By Mike Whitney
Subprime is back!
Only this time it’s popped up in the auto market where it’s triggered an impressive surge in sales. According to Marketwatch, General Motors February sales topped 45% to a robust 207,028 vehicles, way above analysts expectations. But soaring car sales have less to do with the allure of those gussied-up Silvarados than they do with “easy financing” for people with less-than-stellar credit. Here’s a clip from an interview on Wednesday’s Nightly Business Report with Autonation’s President Michael Maroone that helps to explain what’s going on.
NBR’s Susie Gharib: Another dose of good news today from the auto world, a day after Detroit`s big three reported strong February sales. Autonation, the country`s largest seller of new and used cars, reported a big jump in its numbers. New vehicle sales rose 29 percent compared to a year ago. And U.S. brands made up 40 percent of sales. GM models were especially popular….. Mike, what about any kind of special deals or incentives to entice consumers to buy?
Maroone: Well, almost every day there`s a new incentive. They`re used in a very tactical manner. The incentives are relatively flat with prior periods. But today we saw GM announce zero percent financing, up to 72 months on specific models. We`re seeing Honda increase their incentives. Nissan`s got a very aggressive program. Toyota has been aggressive. So almost every manufacturer has something and it varies tremendously. It`s certainly tactically driven and it is stimulating business.
Gharib: What about on the credit side, for someone that does need financing, is it getting easier to get a loan or is it still pretty tough?
Maroone: Susie, it`s gotten much easier. The big driver of the recovery in 2010 was the restoration of credit. The change in 2011 is we`re now seeing an improving environment for sub-prime. So last year prime and near prime were more normal and this year we`re starting to see the sub- prime segment come along and that`s very important for our industry. (The Nightly Business Report)
Repeat: “72 months zero percent financing” to people with dodgy credit. Sound familiar?
But why would the big car dealers want to get caught up in another enormous subprime meltdown? How do they benefit from issuing loans to people who may not be able to repay the debt?
Ahh, that’s the mystery of securitization, Wall Street’s magical profit-booster. The dodgy loans are tossed into the food processor with other savory nuggets, ground to perfection, lightly doused with a triple-A rating, and sold to as bonds to “yield seeking” institutional investors from Schenectady to Milan. It’s all part of the new earnings paradigm that places financial alchemy (“innovation”) above productivity and wealth creation.
But, we’re getting ahead of ourselves….
First of all, we need to remember that workers wages have stagnated for the last 30 years, unemployment is at 9%, and consumers are still deleveraging from losses they sustained during the financial crisis. It will take a while to get their debt-to-disposable income levels back to historic trend which means that they will have to save more and spend less. Naturally, that’s bad for auto sales. So, the only way the dealers can drum-up demand is via credit expansion, which means seducing people into borrowing more than they might be able to handle. What’s important to understand, is that the dealers make more on financing then they do on the sale of the car itself. Here’s an excerpt from an article titled “Auto Dealers Maneuver for Exemption in Financial Reform Bill”:
“New car dealers often make modest margins on the sale of vehicles, but earn substantial sums by arranging financing for car buyers. So-called “after-market” income from financing, insurance and service contracts produced roughly 60 percent of dealer profits from selling new cars in 2008, according to research by Raj Date of the Cambridge Winter Center for Financial Institutions Policy. Former auto dealership workers who have spoken out in lawsuits and interviews say that the push to pump up profits from financing and add-ons leaves consumers vulnerable to a variety of questionable practices.” (“Auto Dealers Maneuver for Exemption in Financial Reform Bill”, Michael Hudson, The Center for Public Integrity)
So, financing is key, which is why the Obama team was so eager to bail out GM. It had less to do with throwing workers a lifeline than it did with keeping the finance arm of the industry (GMAC, now known as Ally Financial) alive. Obama is just as committed as Wall Street to continuing the securitization-looting scam that allows unregulated shadow banks to generate ungodly amounts of credit to people who have no way of repaying their debts. Of course, the banksters and shadow banksters are able to skim-off their salaries and bonuses before the credit bubble pops and all hell breaks loose, but everyone knows that already.
The bottom line: Securitization provides a reliable way for the financial giants to transfer the wealth from working class people to their own coffers. It’s another lethal weapon to add to their class warfare arsenal.
Also, the auto industry has used its lobbying muscle to get an exception from critical provisions in the Dodd-Frank Reform Bill that would have been imposed by the new Consumer Financial Protection Agency (CFPA). So now, dealers can continue to shoehorn customers into loans they cannot afford without fear of penalties. It’s worth noting, that the Better Business Bureau receives more complaints about auto dealers than any other group. The most common complaint–according to Duane Overholt, a former car salesman who created the website StopAutoFraud.co– is from “unhappy car buyers who were called days or weeks after driving a new vehicle off the lot to be told they didn’t qualify for a loan. Buyers are told to bring the car back, unless they are willing to pay more for it. In the industry, this is called “yo-yoing.”
But that’s just one of the many “tricks and traps” car dealers use to extract more money from their prey. Here’s a couple more from the same article:
“Timothy Thornton, a former finance and insurance manager at Buchanan Automotive’s Suncoast Ford, claims in a lawsuit that the dealership’s sales desk “frequently and systematically” falsified the income on customers’ credit applications, creating fake W-2 and 1040 tax forms. The suit claims customers were usually unaware of these and other falsifications because dealership employees forged loan applicants’ signatures on contracts, credit applications and other documents.
Joe David Kezer, a former finance director at Buchanan Automotive’s Sarasota Ford, alleges that the dealership used false information to qualify “customers who were less than credit-worthy” and “power booked” used cars, “listing options and equipment that were not in fact on the car for the purpose of increasing the loan value.”…
(And) Matthew Manley claims his coworkers saddled customers with bigger loans by slipping unapproved charges into the deals. One manager, Manley alleges in his own lawsuit, urged him to target vulnerable customers — referring to the elderly as “people with oxygen tanks” and African Americans as “the dumb blacks.” (“Auto Dealers Maneuver for Exemption in Financial Reform Bill”, Michael Hudson, The Center for Public Integrity)
Do you see a pattern here? The industry is a hotbed of fraud and sleaze, but the CFPA will be kept at arm’s-length because industry bigwigs spent enough money to bribe congress.
And what has the Obama’s role been in this latest subprime fiasco? Well, in truth, it’s Obama who reassembled the industry so the auto-raptors could resume fleecing their prey as before. Here’s a clip from the New York Times:
“The Obama administration provided other forms of assistance as well. It engineered the rescues of the CIT Group, a major lender to auto dealerships and parts suppliers, and also bailed out the troubled auto finance companies Chrysler Financial and GMAC, now known as Ally Financial.
Just as crucial, economists say, was the administration’s effort to lure private investors back into what was once a $100 billion-a-year bond market for auto finance companies, according to Deutsche Bank Securities. That market had all but dried up by the end of 2008.
The federal program provided more than $11.7 billion in below-market financing to dozens of private investors — a group that included hedge funds like FrontPoint Partners, money managers like BlackRock and Pimco, and even a retirement fund operated by the City of Bristol, Conn. — to encourage them to resume buying bonds backed by auto loans. Although the amount of government financing was relatively small, it accomplished its goal: to revive the market for packaged consumer loans and get credit flowing again, especially to weaker borrowers.” (“Behind a Rise in Auto Sales, Easier Credit”, Eric Dash, New York Times)
So, it was Obama who put Humpty together again. In fact, the Treasury actually had to put up 92% of the money via its TALF-giveaway just to induce some of the big players to get involved. (Geithner assured them that they wouldn’t lose a dime of their investment.) So, now securitization is on-the-mend, the shadow banks are up-and-running, and the prospects for another economy-crushing credit bubble are looking more and more likely.
But the man who deserves the most credit in this subprime boondoggle is Ben Bernanke. The Fed chairman was determined to restore the so-called wholesale credit system from the get-go. By keeping interest rates fixed at zero for more than two and a half years, Bernanke has essentially put a gun to the heads of savers who’ve seen rates on CDs and other risk-free investments plunge to historic lows. Fed policy has pushed these people back into exotic debt-instruments–like asset-backed securities (ABS) comprised of subprime auto loans–in their search for higher yield.
The risk-trade is back on mainly due to the machinations of the Federal Reserve. The next bubble will be Bernanke’s doing. so what else is new?