GMAC: Loosening credit standards in the teeth of recession

It may sound counter-intuitive to loosen credit standards when we are on the cusp of  major job losses and bankruptcies.  But, this is exactly what the newly minted bank GMAC is going to do with its free money from the TARP (Troubled Asset Relief Program).

GMAC and General Motors moved quickly on Tuesday to capitalise on the US government’s bail-out of GMAC, the Detroit carmaker’s financing arm.

GMAC said it would immediately loosen its criteria for vehicle loans, providing financing for car buyers with a score of 621 or more on the Fico scale, a widely used measure of Americans’ creditworthiness.

Two months ago, as it was squeezed out of capital markets, GMAC limited financing to buyers with scores of 700 or more, with a maximum of 850.

GM launched low-interest and interest-free financing offers on many vehicles for the first time in more than three months. Mark LaNeve, GM’s North American marketing chief, said the decision signalled “that GMAC and the GM dealer are back in the game”.

I have no problem in principle with making loans to customers with good credit. However, this smacks of loose lending induced by free money. If I were an Austrian economist I would say this is exactly why trying to prevent the downturn only lengthens and deepens it. If I were an Austrian economist I would say this is a subsidy to a zombie company so that it can lend recklessly with taxpayer monies.

But, alas, I have been promoting economic stimulus as a necessary evil. Apparently, these are the evils that are likely to result.  Is GMAC lending to customers who should get loans?

GMAC to loosen criteria for loans upon bail-out – FT

  1. Glen says

    That's awesome! "Is GMAC lending to customers who should get loans?" When you loosen your lending criteria, how can you make a rational assessment of who is or isn't a good customer when you have falling asset prices couple with the possibility of job losses. Back to the good ol days!

  2. ketzerisch says

    You should consider becoming Austrian again. We’ll welcome you with open arms… :-)

    Just kidding. But I still think this wasting of taxpayers money does more harm than good. Instead of bailing overcapacity and uncompetitive industries, the money should be used to bail the American workers that are likely to loose their jobs.

  3. Edward Harrison says

    ketzerisch, hilarious :) sorry for not replying earlier but several comments got zapped by my new comment system. quite annoying, really. you may be welcoming me back if we get any more of this bailout nonsense. you're dead right about the bailouts being a waste and workers needing a bailout. It is because we see the likes of GM and Citigroup getting handouts that protectionism is going to become a problem. People want some protection from a very bleak economic outlook. If PNC and American Express can get it?

  4. fresno dan says

    The problem with the bailouts is that it is an affirmative action program for the stupid (and probably venal as well). I think it is probably a good idea to have a stimulous – unemployment imposes real hardships on those least able to endure them. But why o why are billions upon (hold it….TRILLIONS) going to those who have empircally demonstrated that they do not know how to make loans?

  5. John Creighton says

    Obviously if the GMAC loans were really zero percent then they wouldn't make any money.

    The price is somehow hidden in the price of the vehicle. Anyway, GM has to reduce inventory to improve cash flow and incentives to help people buy vehicles are certainly going to help.

  6. Edward Harrison says

    I just caught this blurb from Barry Ritholtz:

    FYI: Subprime is defined as those credit applicants with a FICO score below 660. Hence, GM plans on shoveling its excess inventory out the door — with a 8% hit on the financing — and the taxpayer bailout holding the bag.

    So, there you have it. Funding subprime zero percent financing on the taxpayer's dime.

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More