Game On

GMAC, the financing division of General Motors, has received a $5 billion bailout consisting of taxpayer funds. The terms of the subsidy stipulate that GMAC sell the US Treasury $5 billion in preferred stock shares which supposedly will pay an 8% dividend. GMAC is owned my Cerebus Capital Management and GM and provides automotive, residential, and personal consumer credit to the retail market. Prior to the current bailout, GMAC had applied to the Treasury to become a holding bank, so that it could become eligible to participate in the Troubled Asset Relief Program (TARP), due to significant losses incurred by reckless lending practices in the subprime residential mortgage market.

Two months ago GMAC wisely tightened their loan standards by refusing to lend to anyone with a credit score below 700. However, the day after they received their $5 billion of taxpayer funds, they loosened their credit standards to 621, which borders on subprime loan quality. Mark LaNeve, GM's vice president of marketing, stated that the looser standards will open the market from 40% up to 75% of American consumers. LaNeve went on to state:
"It will certainly signal that GMAC is back in the game, that your GM dealer is back in the game of financing vehicles. I think that's all positive."
The following points come to mind:

1. We, the public, are lending GMAC $5 billion at 8% interest. The likelihood of us ever seeing the principal, let alone the 8% interest, is sufficiently small that this could be considered a subprime loan.

2. The point of the $5 billion bailout is to stimulate lending to many people who probably shouldn't be lent to, considering the current economic environment. Obviously, this is how GMAC got into this position, but they're more than willing to take the ride again, so long as we buy the ticket.

3. Regardless of creditworthiness, how many people are going to buy from a company that probably won't be around 3 years from now?

It's my opinion that this "rescue" is little more than a glamorized pillaging of the treasury. However, I am inclined to agree with Mr. LaNeve's assessment of GM being "in the game." Unfortunately, the game is Ponzi and we are the marks.

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