As a guy who works on the automotive biz (service side), I have a moderate interest in the goings-on with auto financing and sales. Not because I'm cheering on the Big Three — goodness knows my position is far from that — but because I'm fascinated by economics and money overall ... and how companies and consumers react to each other in times of face-smacking crisis.

In the automakers' world, this is one of those times.

We've all heard how abysmal car sales numbers have been the last few months. From a recent article:



And other carmakers' late-2008 sales figures weren't far off Chrysler's mark. Even the White Knights of car-dom — Honda and Toyota — are taking it on the chin. They too have been forced to cut production numbers and rethink expansion plans.

So how do Chrysler and GM, for their part, attack this malaise? They beg the government for money. And then, when that sweet sweet gubmint cash starts flowing in, flood their dealers' finance offices with zero-percent offers and other incentives.



Such programs have, in the past, been like candy for well-qualified buyers. If nothing else, Americans can be counted on to line up for apparently-great deals ... that really aren't.

Only now, the situation is so dire that "well-qualified" isn't even a factor. Those zero-percent deals are being extended to folks with credit scores as low as 620.



So now that the Well-Qualified Buyer has dropped off the face of the earth (as far as Chrysler and GM are concerned, anyhow), the chosen response is: Throw free money at the subprime car buyer. And hope it sticks.



We might note here how fantastically this premise worked out for the homebuilders and banks. When no good buyers are left to absorb your product at the prices you want, well, just set your crosshairs on the way-less-than-good borrowers. Those guys are easy marks. In their world, low rates are akin free money. Something that simply doesn't exist.

The problem with this plan, of course, is a little thing called risk. Maybe you've heard of it. The automakers have, too. It's just that right now, they don't care.

Look: Folks with credit scores of 620 or 650 or whatever shouldn't be financing new cars — much less zero-percent financing them. Default risk would indicate that such subprime buyers (and they are subprime, as far as I'm concerned) should be paying Guido rates ... if they're allowed to finance new cars at all.

But when you're a carmaker and your entire (failed) business model is hanging by the thinnest of threads, you'll do drastic and stupid things just to keep the shell games going. The low-score buyer defaults will happen, and the soldiers at Chrysler financial and GMAC will be forced to repo a hefty chunk of the vehicles they're currenly forcing out the door at below-market rates.

Depreciation on these defaulted, repo'd vehicles will be what it always has: an atom bomb dropped on the carmakers' balance sheets.

But that will be tomorrow's problem, to be handled by tomorrow's management.

(And, most likely, tomorrow's taxpayers.)

For now, Chrysler and GM are perfectly happy to take their cue from our banks and government officials: When all else fails, make credit cheaper. Show disdain for any sort of risk spectrum.

Kick the can down the road.

And, whenever possible, do it with Other People's Money.

Labels: Automobiles