One obvious consequence of “sweeping” legislation is that nothing gets done while we wait for it to pass and go into effect. Now that it has passed, we will probably start to see a lot more activity in previously dead areas. Perceived uncertainty and the volatility of government actions has been reduced. As the various implementation periods in the bill roll off over the next 6-9 months, uncertainty will further diminish, which will lead to more activity.
Doubtless there will be further evidence of “unintended consequences” too.
Anyhow, a second big piece of post Dodd-Frank Act news (after the boycott by the rating agencies) is that GM is back – making deals and (umm, once that boycott by the ratings agencies is worked around, negotiated away, or whatever) securitizing.
AmeriCredit is a subprime auto lender dependent entirely on the securitization market for its existence; it’s flirted with bankruptcy a few times itself, over the years (hat tip: anonymous). At the moment it finances almost exclusively secondhand cars, any make.
GM needs a subprime lender so they can get someone to make loans to their potential buyers, otherwise GM won’t be able to sell so many cars, which would spoil GM’s planned IPO (which the administration and Geithner will be hailing as evidence of their successful plans, in time for the elections). Surely AmeriCredit will be a captive lender very soon after the merger is done.
The bailout funds are evidently being invested on Americans’ behalf, rather than simply returned, and there will be some strong opinions on that. Perhaps the move will be justified by success: let’s see what emerges from the subprime securitization pipeline this time, shall we, and how GM’s sales go? In the mean time there is enough private/public entanglement here to make holders of just about any political conviction feel decidedly queasy.
What about GMAC, you ask? Good question. GM sold a majority interest in GMAC, but still owns 6.7% direct and another 9.9% via a trust (and the US Treasury owns 56.3%). GMAC’s business is making loans on GM (and Chrysler) cars. It is worth noting that GMAC was not, and is not, a subprime auto lender. Their auto loans have always been prime, or nearly, apart from a post-crisis foray to prop up GM, when already in a ‘bailed out’ state. GMAC did make most of their auto loans interest-free for many years, to help sell autos (!), but maintained credit standards (for the most part). Nevertheless, GMAC went underwater to the tune of around $17Bn. It was subprime RE loans, plus the Crunch, that really did them in.
Why wasn’t GMAC (now Ally Bank) enough? One commenter speculated that GM needed a lender they could control, so they could make sure the loans get made. Ahem. WSJ’s report of AmeriCredits’s activity puts it like this:
But GMAC, which received roughly $20 billion in federal bailout funds, is still licking its wounds from the financial crisis. (Ironically, the most serious of GMAC’s wounds were not inflicted by auto loans, but by the company’s foray into risky mortgage and other real-estate-financing programs). That has left GMAC, now known as Ally Bank, badly hobbled.
Not so with AmeriCredit. The lender has been ramping up its loans to subprime borrowers at breakneck speed. The company said loan originations could total as much as $900 million for the fiscal fourth quarter ended June 30 up from $175 million a year earlier.
It has done three successful securitization deals this year alone, signaling the thaw in that market after it went into a deep freeze during the financial crisis. The company has increased its relationships with dealers to 8,100 in its fiscal third quarter from 3,000 in the depths of the financial crisis in 2008. Like other large lenders, credit losses in its AmeriCredit’s $9 billion loan portfolio have been steadily improving.
Breakneck. AmeriCredit’s shareholders must be very happy with the way it’s worked out; we will see how it looks when GM IPOs.
Perhaps this counts as a first sighting of an expected development in the credit markets in the early stages of a recovery cycle (if that’s what you think we’re in) – a lowering of credit standards to drive loan book expansion. But it is an oddball deal: of course it is all being done to drive GM sales, and it has huge political linkages. Not quite BAU, really…
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These sorts of measures were entirely predictable once the decision was made not to put GM into genuine bankruptcy proceedings, but rather to make it a ward of the state. (A decision which Yves largely supported, BTW.)
Of course they were going to turn GM into an engine of credit! Continuing to manufacture and extend credit to the most marginal of borrowers is basically the federal government’s explicit, number one policy priority at this point.