US Ponzi Scheme Economy Continues with a New Bailout of GMAC
Companies / Credit Crisis Bailouts Oct 28, 2009 - 08:49 AM GMTBy: Trader_Mark
The Wall Street Journal reports of a new round of bailouts for GMAC. If you are not familiar on how the full Ponzi scheme economy is working, I touched on this in a June piece (this was well before Cash for Clunkers) - let's review.
We Americans are a bunch of stones. We are out of blood - we keep squeezing ourselves so we can "shop til we drop - our the terrorists have won".. but gosh darn it, we've hit a dry spell. We've borrowed as a collective to the hilt. Before this crisis, some of us were taking near mortgages out on cars - 4 year, 5 year loans? Haha... nope. Try 8 year car loans. ) [Sep 17, 2007: Is a 10 Year Car Mortgage Far Off?] Feb 13, 2008: Car Loans Being Stretched to 7 Years] Once we have said car, we are now allowed to take "cash out" loans against said asset... an asset that depreciates by the day. The car ATM - Cramerica edition. [Jul 24, 2009: Wells Fargo Offers Car ATM Option] Do I even need to explain the what we did in the housing market the past half decade? If so, you need to exit that cave you might be enjoying...
So instead of accepting the pain a "reset" would cause the economy, we've turned to a full Ponzi scheme both in housing and autos. We've posted tens, if not a hundred+ posts on the housing disaster, but we are doing the the exact same scheme in the auto sector. Here is how it works - many Americans cannot afford a car (house)... or at least a car (house) "they deserve". [Some] banks are finally realizing they have to begin making loans (mortgages) where there is a good chance they get paid back ... I know, very old school. So they offer outrageously high interest rates... like 5-6%. ;) Horrific. Not enough Americans can afford a car (house) at these unfair rates... and without home equity to borrow against to purchase said car they have to actually borrow against income / savings. Of course 70% of Americans essentially have no savings so that's the #1 issue. Plus, savings is a bad word in America - just ask our government and central bank. Every "solution" brought to us the past 18 months has been to increase SPENDING, not SAVING. And what savings you do have, Ben Bernanke is attacking to make sure you get nearly nothing on your money. (ma! I got 1.32% on my CD! Awesome!) It is as if the leadership in our country hates savers... they punish them relentlessly and reward spenders.
As we watch GMAC just replace that acronym with (pick your poison: FHA, Fannie, Freddie)... and you can parallel American policy for autos with homes. Of course the housing disaster we're "rebuilding" is of much larger scale - but the same playbook. We borrow money we don't have from the future or foreigners .... to subsidize interest rates. That allows Americans to afford cars in cool deals where little to nothing down is required and "rock bottom" interest rates are prevalent. Since few banks will do that stupid of a deal anymore we need a true idiot to show up. Lo and behold - the Bank of the US Taxpayer via GMAC is here. That's where the taxpayer is used on the front end of the deal. But your work is not done sir/madam. On the back end of the deal, when many of these buyers can't afford the car "they deserve" - they default on the loan, and lo and behold GMAC shows up (as they have for a third time) to collect from the Bank of the US Taxpayer. Because only with a truly insufferable fool who does not realize the money he "receives" is his own money, borrowed - with interest ... into perpetuity; can you pull this stunt off. Thankfully a massive populace who lacks financial literacy is happy to provide the dough. And much of this populace, who already does not save - is trained they don't need to; others will provide for them with constant government handouts (loosely labeled incentives) so they can live the lifestyle they truly deserve. Why start saving now ?
Shell 1, shell 2, shell 3... doesn't matter which shell you look under. The same money (that we don't have) is under each shell - to help create "prosperity". [May 19, 2009: Paper Printing Prosperity Defined] Housing. Autos - it's all the same. Just change the delivery method slightly....
Speaking of which - good news: an extension of the home tax credit is roaring through Congress. Shell 83.
I see some you with steam above your head out there... don't be mad about it. I am sure if you talk to your fellow American (who lives inside the Matrix) they are happy to accept the money because "the government owes it to us". You might want to ask them who exactly "the government" is (if they blink in rapid fashion as a response ... be patient) but please don't bother asking them where the money is coming from because we don't want anyone's head to explode. Yours or theirs. It's all good... and I still stick by my prediction Cash for Clunkers 2.0 will be here by next spring. Remember, as each of these programs roll out the apologists can say "it's only $XX billion" and "we deserve it".
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Onto the latest bailout / handout my friends...
- In a stark reminder of how some battered financial firms remain dependent on government lifelines, GMAC Financial Services Inc. and the Treasury Department are in advanced talks to prop up the lender with its third helping of taxpayer money, people familiar with the matter said.
- The U.S. government is likely to inject $2.8 billion to $5.6 billion of capital into the Detroit company, on top of the $12.5 billion that GMAC has received since December 2008, these people said. (this won't be the last round, check back in 6 months) The latest infusion would come in the form of preferred stock. The government's 35.4% stake in the company could increase if existing shares eventually are converted into common equity. (cool, we can put this into our portfolio of AIG, GM, Citi, Bank of America, Chrysler, am I leaving anything out?)
- GMAC has $181 billion in assets and is a major financier for 15 million borrowers and thousands of General Motors and Chrysler car dealerships in the U.S.
- Federal officials also are moving to shore up GMAC's ability to fund its daily operations, with the Federal Deposit Insurance Corp. telling the company Tuesday the agency will guarantee an additional $2.9 billion in debt, according to people familiar with the discussions. The FDIC guarantee will make it easier for the company to sell debt to investors. The FDIC backed $4.5 billion in GMAC-issued debt earlier this year.
- People close to GMAC said they don't expect the government to call for changes in management as a result of the likely infusion. The company posted a second-quarter loss of $3.9 billion amid rising loan delinquencies and the continued U.S. auto slump. It expects to release third-quarter earnings next week. (looking forward to it!)
- GMAC entered into an agreement with Chrysler in April 2009 to provide auto financing and services to Chrysler dealers and customers. This allowed GMAC to leverage its core strength of auto financing and become part of a solution with the U.S. government to restructure the auto industry. (aka the Ponzi solution)
By Trader Mark
http://www.fundmymutualfund.com
Mark is a self taught private investor who operates the website Fund My Mutual Fund (http://www.fundmymutualfund.com); a daily mix of market, economic, and stock specific commentary.
See our story as told in Barron's Magazine [A New Kind of Fund Manager] (July 28, 2008)
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