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.  

--Joshua Fershee