August 11, 2010
GM to Buy AmeriCredit: Subprime, Bailout, and Other Mildly Relevant Buzzwords
The New York Times (among other sources) reports that General Motors is considering buying AmeriCredit, a subprime financing company that provides auto loans to those unable to find credit from banks, credit unions, and other more traditional sources. In his Dealbook column on the possible acquistion, Andrew Ross Sorkin questions whether this is a good idea. After all, he says, these same customers have been denied credit by others. He further notes that G.M. doesn't have any interest in "prudent lending," because the company wants to move as many cars as possible, especially G.M. ramps up for an IPO.
To me, this is a lot of histrionics about risk, when the market seems to be working just as it should. First, Sorkin notes that GMAC, the former lending arm of G.M. needed a major bailout. He then concedes that it was not auto lending that was GMAC's problem, it was home mortgages. Sorkin continues:
So here we go again, three years later, and G.M. is buying a subprime company to finance cars for people who may not be able to afford them, and given high unemployment levels, may not even have jobs to start saving for one. And yes, we, the taxpayers, still own 61 percent of the automaker.
"Here we go again?" He just admitted that subprime auto loans weren't a major part of the problem. In addition, as Sorkin later notes, auto loans aren't as dangerous as home mortgages because everyone knows autos are depreciating assets. No one expects the car to appreciate like they might a home. Further, unlike home loans, auto loans are collateralized loans where the borrower tends to remain liable for a deficiency between the value of the collateral and the outstanding loan. Although the borrower still may not have the money to cover the deficiency, this still provides the lender additional potential for recovery on a bad loan.Making loans available to people with higher risk credit scores is not inherently bad, and the implication it is, I think, is one of the reasons the recovery has been slower than hoped. We need to be careful not to repeat the mistakes of the past, but we also should not impute past mistakes to others who are not necessarily in the same boat.
Finally, Sorkin says,
But why not form a tighter alliance with AmeriCredit rather than buy it in its entirety? The question answers itself: an alliance would never give G.M. enough control over the lender to loosen its credit standards.
This is necessary, Sorkin implies, for G.M. to make the company look as strong as possible for the company's IPO. Sorkin raises some very valid points, but if one has faith in markets, then one should expect that the IPO market should punish G.M. for taking a bad risk in buying AmeriCredit (lowering the IPO price or even having the IPO fail) if this is a bad practice. If the market thinks it's a good purchase, the company should benefit with a solid IPO.
I know that the market has not always done a great job evaluating risk in the past (see, e.g., Enron), but that is the cost of doing business in a (relatively) free market. This is not, at least as presented, G.M. doing the same old thing, in the same old way. I say let the market do its thing and let's see where this goes. As a taxpayer, and thus interested stakeholder, I hope G.M.'s IPO price goes up. But if not, as investors, that's the risk we have taken.
"[I]f one has faith in markets, then one should expect that the IPO market should punish G.M. for taking a bad risk in buying AmeriCredit"
The problem is not that the market will not punish G.M. sooner or later for taking a bad risk in buying AmeriCredit. The problem is that it is the taxpayers who bear the consequences if it does.
Deferring to the market works fine when government is not in the business of owning businesses, but not so well when government is a business owner who is an active participant in the market. When the government is a business owner, one needs to debate the merits of the business decisions that are made, not simply the virtues of interfering or not interfering in the market.
One thing that any integration of two firms that provide different services does is to obscure the relative contributions of each firm to the end result. It becomes harder to distinguish profits attributable to financing from profits attributable to selling vehicles. This, in turn, makes it harder to evaluate the performance of the investment that the U.S. government made in General Motors the car company. The more complex an entity is, the more open to manipulation measures of its performance are. Yet, being able to transparently evaluate the performance of government owned entities is particularly important, because it takes a great deal of clarity to motivate political actors who can't act incrementally or quickly the way that private investors can.
Posted by: ohwilleke | Aug 13, 2010 3:07:35 PM
Once taxpayers are market participants, they must let the market work; otherwise, the investment cannot be maximized. Of course, seeking maximization involves risk. The issue to me is that taxpayers should be looking at the near-term -- a strong IPO -- to get their investment out of GM, but concerns about AmeriCredit are long term. I think the government should get of the business as soon as possible, and the IPO price should be one key part of that.
I agree that if the market punishes GM for buying AmeriCredit, it is the taxpayers who bear the consequences if the punishment is in the near term. I just think any of the concerns raised are relatively long term, which will mean (or should mean) that the government will have sold or greatly reduced ownership. Many seem to think the AmeriCredit purchase has value in the near term for the IPO, and if the market responds accordingly, that's good for taxpayers.
Certainly, though, even if the IPO helps reduce taxpayer exposure, if the government plans to bailout GM again if the AmeriCredit thing messes up the newly profitable company, then that's another issue. And we have a whole host of other problems.
Posted by: Josh Fershee | Aug 14, 2010 4:52:11 AM