prudent lending is not at the top of G.M.’s to-do list: it needs to move its vehicles off the lot and it needs to do so quickly.”
Sorkin asks the right question: “did we really spend $50 billion of our money just to revive the kinds of practices that led to the credit crisis?”
On the upside, a successful deal for GM’s auto financing arm could help the taxpayer. Since the government still owns 61 percent of GM, a successful I.P.O. is vital if U.S. taxpayers are going to get back at least a portion of the money that was invested in the firm over the last two years. On the downside, a GM that increasingly depends on more risky loans (through AmeriCredit) may come at the cost of a long-term recovery. Is GM heading down the same path that ultimately led to a government take-over?