More Bad Medicine: Rates Were Never the Problem
More good news for GMAC. Now that GMAC is more like a bank, the Treasury gave them $6 Billion dollars in TARP money. GMAC said that it would use these monies immediately to introduce 0% loans, and loosen lending standards. Management hopes that this move will help GM reduce its car inventory, and create additional cash to keep it floating. I am not as optimistic. As we have noted rates (whether they were for cars, credit cards, homes, or business loans) were never really the problem. When rates were lowered it encouraged more people to buy and refinance, money was cheap to borrow. Now that we have extended too much credit to the wrong borrowers, we are seeing the fallout. GMAC's move may be the initial step. It may temporarily sell cars. The large glut of inventory may move. However, extending more credit could well be a recipe for disaster.
According to Nouriel Roubini "Today's global crisis was triggered by the collapse of the US housing bubble, but it was not caused by it. America's credit excesses were in residential mortgages, commercial mortgages, credit cards, auto loans, and student loans. There was also excess in the securitized products that converted these debts into toxic financial derivatives; in borrowing by local governments; in financing for leveraged buyouts that should never have occurred; in corporate bonds that will now suffer massive losses in a surge of defaults; in the dangerous and unregulated credit default swap market." (1)
As companies and governments attempt to remedy borrowing through reduced rates... and loosening credit standards, they may only exacerbate the situation. I remind readers that government intervention is not only limited to GMAC, but a variety of lending institutions which have received direct infusions from the Fed as well. To encourage the same practices that caused the original problems is not only senseless, it encourages the same people who have helped cause the financial crisis to remain in the picture. It is almost as if governments are encouraging a policy of Natural De-Selection (encouraging the weak, in-efficient, and dumb) to survive. And we watched Wall Street react with 185 point run-up... go figure!
1. http://www.guatemala-times.com/opinion/175-year-end/663-will-banks-and-financial-markets-recover-in-2009.html
24 comments:
Giving to GMAC to loosen their credit standards? So they can offer cars to people who can't afford to pay them back? So once the government pays for those defaulted loans GMAC can continue to borrow? That's like offering a 500 lbs man a weight loss routine that consists of only eating Big Mac's! Insane! As for the wall st run up I am baffled as well. I think the market is looking for any hope of optimism as the reality of the economy continues to set in.
Housing market still stinks. TOL is worth a look at. I mean, really, who can afford a high end home in this market when 1 in 5 are underwater? Stock is stubbornly high. I agree with Ax on SRS. Under 60 and we have 14,000 stores closing?
http://money.cnn.com/2008/12/31/news/economy/retail_closures/index.htm
SIVB is worth a look at. SIVB Level 3 assets are up to around 48% with about 90% of those are non-marketable securities. Level 2 assets are at about 189% of total equity!
DC NORTH... A Happy New Year to You my friend.
You are right about the "Era of Good Feeling" ... things will shake out a bit. GDP will be reported on 1/8...and a whole host of dismal retailers. Unemployment is bound to hit double digits by March!!!
I have an insider who worked in the mortgage business that may help shed a bit of light on SIVB... I will get back to you as soon as I hear something...
I will have new recommendations next blog!
P.S. I gave kudos to you and Ax on my Ernest Hemingway "Men Don't Grow Old" entry...
Hey Dc... A follow-up to the SIVB play. I spoke with the source from Cali. He told me that he didn't know too much except "They seem to be run pretty well by some very smart guys and are fairly conservative." That being said, we might want to delve into their portfolios a bit and see what their exposure is to the Silicon Valley Market... Alt-A... and Option Arm scenario. Jumbos are area for concern. It was once thought that Silicon Valley would never "lay off" not to mention, see a real estate bubble. That only happened every where else.
Let's dig a little more!!
TC
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