Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

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.
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos