President Obama continues pointing to his crony bankruptcy bailout of GM as a success. Never mind that it stiffed the secured creditors to favor the UAW, a huge backer of Obama and the major cause of the domestic auto crisis to begin with. Never mind that that GM was allowed to carry forward losses from the bankrupt entity to offset future earnings, stiffing the taxpayer and giving it an unfair advantage over Ford and the foreign auto makers, none of whom got the bailout. Never mind that when GM went public again, the UAW was able to sell its shares first, which enabled it to be made whole while the taxpayers saw their shares diminish in value.
Now it turns out that much of the recent sales growth GM has bragged about is due to GM jacking up its sales with subprime loans.
In the auto industry (like other industries that sell products and offer financing to the customers), the credit worthiness of customers is judged by their FICO scores, which range on a scale from 300 to 850. Subprime customers are those with a score below 660. In the fourth quarter of 2010, subprime loans accounted for 4.8% of GM’s sales. In the first quarter of this year, they hit 8.32%, which is over one-third higher than the industry average (6%).
Why is GM taking on more risky debt in a chancy economy? Edward Niedermeyer (editor of The Truth About Cars) puts his finger on it: “[GM] may be trying to goose short-term sales with subprime lending to boost its stock price, which is tied to the government getting out of its GM investment.”
Indeed. The federal government still owns nearly 30% of the stock (500 million shares). The stock price is only about $20 per share, close to the post-IPO low. For us to get our $26 billion in direct support back, the price would have to hit $53 per share.
So GM — controlled by the Obama administration — is pushing junk loans. This is rich, coming from the same guy who sold the Dodd-Frank financial regulation bill by claiming that greedy capitalists had duped innocent buyers into risky subprime loans.
What’s greedy for capitalists must be ethical for neosocialists.