GMAC and Chrysler-Fiat Mashup

One of the more interesting details about today's announcement by Obama about Chrysler's chapter 11 filing was the deal with GMAC to be Chrysler-Fiat's primary lender. Said Obama:

The path we're taking also involves steps to shore up
financing, because we cannot have viable car companies
without strong car financing companies. It's now clear
that Chrysler Financial -- the institution that finances
Chrysler cars and dealers -- would on its own require an
unacceptably large stream of taxpayer money to remain
viable -- and that's something I refuse to provide. And
that is why, as part of this agreement, GMAC, an
independent bank holding company that finances General
Motors, has agreed to finance new Chrysler sales. We will
be providing additional capital to GMAC to help unlock our
frozen credit markets and free up lending so that consumers
can get auto loans and dealers can finance their
inventories;

I wonder if this was in a way punishment to Chrysler Finance for refusing the $750 million TARP infusion because the execs didn't want to abide by the compensation rules? By refusing to prop up Chrysler Finance, Obama is really sticking it to Cerberus. As part of the requirement for GMAC becoming a bank, Cerberus must sell off most of its stake.

Using GMAC helps GM because GM still owns a large minority stake GMAC. And because GMAC is a bank holding company, it is easier for the government to support through the TARP.

It also may be a hint of Obama's future intentions. If Chrysler-Fiat fails, the groundwork for GM absorbing Chrysler may be laid here.

Reminder: Get Out Of Demand Notes

Update: I have attracted some hostile comments. To clarify my position:

No one who has a low tolerance for risk should be in GMAC Demand Notes. If you are using them for long term savings, get out. If you understand that you are chasing returns, and that this is similar to "junk bonds", and you have a diversified portfolio, have at it.

---

A friend of mine has some of his money in GMAC Demand Notes. I recently reminded him that this is crazy--they are basically unsecured loans to GMAC.

That's why they pay 4%, compared with FDIC insured rates of 2.25% at GMAC Bank.

With GM looking at a possible bankrupcy, and GMAC shaky due to mortgage exposure, no one should be in GMAC Demand Notes. The 1.75% extra yield is not worth the risk. If you have money that you don't mind investing in "junk" debt, buy a diversified junk bond fund or ETF,which gives you some protection against a single company default.

The same goes for Ford's Interest Advantage.

Comparing The Cash For Clunkers Bills

There are two competing "cash for clunkers" bills in the House.  One is more left-leaning, HR520, and the other is more populist, HR1550.  Both bills aim to do the same thing: encourage people to scrap older cars to buy new ones.  But they are very different in how they do so. 

In fine high school government class style, I will now contrast the two bills.

Key Differences:

Definition of a "high polluting" or "high consumption" automobile.

HR520: Average (city+highway weighted average) fuel economy of <18mpg.

HR1550: A car built before 2001.

Definition of a "fuel efficient automobile"

HR520: 2003MY or later, <$45,000 price, Tier II Bin 1-5 EPA emissions, 

25% better fuel economy than current or future CAFE standards.

HR1550: 2009-2011MY, <$35,000 price, Tier II Bin 5 emissions.

Voucher Amount:

HR520: New car voucher: $4,500 for 7 year old or newer car, 

$3,000 for 8-10 year old car, $2,500 for 11+ year old car. 

Used car voucher: $3,000, $2,000, $1500.

HR1550: $4,000 for US assembled 27 hwy MPG+, North America 30 hwy MPG+, 

or US light truck 24 hwy MPG+; $5,000 for US assembled 30 hwy MPG+, 

or US assembled work truck (registered commercial); 

$3000 for a NA assembled light truck with 24 hwy MPG+

Both bills require the old vehicle to be destroyed.  Parts other than "engine block and drivetrain" can be recycled, but the titled body, engine block and transmission must be destroyed.

HR520 is obviously geared towards fuel economy.  It doesn't care what kind of car you buy, as long as it is 25% better than the current requirements--which will greatly limit what kind of vehicles would qualify.  It also won't help you unless you are driving something which is relatively thirsty.  A typical case might be a trade-in of an old SUV or pickup truck.  

For example, the current standard is 27.5MPG (combined) for cars and 23.1MPG for trucks, so to qualify for the HR520 voucher now you would have to buy a passenger car that gets at least 34.4MPG or a light truck that gets at least 28.9MPG (combined).  The list of vehicles that would currently qualify is short: small and mid-sized hybrids such as Prius and Fusion, Smart, VW TDI, Toyota Yaris, Mini, Ford Escape Hybrid.  HR520 may give more benefit as time goes on, because more fuel efficient cars will appear, ahead of the tougher CAFE standards.

I think HR520 would have an unintended side effect of boosting the residual values of used large engined vehicles.  Cars that would have been worth $700 (like this one) would be worth much more, because they could be bought and titled just to qualify for the voucher.

 

HR1550 is designed to be more of a short term shot in the arm to the auto industry.  It very broadly defines what a "polluting" and "clean" vehicle is, because it isn't really about being green. It is only in force for several years, and heavily favors U.S. assembled or NAFTA vehicles.  This favoritism could cause trouble at the WTO, although it does include transplants such as Honda who have plants in the U.S.  

I prefer HR1550, because it would be better for the Detroit 3 in the short term.

A Prophecy Sadly Comes True

Back in the earlier days of this blog, circa 2005 (when I would get more real comments than spam), I posted that I thought GM should kill Pontiac.  At the time, Bob Lutz admitted that if Pontiac and Buick didn't pull their weight, GM would consider phasing them out.

I wrote:

Pontiac has no real identity--it is the "driving excitement" brand, but the cars are just not that exciting. Until recently, they were just warmed over, plastic clad versions of GM's platforms. Barely disguised Chevys and Buicks. 

This was before the G8 appeared, but also before the G5.  

The press is now reporting that GM will be killing Pontiac.  From Detroit News:

In its restructuring plan rejected by President Obama's autos task force last month, GM proposed shrinking Pontiac into a niche brand with one or two offerings. But the task force wants GM to cut deeper and faster, necessitating the decision to eliminate Pontiac, which leaves the automaker with four core brands: Chevrolet, Cadillac, Buick and GMC.

From a product portfolio, this makes sense.  Even with the life-support of Bob Lutz' heroic efforts to get some real excitement product for Pontiac (Solstice, G8, aborted Sport Truck), it was not enough to revive the brand, which was still being poisoned by its old-school badge engineered products.  Whatever street cred was gained by the Solstice and G8 was drained, zombie style, by the G5 (Cobalt), G3 (Aveo!), and Torrent (Equinox).

The big question now is, what happens to the dealers?  Most Pontiac dealers are multi-brand, using Pontiac as a complement to Buick and/or GMC.  Many smaller dealers will not survive without Pontiac.  How will the franchises be closed--through bankrupcy court?  Dealer lawsuits could swamp GM's emergence from bankrupcy court for years.  Or will Obama have to buy them out?  

Another Sign Of The Carpocalypse

(I hope Jalopnik doesn't go 1-800-Call-Sam on me for using "carpocalypse".)

One of the horseman of the carpocalypse rode through my workplace.  We used to have a cafeteria in our building which was run by a major catering company.  Between the layoffs and people cutting back on spending, they couldn't make money at it.  

Gone are all the made-to-order stations, and the hot entree line.  The cafeteria was changed into a convenience store--prepackaged sandwiches and salads, candy, chips, and bottled drinks.  Prices also went up.

The horseman left with heads hanging on his saddle.  Two managers, a chef, several cooks, and others lots their jobs.  I heard him rapping on the way out as he rode, "I'm rollin' down a hill, snowballin' gettin' bigger..."

Cutting Back

I am, thank God, employed.  

However, I don't have high confidence that I will be employed at the end of the calendar year. Considering the way the economy is going, I guess I have about a 50% chance, assuming that there is no rebound in car sales.  

So, my family has been cutting back to save some more cash for our rainy day fund.

Here are a few examples of ways that I have been saving money:

• We don't have cable or satellite TV anymore, we are using one of those digital TV converter boxes on our 10 year old analog TV to watch free over-the-air TV.  With rabbit ears.  It works, and besides, TV is over-rated.  Everyone could benefit from more reading time.
• I don't subscribe to the local paper, instead I read it for free online (sorry Detroit News and Free Press).  I get a few other magazines such as Consumer Reports for free as hand-me-downs from other family members.  There's some thrifty advice you'll never read in CR: hobo your Consumer Reports!
  
• My family has nearly stopped eating out.  Except for the occasional lunch with my co-workers, or a night where we don't have the will to cook anything.
• I have gotten used to driving no more than a couple of miles over the speed limit.  My mid-sized sedan with its <2.5l>
• I am stretching my oil changes out to 6,000 miles (manufacturer suggests 3,000 miles on my wife's car and 5,000 on mine).
• I have cut back on beer and wine consumption.  I used to take a bottle of beer or a glass of wine every day, now I find myself stretching it out by drinking on weekends.  I do have a weakness for scotch, though...
• I have cut back on how much meat I eat.  I think I eat red meat less than once a week now, and chicken or fish no more than a couple of times a week.  I admit this is also to improve my overall health, but you can save quite a bit of money this way.
• I have cut back on buying gadgets, except for ones that have an actual useful purpose.  For example, my old Dell laptop (Windows XP, P4) works fine, no need for one of the new ones--I just replace broken parts, which are cheap and plentiful, when something breaks.  I did buy a new digital camera, but I sold the old one on eBay so it was not a big investment.
• My wife and I don't give each other expensive gifts for birthdays and holidays, just small items to express the thought.  

If you think about your spending habits more carefully, you might be amazed at how many places you are spending that you could trim back, with a little bit of adjustment.

Of course, I'm one of thousands doing the same thing.  As a result, the economic death spiral accelerates.  Restaurants are closing, food producers are hurting, newspapers are going out of business, magazines are getting skinnier (even Consumer Reports).