Auto Bubble Bursts – March 09 Auto Sales Down 40% – Tax Dollars To Fund High Risk Auto Loans

Just 2 days ago certain commentators incorrectly reported a  25% sales jump  

Too many cars, and they’re not on the road

After ‘car bubble’ collapses, excess inventory creates a backlog

WASHINGTON – The sea of new cars, 57,000 of them, stretches for acres along the Port of Baltimore. They are imports just in from foreign shores and exports waiting to ship out — Chryslers and Subarus, Fords and Hyundais, Mercedeses and Kias. But the customers who once bought them by the millions have largely vanished, and so the cars continue to pile up, so many that some are now stored at nearby Baltimore-Washington International Marshall Airport.

The backlog exists because many of the factors that contributed to the collapse of the housing bubble — cheap credit, easy financing, excessive production, consumers buying more than they could afford — undermined another large and vital American industry.

“There was a car bubble,” Steven Rattner, who President Obama recruited to head a Treasury Department group charged with finding solutions to the mountain of problems facing the American auto industry, said in an interview last month. “We had this artificially high sales rate.”

During the boom years of the early and mid-2000s, automakers were selling more than 16 million cars a year in the United States. They are on pace to sell fewer than 10 million this year. General Motors posted a 44.5 percent drop in March compared with the same month a year ago. Ford’s sales tumbled 41.3 percent. Chrysler’s fell 39.3 percent. Toyota’s sales fell 39 percent, and Honda’s dropped 36.3 percent.

One of the key questions the auto task force must answer is figuring out a sustainable number of annual auto sales. Only then can it determine the best way forward for U.S. automakers. “You had a huge number of cars being sold,” Rattner said, “so I don’t think it is prudent to assume the sale levels are going to back to those levels.”

Confidence and easy cash
What drove sales so high in the first place?

In short, the same confluence of confidence and easy cash that fueled the housing boom.

“Consumers felt good about their future,” said Mark Pregmon, a SunTrust Bank executive and chairman of the automotive finance committee of the Consumer Bankers Association. “It was riding the wave of the ‘go’ economy. Stocks were rising. Equity in houses was rising. People felt they could just borrow off their house. Their house was their ATM machine.”

Car companies did their part to entice consumers.

“Loose credit, incentives, leasing — it really kind of fed the beast,” said Jeff Schuster, executive director of forecasting for J.D. Power and Associates. “That made many cars that might have been out of reach affordable.”

 

In turn, Americans bought more cars and bought them more frequently. They spent more money than they could afford, thanks to loans that stretched six years or longer, even for buyers with shaky credit. Rental car companies and municipalities turned over their vehicle fleets more often. And the automakers kept churning out cars to meet the very demand they had helped create.

“You keep doing what you’re doing, and you just keep assuming that growth is going to go on forever. And then at some point it just drops out from under you,” said Alan Pisarski, a transportation expert and author of “Commuting in America.” He compared the years of overproduction to putting a Burger King on every street corner. “The world just can’t use that many hamburgers,” he said.

When the bottom finally fell out, many people found themselves with loans worth more than the cars, just as millions of Americans owe more on their mortgages than their homes are worth.

“People were taking all kinds of risks buying cars beyond their means,” said John Townsend, a spokesman for AAA Mid-Atlantic. “The cars that they drive are not worth what they owe on the car.”

The result has been an increase in the repossession rate for autos, he said, as well as higher delinquency rates on car loans and fewer people venturing onto the nation’s car lots.

“The uncertainty in the economy is causing consumers to postpone making big-ticket purchases,” said Jesse Toprak, an analyst with Edmunds.com. “Cars are the second-most expensive purchase a consumer can make after their homes. We are seeing consumers holding on to cars longer than in the past. The average used to be 4 1/2 years, and now is probably going to go over six years.”

In addition, many auto repair shops and do-it-yourself retailers such as AutoZone have seen a boost in business as the GMs and Chryslers of the world have suffered.

“The big question is, how do you jump-start auto sales again? Or can you?” Townsend said.

The big automakers are certainly trying.

GM and Ford have announced programs that assist buyers with up to nine months of car payments if they lose their job. Car loans in many markets are becoming easier to get, though most buyers have to show that they are employed and earn enough to cover both a mortgage and a car payment. GM announced this week that it would lend to buyers who had credit scores below 620, which is considered a high-risk, subprime consumer market. A few months ago, the credit score threshold was 700.

[Isn’t that how we got here – making loans to people who could not pay them back – The same thing is happening in the Mortgage Market. The Sub-prime market is opening again] 

GMAC, the financing arm of GM, has taken steps to reduce the cash crunch many dealers face by temporarily waiving some dealer fees, eliminating loan payments on aging unsold cars and postponing wholesale interest charges. It also announced that it would make $5 billion available over the next two months to expand lending to potential car buyers. [$5 Billion of taxpayer money to expand risky auto loan programs]

 

Employment is key

Most analysts agree that the auto market will probably not rebound until people feel more secure in their jobs. As with housing, an intrinsic link exists between the health of the economy and the health of the auto industry.

“There’s a tremendous correlation between people who work and own automobiles,” Pisarski said. “If you look at where the cars are, that’s where the workers are. If employment doesn’t grow, car ownership doesn’t grow.”

The shaky economy has kept consumers at bay. Nine hundred car dealers closed in 2008. The National Automobile Dealers Association calculates that another 1,200 will shutter this year.

While it lasted, the car bubble effectively masked significant structural problems at GM, Ford and Chrysler, as well as at foreign automakers like Toyota, which ramped up production in the United States in recent years but suddenly found itself burdened with inventory it couldn’t sell.

The bursting of the bubble has exposed the precarious nature of the industry and made clear that bankruptcy might be the most feasible option for U.S. carmakers.

In the meantime, new cars nobody wants to buy continue to pile up in Baltimore and at ports around the globe. Last month, when space filled up at one Swedish port, Toyota was forced to lease a cargo ship as a sort of floating parking garage for 2,500 unsold cars.

http://www.msnbc.msn.com/id/30024711

Treasury’s latest “Toxc Asset” plan – The Return Of The Bush Plan – Taxpayers Take The Risk – Hedge Funds Take The Profits: By MSNBC

Treasury’s latest plan faces pitfalls

Government seeks private partners, but taxpayers bear the risks

By John W. Schoen
Senior producer
msnbc.com
After months of speculation and false starts, the Treasury Monday announced a new plan to deal with the so-called “toxic assets” that have been weighing down the financial sector and clogging global credit markets.

The announcement by Treasury Secretary Tim Geithner was greeted by a big rally on Wall Street but leaves unresolved some major hurdles that have plagued the rescue plan since October, when the Bush administration first floated the idea to deal with the troubled assets. And the new plan leaves unanswered the biggest question echoing from Wall Street to Main Street: Will it work?

With private investors still loath to step up and buy mortgage-backed securities and related assets, the latest Treasury plan shifts much of the risk to taxpayers. By partnering with the government, a few big investment funds will have a chance to profit off the toxic assets, sharing any proceeds with the government. But if the investments don’t pay off, taxpayers will bear most of the risk. [Who decides who gets to participate and have a shot at making a profit? Will politicians be rewarding their political cronies again?]

“There is no doubt the government is taking risks,” Geithner told reporters. “You can’t solve a financial crisis without the government taking risks.”

In addition to the risk of taxpayer losses, there is also the risk that the government could set such a low price on the toxic assets that it could actually worsen the credit crunch.

The new plan will draw on up to $100 billion in funds already approved by Congress under the  Troubled Asset Relief Program, as well as additional funding from the Federal Reserve. The government will match private investment dollar-for-dollar, and the Federal Deposit Insurance Corp. will put up significant backing, up to $6 for every $1 invested, in exchange for a fee.

[The Government will provide 70% to 90% funding of the “toxic asset” purchases] 

The FDIC funding will be in the form of “non-recourse” loans, meaning private investors will be allowed to walk away from their investment if it goes bad, leaving the government with the failed investment and any losses on the loan.

[This isn’t a “partnership” in a “partnership” all parties share in the “profit or loss” – generated from the relationship. This is simply a giveaway of Taxpayer Dollars under the disguise of “partnership”] 

After months of preliminary discussions with potential investors, the Treasury is now moving quickly; private firms have to apply by April 10, and the government will respond by May 1. Some of the nation’s biggest money management firms, including PIMCO and BlackRock, are considered likely candidates. The Treasury is expected to limit the list to a half-dozen firms at most. [Who deicdes who gets to participate? Blackrock or Blackrock Financial is a Hegde Fund or Holding Company. http://en.wikipedia.org/wiki/BlackRock, Black Rock was involved with “no credit score” no “FICO” Mortgage Loans in California. http://www.blackrockloan.com/ . http://www1.blackrock.com/. PIMCO is a Bond Fund – http://www.pimco.com/Default.htm, http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=PZ&date=20090320&id=9715984 ]

What’s the ‘market’ price?
At the height of the housing boom, investors couldn’t get enough of the mortgage-backed bonds Wall Street was churning out by the boatload because these investments offered a good return for what seemed like little risk. [The Plan returns to the “source” of the problem and rewards the same actors].

But when it became apparent that sloppy mortgage lenders had doled out hundreds of billions of dollars to people who couldn’t pay it back, no one wanted to touch investments backed by mortgages. With no way to sell them, banks are now stuck with trillions of dollars worth of assets they can’t properly value. That’s clogging up the global flow of credit.

WOW – at least $5 Trillion in additional Government spending – $5 Trillion in additional Tax Dollars. When will it stop.

http://www.msnbc.msn.com/id/29839898/page/2/

Though roughly 90 percent of mortgage holders are still making payments, investments backed by mortgages are selling for only 30 to 60 cents on the dollar. The reason is that — with unemployment rising and home prices falling — no one knows which mortgages will be the next to default. So banks have been forced to write down the value of these investments and take huge losses to cover the write-downs.

The Treasury is hoping that by jump-starting the private market with a massive shot of government investment and lending, prices of these assets will stabilize and banks can either sell them off or assign them a more realistic value on their books. [Why would this happen – the asssets are being purchased with Government funding, the Government funding 70% to 90% of the pruchase. The Plan will simply create two classes of investment vehilces – Risky, Government backed Mortgage based securities and risky Mortgage backed securities not backed by taxpayer dollars. To imply both groups wil be treated equally in the market place is ridiculous. Fundamental change to the Government Programs that created the “bogus bad mortgages” is what is required if one wants to restore confidence in “mortgage backed securities”. This proposal not only leaves the risk with the Taxpayer – it is a solution akin to blowing smoke away from a fire, it will give you a better look at the fire but won’t put the fire out]

The plan still faces a major hurdle that’s dogged rescue efforts since the Treasury first unveiled a plan to buy mortgage-backed bonds last October. If banks in the deepest trouble need to raise cash by unloading their troubled assets on the cheap, much the way they’re dumping foreclosed houses at distressed prices, that “market” price for one set of bad loans could force other banks to take bigger write-downs on their holdings. [So the Congress and the Treasury can send more Taxpayer Money to the Financial Institutions – What a scheme] 

Banks may also have second thoughts about selling their “toxic” investments at any price, because bankers believe that most of these assets won’t be toxic forever. Since most mortgage holders will eventually make their payments, many of these investments should recover much of their lost value once the housing market and economy stabilize. If the Treasury purchase program sets a market price that’s too low, banks could decide to sit on these investments for years — producing the opposite effect the Treasury is trying to achieve. [Payments through the Mortgage Rescue Plan – Isn’t it time to pause and let all of these programs catch up with each other, instead of pursuing this shot-gun approach that requires throwing Trillions of Taxpayer Dollars at every issue simultaneously] 

The Treasury’s buyback plan also could be affected by a proposal now working its way through Congress that would change the so-called “mark to market” accounting rules that force banks to take big losses on investments that may some day recover much of their lost value.

With Congress in an uproar over bonuses paid to executives at bailout-recipient AIG, some potential private investors also have been reluctant to sign on for fear that the rules may change after the game has begun. The Treasury is trying minimizing that risk by promising firms that participate in the purchase plan they won’t be subject to executive compensation caps added to the original TARP plan.

But some on Wall Street fear Congress may yet enact rules that undercut the appeal of partnering with the government.

“The dark cloud on the horizon is this congressional hysteria against pay and redesigning the terms of a contract after they’ve been written,” said Steve Bartlett, CEO of the Financial Services Roundtable, an industry lobbying group. “I think Wall Street is just sort of justifiably holding back because of that.”

As anger in Congress has risen, the odds have fallen on the possibility of additional bailout funding. But key portions of the Treasury’s plan don’t require congressional approval. That’s because the program draws much of its funding from the independent Federal Reserve and from the FDIC, which can draw on its own assets. [The whole program subverts the Constitutional Separation of Powers and prevents regualtion of the actions by Congress – so the same “guards” who were on duty when this mess started are in now charge and they get to choose who participates – Isn’t this a sure formula of disaster for Taxpayers]

 

 Despite the unimaginably large pile of money being funneled into the financial system, some of those involved in the plan say that — even if it works — it’s only a down payment on the eventual solution.   

“Its fair to be optimistic; that’s the way Americans should be leaning,” said Bill Gross, chief investment officer at PIMCO, one of the nation’s largest bond funds. “But the hole here is a $5 trillion-plus whole in terms of assets and capital destruction.  I think we’ve only gone about half of the way and the will be additional programs to come.”

[How much of the $5 Trillion goes to PIMCO Clients at Taxpayer Risk?] 

 

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