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GM: Subprime Lending? Great Idea!


Same old excesses unlikely to cure the hangover.

While General Motors (GM) surely has a hangover from the credit crisis and faltering economy, it's hoping to cure some of the effects of that hangover with the hair of the dog that bit it.

GM's finance division, GMAC Financial Services, is cutting financing costs and reviving subprime lending to speed up car sales and entice people back into GM showrooms. Subprime lending is the very thing that helped sink GMAC, and in turn, helped accelerate the parent company's decline.

General Motors has been given a June 1 deadline to come up with a restructuring plan. Bankruptcy is the alternative. GM has relied on $13.4 billion of US government loans to stay in operation since the start of the year.

Whether it's tequila or subprime loans to shaky borrowers, the hair of the dog rarely turns out well. It's hard to see how it'll be different this time for GM.

GMAC, which is owned by GM and private equity firm Cerberus Capital Management, announced at the start of April that it would make at least $5 billion available as loans to car buyers over the next 60 days. The end date for the program -- June 1 -- isn't coincidental: GM must prove to the federal government by that day that it can ultimately survive on its own. GMAC is also providing loans to dealers to help them clear a backlog of unsold cars.

GMAC's loans will be made available for buyers of both new and used cars. Buyers can have credit scores under 620 - this crowd being the subprime gang. Just the term strikes fear into the hearts of past and present derivatives traders.

Back in October, GMAC restricted lending to customers with scores over 700. When the government provided GMAC $6 billion in loans, the minimum score was lowered to 620. The cash infusion was meant to allow GMAC to get more consumers the car loans they needed. Now it's gone back under 620, a return to those halcyon days of lending. GMAC insists that the subprime group would be approved sparingly, but if it wants to show that business is improving, discretion isn't a good idea.

US auto sales dropped 37% in March, and GM's sales were down 45%, though slightly better than estimates. This move, as a way to open up credit, smacks of desperation. Obviously, GM believes it must do something to get cars out the door again. But, then again, what does it have to lose?
No positions in stocks mentioned.

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