Remember subprime? The billions of dollars worth of credit card, mortgage and auto loan debt that turned out to be completely toxic? Well it looks like General Motors is pushing to get back into subprime and party like it's 2006.CBS News has a story this week on how General Motors is negotiating with banks to line up auto loans for subprime borrowers. Apparently its former captive financing arm, which used to be called GMAC Financial Services but changed its name to Ally Financial following GM's bankruptcy, is insufficiently eager to lend to borrowers with bad credit, and that's hurting GM's sales:
About 16 percent of loans for new cars and trucks went to subprime buyers in the fourth quarter of last year, but because of Ally's reluctance to lend to them, GM was unable to tap that market.
"We are developing relationships with other financial sources on a selective basis for specialized financing needs, such as leasing and subprime financing," GM spokeswoman Renee Rashid-Merem said Wednesday.
This is no surprise -- car companies exist to sell cars; they don't really care if the loan is paid off or not once the car is driven off the lot. Dealerships are in the same boat -- they make money off the cars that they sell and a little more from the bank if they happen to broker an auto loan.
Unfortunately, this situation creates the same sort of conflicts of interest that we saw with mortgage brokers during the worst of the housing craze. Automakers like GM have no "skin in the game" when an auto loan is written. But as we've seen with the flood of bank bailouts in the last few years, taxpayers do.
I'm not saying people with bad credit shouldn't be able to get an auto loan; in many communities, especially rural ones, if you don't drive, you don't work. There's just no feasible way to get around without a car. What I am saying is that I hope the banks GM is shopping these subprime auto loans out to keep in mind the fact that GM's incentives are totally different than theirs, and lend a little more carefully this time around.
You can't blame GM for trying to find suckers to underwrite risky loans. It's business after all, and GM is trying to maximize its sales any way it can in a tough economy. Hopefully they'll have a harder time finding banks to play the fool this time around.