Willful Ignorance at GM

Some folks never learn.  The news from General Motors – or “Government Motors” if you prefer a more apt description – confirms that the Obama administration is either unable or unwilling to learn the lessons of history and the laws of economics.

GM is in trouble, it has been for some time.  As labor costs have demolished any semblance of a  reasonable financial model at the automaker, the government has stepped in to prop up the broken company.   Today we learn that in order to sell its cars, GM is relying on subprime loans.  If you are not cringing you should, subprime lending is largely what collapsed the American economy.

In the first quarter of 2012 GM increased subprime lending, through its loan office, the government owned Ally Financial, by a whopping 93 percent.  People with the worst credit scores received a massive $2.3 billion in loans in that quarter.  GM apologists at places like Media Matters claim that GM is only following industry practices but that is not true.  GM grants subprime loans at a rough 130 percent of the industry average.

President Obama likes to talk about “the people who got us into this [economic] mess,” and their “failed policies,” yet under his watch dangerous practices have in fact become more commonplace.  Whatever successes GM may claim do not change the reality that the company own by the taxpayers has over $176 billion in outstanding liabilities, and dimming prospects.

GM spokesman Jim Cain deflects criticism of the subprime addiction claiming, “our experience, however, is that with proper management they are very good risks.”  As evidence he points to GM’s credit losses which have not risen above 5.5% since late 2010.  Go ahead, read that again.  GM is happy with unsustainable losses that are not greater because they are propped up by loans to the people least capable of paying off those loans.

Increasingly GM is reliant on those subprime loans to create buyers.  GM loans to prime borrowers, those with credit scores above 660, have dropped by 42 percent.

At a fundraiser in 2010 Obama claimed the mantle of believing in “fact-based policies.”  Unfortunately he seems to think he can create his own facts.  The actual facts are frightening.  GM exists today because of a $50 billion bailout in 2009.  Add to that a $45 billion tax write-off specially granted to the failing automaker to cover post-bailout losses, and GM has enjoyed a negative tax rate that netted them an additional $110 million tax payment in 2010.  But this is the macro view of GM.  The micro view of Obama’s “fact-based” policies at GM illustrate an even starker picture.

The Chevy Volt lists at $41,000.  It costs GM $40,000 to make a single Volt.  Of course to make those $40K Volts, GM first received from the government $700 million to develop the car, $70 million from the government to advertise the car, and $240 million in an Energy Department grant to improve the clean fuel technology.  A Korean manufacturer got $150 million from Uncle Sam to make the Volt’s batteries – which still have an unidentified problem that causes fires.  Despite all this “stimulative investment” no one is buying Volts.

Forbes writes that Volt sales are “in the hundreds, and most of those are government purchases.”  The magazine notes that Volt sales make “Edsel sales look good by comparison.”  So, to stimulate buyers Obama offers a $7,500 per car bribe for each Volt purchased, effectively lowering the cost-to-own price to $34,500 for a car that costs, according to industry analysts, a total of $250,000 to make [the aforementioned $40,000 please a per capita share of the above referenced government grants.]

To date, about 20,000 Volts have been sold nationwide, each at a massive loss.  So, Obama appointed GM CEO Dan Akerson has decided to…wait for it… up production to 60,000 Volts a year.  I guess he assumes that all those new subprime borrowers are anxious to get an under-sized, under-powered, over-priced green car.

It’s like I said, some people never learn.  In 98 days we will find out how many of those obstinate folks vote.

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3 thoughts on “Willful Ignorance at GM

  1. You can be sure I’ll be voting, obstinacy and all. “Saving” GM through a pre-packaged bankruptcy was essentially exactly what Mitt Romney had recommended (before he didn’t), what Barack Obama did, and what any president would have done rather than watch a huge share of the GDP represented by GM’s supply chain itself bankrupted by a disorderly liquidation. Whether GM survives in the long run is another question, but at least the supply chain has a chance to protect itself and diversify. And while it is true that at present the U.S. Treasury still owns a majority of common shares and a chunk of preferred stock and other instruments in the new GM, it is incidentally not true that Ally is new GM’s loan office, as dumb and counter-productive (and, incidentally, exploitive) as the referenced increased sub-prime lending may be. If you will view the company’s latest 10Q you will find this statement: “At March 31, 2012 and December 31, 2011 we held a 9.9% common equity ownership in Ally Financial. Our entire equity ownership is held indirectly through an independent trust which has the sole authority to vote the shares and is required to dispose of all Ally Financial common stock by December 24, 2013.” So GM can’t control Ally, but it may be using Ally in co-dependent way that is certainly open to criticism. That might be a fairer way to put your criticism. Of course, capitalism worked reasonably well in this instance: the old GM stockholders were wiped out as they well should have been… And as to the Volt, if I were a driver I’d have one. It is certainly not the end point of the technology but is a remarkable American technological achievement. You anti-American or somethin’? 🙂

  2. One more thing, Jason. I think you should go back to cross-posting your Yawps on Facebook. I enjoyed having the option of responding to you there or here, and if your settings are appropriately set, you may find that some of my other conservative friends (yup, I have ’em, in perhaps surprising quantity) spot the dialogue and discover Yawper that way.

  3. Good info on Ally, thanks for that.

    I am trying to keep politics off Facebook. I think people prefer FB for pictures of kids and cats, not arguments. I abused that for a while to help build a following, but now need to keep away.

    With the election approaching, and the heat rising, I am trying to be courteous. Like Jay Nordlinger, I think there should be some spaces in civic life that are free from rants. Certainly I will violate my own prohibition in small ways, but the blog seemed a bit too much.

    I’m just glad that you still drop in here.

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