skippy the bush kangaroo: let's look in the "way back" machine

Monday, March 30, 2009

let's look in the "way back" machine

and see part of the problem with gm's problems. and it's not necessarily about the cars.

from march 2, 2007 - salon.com

back at the dawn of the automobile era, banks generally refused to loan money for such things as buying a car. it wasn't considered prudent. this was frustrating to companies such as general motors, which naturally wanted as many people as possible to have the wherewithal to purchase cadillacs and oldsmobiles and pontiacs and chevrolets. so gm decided to solve the problem by, in effect, becoming its own bank. in 1919 gm created the general motors acceptance corp., a financial arm of gm that specialized in offering credit to car buyers and allowing them to buy on installment plans.

gmac was a huge success. so much so that, over the years, it gradually expanded its operations, becoming a significant bottom-line contributor to gm's profits. in 1985, gm's execs decided, hey, if we're loaning money to our customers to buy cars, why not go ahead and loan them money to buy homes as well? gm promptly purchased two large mortgage lenders and instantly became the second largest mortgage bank in the u.s.

along the way gmac also became an early player in the world of "structured finance" or derivatives, by taking the income streams generated by all those car and mortgage payments and turning them into bonds, through the process known as "securitization," which it then sold off to investors. all very state-of-the-art, all very emblematic of the career arc of the modern american corporation.

...on thursday, gm shook up wall street by announced that it was delaying filing its 2006 annual report by a couple of weeks. the reason, said analysts, had to do with gmac's significant exposure to the ever-popular subprime lending debacle. like so many other players in the mortgage business in the last few years, gmac's home lending subsidiary, rescap, apparently got pretty deep into making risky loans to homeowners with bad credit, and now is paying the price. - salon.com

bad auto sales plus subprime mortgates and derivatives...gee...how many scandalicious bad business decisions can you roll up into one.

Labels: bailout, banking, bankruptcy, cars, foreclosure, gm, michigan

posted by Cookie Jill at 7:35 PM |

2 Comments:

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Anonymous, 11:54 PM PDT

GM's downfall started when they went into the home loan business. If they wouldn't have gotten greedy, like so many large banks and AIG did, they would have been no worse off than Ford is right now and would have been able to pull themselves out of this like Ford is doing.

I really think the only way for GM to recover at all is to file Chapter 11 and restructure. It looks like the new guy in charge at GM is willing to do just that.

Sad for Chrysler, I think they will be going the way of the De Soto. (For those who remember what a De Soto was.)

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