Why the Auto Bailout's a Dead End
Detroit's primary moneymaking vehicle has been selling credit, not cars. The Big Three may have finally run out of road.
According to industry analyst Art Spinella, president of CNW Research, fully 85 percent of Americans with a car loan have negative equity. Other studies show that these loan holders, on average, owe $4,400 more than their cars are worth. Millions of Americans didn't get upside down on their car loans without a lot of help. Enter the great scourge of the American consumer market: the car dealer. Car dealers have been out in force in recent days lobbying Congress and holding rallies at dealerships around the country to generate support for the rescue plan. As a result, there's been a fair amount of sepia-toned media coverage about the desperate plight of the poor, local car dealer, that pillar of the community who supplies softball teams with T-shirts. And it's true. These folks are now threatened right along with the Detroit assembly-line workers. The National Association of Auto Dealers predicts that 900 dealerships will fail over the next year.
Lost in all the news coverage is the fact that many car dealers played a central role in creating the current mess. As franchisees of the manufacturers, car dealers don't make much money actually selling cars. The markups are pretty slim, and in recent years, Detroit has squeezed their dealerships for more and more profits. In the old days, car dealers would come up with creative ways to compensate for the small margins, such as rolling back odometers to sell cars for more than they were worth. But after Congress cracked down on the practice, dealers (and manufacturers, too) found a better way to pump up their bottom lines: selling financing.
Back in 2003, Forbes magazine observed that GM was better described as a bank that happens to make cars than as an automaker. At the time, as much as 90 percent of the company's profits came from its lending arm (which also had a mortgage branch), not from car sales. For the past decade, much of Detroit's output has been little more than a vehicle for selling credit, and the dealers have done the dirty work for them the way local mortgage brokers generated large volumes of questionable loans for big banks and finance firms.
Here's how it works: When a customer comes into a dealership to buy a car, he already knows how much the car should cost (thanks to the Internet), but he usually relies on the dealership to arrange the financing, often because they advertise lower rates than banks. That's when the scam starts. Many car dealers routinely load up car loans with all sorts of expensive but useless add-ons. These include such things as "theft etch," when a dealer will spend $37 to etch the VIN number of the car onto the windshield, tout it as an "antitheft measure," and charge the customer upward of $2,000 for it. Unbeknownst to most car buyers, dealers also routinely—and legally—bump up the interest rate offered by the bank or finance company in exchange for kickbacks from the lenders, which are often the manufacturers themselves. And in many cases, dealers encourage customers to trade in a car that isn't worth the amount of their current loan by offering to roll the old loan into the new one, thus inflating the principal and making the loan more lucrative for the lender. That's how people can end up owing $40,000 on a Ford Focus. This only works because auto lenders now stretch out the terms to six or seven years to make the payments affordable, a practice that virtually ensures that many cars won't last as long as the loan. (In the 1980s, by contrast, Spinella says the average car loan lasted only three years and required a 20 percent down payment, which limited the kind of negative equity problem seen today.)
These are not aberrant practices. They are endemic to the industry. Earlier this month, the FBI raided two California dealerships accused of defrauding a local credit union by falsifying loan documents. And in September, Bill Heard, the country's biggest Chevy dealership group, a $2.1 billion operation with dozens of outlets all across the South, shut down after GMAC cut off its financing stream. The state of Georgia had sued the company, alleging that Heard dealerships had lied to lenders about their customers' income on loan applications, forged signatures on loan agreements, and packed car loans with all the usual junk. The state's consumer affairs office had been investigating the company since 2003, and had sued it before over deceptive advertising practices. Consumer watchdogs suspect that Heard's legal trouble lies at the root of GMAC's decision to stop funding the dealerships.
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The bailout of Wallstreet and the auto industry is wrong for many reasons but most importantly because the federal government is far more powerful than it was ever intended. As a condition for bailing out the auto industry the fed can now be a stockholder? Sounds like socialism.
On the upside, it now makes complete sense for the auto bailout to come out of bank bailout funds. It can't be argued that it's inappropriate to use money intended for banks to go for auto companies instead. Of course, the whole appropriateness of the bank bailout is arguable. The auto bailout makes more sense.
auto dealers are looking for sympathy from us average citizens? Wow that takes some chutzpah, you didn't have to read this article to know they are scam artists and con men.
US automakers haven't made a vehicle with anywhere near the quality of Japanese vehicles, with the possible exception of the Saturn. If we bailed them out what would they do with the money - continue making Expeditions and Hummers?
And if the money is extended, not only should it come from the 700 billion we taxpayers have already given, but it should be given with conditions, or better still, with the following REGULATIONS:
1. Make cars as good as the Japanese cars.
2. Make high mileage cars.
3. Transition to hybrids, electric cars, and other green vehicles. Help the United States become energy independent.
Otherwise no money.
As for the jobs that would be lost if there is no bail-out, the auto workers could transistion to start-up companies making electric vehicles. If you Google "electric car" you will find a multitude of companies making electric cars all across America.
I don't agree with the bail out. But, your argument against it needs to more than saying, "Sounds like socialism." Explain to me what's wrong with socialism and why the word alone is supposed to end all discussion?
In bankruptcy, individual debtors can still "cram down" a car loan to the value of a car as long as the car was purchased more than 910 days before the bankruptcy filing. Your basic point is correct though - this provision hurts most individual debtors and should be rolled back as part of any auto bailout.
Well it's the end of the road now, and it's not looking good. When you've got no more wriggle room left it's a crash.
It's the fault of the workers on the assembly line, right? I mean unions are evil, or at least that's what I'm told by the government and media.
i have an idea. let them go out of business. the same way your boss would throw you out on your ass without a seconds notice if it helped the profit margin. this is supposed to be a free market people, not socialism for the wealthy.
Maybe the oil companies can bail them out with some of their rcord profits.
Union leadership (note, I didn't say the rank and file guys on the line) deserve scorn right alongside management when criticizing the "easy, shady credit" policies of the past ten years. The desire to keep the factories humming at full employment was the driving factor behind the at-all-costs approach to pushing cars out the door.
The union manufacturers have been avoiding reality (less production due to lower demand for the product, fewer factories) for two decades or more.
I find it admirable that hindsight is now a lack of Automotive foresight-Now the Auto Industry should have been aware that the Bush Administration would deregulate banking, let the gasoline prices go to $4.00 a gallon-that one alone has never happened on any other Presidential watch without action being taken and that the President would favor Big Oil and the Pentagon more than his basic Manufacturing and basic Economy....The mismanagement is not the President and Congress and Paulson-It is the Auto Companies!My only comment on this line of reasoning is a question-Where have you been for the last eight years?
This article makes sense out of the Big 3's business plan in regards to their cars:
They have little incentive to make fuel efficient and dependable cars considering their main source of income. Small cars attract an audience who comparison shops and who has practical considerations. That means spending money on research and giving smaller loans to people with good credit scores and who pay money down. The Big 3 want to sell testosterone guzzlers because they attract a young audience who wants something cool with expensive rims and has no idea what 20% interest is.
What should be a relatively happy time, i.e. the purchase of a new car, has been rendered a stressful and miserable experience. And 99% of car salesmen will tell you that it's the customer's fault. Nowhere has my car-buying experience been worse (not even close) than at Koon's Ford in Sterling, VA. Because my Ford was such as piece of excrement and because of Koon's, I'll never buy a car from _any_ domestic automaker again. Screw me once, shame on you,... This article does not seem to mention foreign car dealers; my guess is that dealers for domestic manufacturers behave the way they do because so few people want to purchase their cars. Trabant, anyone?
More to the point of the article, I'm far from a free market, capitalism, purist. My objections to the Wall St. bo have more to do with how it was done and the fact that we have virtually nothing to show for it; the money doled out so far is generally not being used for loans to ease the credit crunch. Much is being used by Wall St. firms for acquisitions and Main St. will be harmed by that.
The bo for the automakers is not officially a bo...it's a loan. But these companies are not going to be able to pay this money back. The best thing to do IMO, is help the companies through bankruptcy via a soft landing, making sure to take care of the workers, and those to which the automakers are heavily indebted.
Socialism? Most people who cry "socialism" couldn't even define it. But we have been passing and will continue to pass into socialism. People will complain, even as they make demands that they do exactly that.
Perhaps the UAW did push a bit too far. And my 1993 Ford Taurus SHO (proudly assembled in Atlanta Georgia) was poorly assembled. But workers in the auto industry could work for half the pay and half the benefits, and American automakers would still be making crappy cars. That is the essence of their problem. And on my car, who was failing to perform the Quality Control? Management, most likely.
I don't question much of the article's description of car dealer practices.
Still, where is the car buyers' accountability? My son-in-law sells Nissans and tells me that the majority of his customers are only concerned with what their monthly payment will be.
He says the customers seem to assume that they will always have car payments, so, as long as the monthly car payment is what they want, nothing else seems to matter! He says people often simply have no sense about car buying.
He says people will bring in a 2-3 year old car, want a new one, and don't care what their total new debt will be when they roll the old car loan in with the new one. They don't seem to care that their 4 year loan has become a 6 year loan... ...only what their monthly payment will be!
Anyway, it seems to me that the typical customer willfull ignorance of how debt works is as much as fault as the sellers.
This article is incomplete without a discussion of lease financing. Like Bill Perney says most new vehicle customers are only concerned with an affordable payment that fits into their monthly budget. If they're going to get a new one every three years they just factor the user cost over those years, and they get tax write off benefits to boot. They invariably decline to buy or refinance the vehicle at the inflated price the dealer wants at the end of the lease term so the cycle begins anew. They just lease a new one. At least until the easy credit dried up.
I'd like to see the percentage of people who lease vs. buy and the ramifications that has for the car industry. Be my guess all these financing schemes to get Americans into
vehicles that in a sane economy would have been priced out of reach for most
was in the long run always unsustainable. In the end the market's proof is in the pudding. A huge SUV isn't worth $70,000 anymore than a condo in Miami is worth $500,000 if no one can or will take it at that price. And the resale value has to go down until it reflects a real price.
The age of consumerism is ending. The age of living within one's means had better be starting, or we are cooked.
Let GM, Ford, and Chrysler sink or swim on their own. And get the money ($750B) back from Wall Street.
Car salespeople, and realtors...let them all twist in the wind.
I just bought a car and didn't take dealer financing. They told me they got a 4.5% interest rate on a loan, but their payments were higher than those through my bank with a %5.14 loan. Dealers are playing on the public's need to have what they want NOW! If consumers take more time to do their research, they will learn about dealer tactics.
for all the analysis of the myriad causes of the demise of the 3 detroit stooges, this is one of the weakest arguments so far. The Author has picked on a real if only minor causal factor and inflated it engulf the entire problem. The contention that the negative amortization that has befallen the Detroit stooges was a scam cooked up by wall street versus the more plausible flailings of a drowning industry, is more a illustration of Stephanie's bunker mentality...Sloppy journalism all round.
America for Americans0we used to actually believe that and the President and Congress would actually try to protect our borders and protect American Companies and didn't sign trade agreements and allow gasoline prices to put major American Industry out of Business! Why and When did this stop and why and when did extremely large corporations that give huge bonuses to their CEO's come into being? I get the feeling thet Fannie Mae and fredddie Mac , AIG, and many other huge Wallstreet Firms are actually in violation of the Anti-Trust Laws that have been swept under the table for huge profits. My only comment is that the Credit Unions and smaller bankks have not had the problems of these big corporate monsters that feed on their own greed and take their investors for a real ride!
So true!! i was in the business 15 years ago and there was so much dirty dealing even then. We had a chief wholesaler, who was finally convicted and sent to "club fed" where he even took his golf clubs, and when he finished his short sentence, he went right back to the same old stuff, only he had someone else sign their name to his work. Nothing changed, except the name.
Your suggestion ie. the oil co.s floating the auto makers out of the hole with it's well spring of profits, Solomon-like, look after your own, in this case, "thieves looking after thieves". As "sympathies" go, you cut right to the bone, Kudos!
The irony of those 'titans of commerce' engineering the near-fatal collapse of their capitalist "free" market in their insatiable greed, shooting themselves in the foot, is almost too poetic!
However this financial melt-down settles out, I have little delusion the many varied thieves' ill-gotten gains will be turned out from their over-stuffed pockets. 2009. Onward in any event!
"The people go on forever."
- Ma Jod.
WI Ali Lama
Maybe the oil companies can bail them out with some of their rcord profits.
Posted by: Brian December 24, 2008
Your suggestion ie. the oil co.s floating the auto makers out of the hole with it's well spring of profits, Solomon-like, look after your own, in this case, "thieves looking after thieves". As "sympathies" go, you cut right to the bone, Kudos!
The irony of those 'titans of commerce' engineering the near-fatal collapse of their capitalist "free" market in their insatiable greed, shooting themselves in the foot, is almost too poetic!
However this financial melt-down settles out, I have little delusion the many varied thieves' ill-gotten gains will be turned out from their over-stuffed pockets.
2009. Onward in any event!
"The people go on forever."
- Ma Jod.
WI Ali Lama
hey ugly why are you so screwed up in the head
can i have a blow job you stupid ho
i dont think your comments are vary good please stop or the cop will get involved!
wow i suck at life i need cap to the head someone help me out please!
Where is my bailout-read some articles about the bailout on blackcoptermedia.com and begin to ask your elected officials about your bailout.
Was Jan. 6th, kool aid drinkers' day ?!
Talk of mental midgets, regular cluck of buffoons ranting incoherently about god only knows what, or could possibly care.
You amoebas need a fuller life, perhaps selling brushes door-to-door!?
First let me say that the common sense solutions proposed at the end of this article are excellent. I am certain that the American Auto Manufacturers would be happy to see them enacted.
Second I have to point out that on the whole this article is misleading to the point of being in effect dishonest. It points out a number of unscropulous by some dealers. Perhaps a lot of dealers, I'm not entirely sure. I don't think that the $2000 dollar windshield engraving is widespread but it is true that whether the dealer is financing through a bank or the companies finance arm, the dealer can leagaly charge the consumer higher interest than he is paying the lender. He pockets the difference, he does not share it with the manufacturer. The fundamental problem with this article is that it condems the Big Three for practices at the dealership that they have no control over. It also fails to mention that the same practices go on at foreign car dealerships. The author seems to be deliberately misleading the reader.
As far as the seven year loans outlasting the vehicle, unless the owner is putting at least 20,000 miles per year on the car, the vehicle should definitely last longer than the loan. I wouldn't advise a 6 or more year loan because there will be a period where the car is worth less than is owed and there will be a period where the owner is making loan payments and incuring maintenance expenses. However, considering the extended life of cars built today a 5 year loan with twenty percent down is equivelent to the old 3 year loan. The lower down payment is a problem but there is not a lot a car manufacturer can do about that, talk to the banks and finance companies or pass a law that everyone has to follow. Laws and regulations are necessary to level the playing field for everyone.
One last request that was originally made by Lee Iacocca back in the 1980's. If you want us to sell small fuel efficient cars raise the @#^#!@ gas tax. A penny at the pump is a billion for Washington. Let's send the money there instead of the Middle East. And if you want to help level the playing field for US car companies, how about national health care? As it is the fact that the Big Three provide good health insurance puts them at a huge disadvantage. Of course there are those who say a controlled bankruptcy could free them from these and other "legacy costs". Not to mention it would accelerate America's race to the bottom.
The "Free Market" is a myth. There has never been such a thing and there never will be. The government makes rules that create a market. Those rules determine winners and losers. Suppose the U.S. had universal health care like the rest of the industrialize world. The Big Three would have huge cash reserves to get through this credit meltdown. Suppose states were not allowed to give tax breaks and underwrite the foreign car plants to get them to locate in their state? Their cost goes up and the US car companies position is stronger. And what if the government stopped the cheap gas policy? Then the Big Three could make a profit on small cars because of the increased demand.
What do you mean who's going to buy their cars? Did you not read about the big bonuses given to AIG execs? I'm sure those guys can buy a few cars.
This entire "free market" debate is silly. Come on, we all know how the game is played. Those in command decide what the definition of "free market" is. This is not a new concept.
It amazes me that people complain about the "free market" only when they don't like what it has become. However, when they agree with the definition, they loudly declare that the "free market" works.
We need to eliminate EVERY automobile on earth, so it's wrong to bail out automakers. We need to end the wage (capitalism) & teach all people to work part-time 10 hours a week building only 100-story Tower cities connected to maglev Trains, to save lives & save the earth itself. We never should have built any cars, weapons, small buildings for wage. We always needed Towers & Trains. No one is free until every person on earth owns all things on earth; anything else is slavery: a few rich own things & pay small temp wages is slavery). Corporations are slave plantations & employees are slaves; but entrepreneurs are also slaves, the rich are slaves, the poor are obviously slaves, debt is slavery, we're all slaves. And we need to end this evil slave system. USA forced Socialism & Communism to fail (Bill Blum "Rogue State") by killing millions who wanted to help the poor & end world poverty.
I subscribed in early December and have not received any issues.
Thank You
I think the Big 3 should get out of real estate and banking and get down to brass tacks, and just make vehicles, and they should also make a good-faith effort to de-globalize, re-localize their operations to MoTown, and go for what they know, here. It's shirt sleeve and greasy finger time for the CEO's, to get their Henry Ford on, and maybe even consider going non-union. Just-in-time production, instead of mass production/overproduction, have smaller production runs but sell a higher percentage of vehicles manufactured each year, and also, there's another factor to consider here: The national car shortage. It's just wonderful how automakers around the world are responding to this critical problem that threatens America's future, the car shortage has utterly crippled our Con Me, forcing even the richest of schoolchildren to walk 8 miles uphill both ways in chest-high snow, it truly is a tragedy, if only Detroit could see fit to bring their Hummer production into full swing, to 100,000 units per month, but no, but no...;)
Obviously your commentator has no idea how important the Auto industry is to this country. It is one of the few industries left in the USA. If this Indusrty falls. The USA will fall inot DEPRESSION. NAFTA has virtually undermined every single business there is in the United States from the Auto industry to the Textile industry,clothing,and all Fishing industries around North America. These companies run unimpeded from and regulations and those that do exist they break at will. From over fishing the Oceans and killing whales at insurmoutable devestation and depletion to our Oceans all for the sake of undermining our Economy. They promote child labor and have inhuman work conditions and they manipulate theyre currencies all in the name of bringing the USA to its knees. Now If we are truly Americans we need to support those last Industries we do have just as those abroad are supported by their countries. Its TIME to stand up for AMERiCANS. WAKE UP.
I am tired of hearing people rag on the AUTO industry. If you truly cared about the USA and Jobs in the USA you would be standing up and reading what NAFTA entails. I guarantee you you wouldnt be spouting off non-sense if you did. The next JOB will be yours. From high tech to the most miniscule labor is leaving this country and all you want to do is rag on the ones that we do have because they are hurting because of NAFTA. They say it was the FINANCIAL institutions that caused this ,but I beg to differ. The banks built a fake deck of stack cards and they new it would fall. The reason that the housing market soared was do to uncontrolled lending. This was initiated in order to distract from what was really going on. But Americans as I am one are not very smart. So once the jobs started leaving it left those with the loans no way to pay and then we had the foreclosures. These are just the beginnning of whats to come. The mortgage market will melt three times as far as it is now and real estate will be invaluable. ASK why your Representatives signed this into law. Ask Bill Clinton why he is getting millions for speeches from foreign countries. Do you think the Chinese really care what he thinks. Or Malaysia or any of the others that lobbyed him to sign NAFTA. WAKE UP THINK before you have nothing. NOONE is UNTOUCHABLE unless of course you are fully invested in foreign goods with billions in the BANK.
And where is the risk management at the financial institution? Why would they intentionally make a bad loan? Oh yeah, they just repo the car and sell it again? The financial side of the car business really has no economic incentive to do the right thing. Is it any wonder noone seems to know what the right thing is any more?
I remember the day G W got in front of the podium to tell mr and mrs mortgage holder that they needed to take responsibility for their mortgage decisions and not to expect any help from Uncle SAm.
Now that the problem has trickled up to the lenders it is some how a different story. So what's different?
If we don't help wall street and detroit our economy is going to crash.
We didn't help ma and pa sub prime borrower and upside down in their car loan and our economy is on the brink of collapsing.
Ok not much difference there. How about who should be held more accountable.
Back in the day your yearly income dictated the size of your home and weather you bought a new or used car. the banks wouldn't loan the money if you couldn't make the payments. So why all of a sudden did the banks ok loans to people that couldn't afford it and why did detroit start rolling old car loans in with the new ones?
There was a plan. One devised by wall street and made unregulated by congress. The plan was to take these debts bundle them up and sell them as equity. All ma and pa wanted to do was have a home that they could gain equity in and a nice car to drive. Ok not entirely true, some of the people that got caught in the sub prime trap were encouraged to go out and get some rental property, not enough notes to bundle?
I wonder, if G W had given this bail out money to ma0and pa , would wall street and detroit get the money any way?I think so and ma n pa would also get to keep the house.
Some would argue that there is no guarantee the ma n pa would do the right thing with the money. But I would rather take that chance than to watch my tax dollar being paid as a 50 million dollar bonus to a CEO or bank executive who all ready has 3 six million dollar homes while ma and pa are booted to the curb. How many 6 million dollar homes does a CEO need anyway?.
Socialism, I think not. I see unrestrained unregulated capitalism and the control of my country in the wrong hands. These people only want a free market if it suits them. If all the cars that have been over produced were on the free market we could buy new Cadillacs for $2000 all day long.
As far as labor leaders responsibility in detroits mess. The only thing they are responsible for is the safe working environment and that management doesn't take unfair advantage of labor not the checkbook of the big three.
Deregulation during the Bush administration has shown me anybody that doesn't want to be watched handling my money my government or the safety of our country as a whole needs to go else where. In fact the next person to suggest such a thing needs to be demoted to school crossing guard or play ground monitor
Giving them the financial
Giving them the financial help without serious changes in their management and business practices is like giving an irresponsible juvenile a credit card. I think there's nothing wrong with bailout, it's just that we expect for positive results here. Why not let them produce only limited cars that people will definitely buy? Not just focusing on luxury but greatly on demands just like with (Energy Susp Rack).
All loans are crazy
It is craziness. Customers are not paying any attention at what they are paying for nowadays. All that huge car loans, payday loans and any other loans are just terrible. But it is hard to change something. Maybe now, when the world is deep in crisis, people will think what for and how much they are paying. Maybe today they will look at their huge bills and they will understand that something needs to be changed.
What about dirty dealers in auto industry - we can do nothing about it to my mind.
Informative post
Yes indeed it is an informative and useful post.The worldwide recession has made a lot impact on automobile industry.But Brazilian Cars are still making its contribution in Brazil economy.
