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PPIP: New, Improved Vendor Financing


The right course of action: Demand real price discovery for toxic assets.

More than a decade ago, in response to a struggling economy, the Big 3 automakers -- GM (GM), Ford (F), and Chrysler -- launched their 2.9% financing program to help move cars. And for a while, it worked.

But ultimately, as Americans now know, the incentive rate became 0%, coupled with no money down. Free money and leverage were going to save the auto industry.

And now the Obama administration and the Federal Reserve believe that this same approach will help save the financial-services industry - whether through incentives on mortgages, asset-backed securities, or "toxic" legacy assets.

Don't get me wrong: Like the automobile industry, incentives will work for some period of time, thanks to the simple repositioning of the demand curve. But unless the economy recovers before "some period of time" is over, the demand curve will ultimately move back to where it was before the incentives kicked in.

But for a nation that's been posterchild for vendor financing excesses (whether from China, the Big 3, Harley-Davidson (HOG), from credit-card teaser rates, from Alan Greenspan, etc.) the notion that additional vendor financing will cure what ails us is like yelling "open bar" to a three day drunk.

With all due respect to the team in Washington, the best thing they could do right now is to demand price discovery for toxic assets using real market interest rates, real market-determined leverage, and full recourse.

Sobering? Absolutely. But then and only then will we see the bottom.
No positions in stocks mentioned.
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