The Downstream Effect of the Credit Crunch - Auto Market

[PhishPhood]

With the banks currently frozen amongst themselves the next several tiers of 'credit users', the banks customers big and small are finding it hard to get credit to do business and to buy big ticket items.

Big customers such as GM, Ford, Chrysler, et al are finding it hard to secure funds to finance operations.
Medium sized customers such as dealerships need funds from their own bank or the finance arms of the auto companies ( see above ) in order to floorplan vehicles.
Small customers ( we the buying public ) are now finding it hard to secure affordable loans. Cash is King, again. Hello 1965!

http://www.nytimes.com/2008/10/01/bu...=1&oref=slogin

The virtual lockdown on credit is hurting Detroit’s Big Three and other automakers at every level. More consumers cannot get auto loans. Dealers are hard-pressed to secure financing for new inventories. The auto companies themselves are running short of cash and can hardly afford to borrow more at interest rates as high as 20 percent.

It all adds up to an increasingly dismal forecast for the industry. Vehicle sales fell 11 percent in the first eight months of the year compared with 2007. But September sales, which automakers will report Wednesday, are expected to be down as much as 19 percent, according to the auto research Web site Edmunds.com.

“We thought we had hit bottom, but it doesn’t look that way,” said David Healy, an analyst with Burnham Securities. “Unfortunately, October could be even worse.”

The biggest problem for the industry is the difficulties prospective car buyers are having in securing loans.

In 2007, nearly 83 percent of applications for auto loans in the United States were approved, according to CNW Marketing Research of Bandon, Ore. But so far this year, the approval rate has plunged to 63 percent.

“It frankly has become a nightmare for dealers and consumers who need a vehicle,” said Art Spinella, CNW’s president. “This is the worst we have seen it since we’ve been tracking it since 1984.”

Many shoppers — some with blue-chip credit histories — are able to get loans only at high rates.

“Instead of paying 7 percent like they should pay, they might have to pay 9 or 10 percent, and they’re just passing,” said Larry Kelly, general manager of Ritchey Cadillac-Buick-Pontiac-GMC in Daytona Beach, Fla.

The squeeze is particularly severe for customers with less-than-stellar credit scores who need subprime loans at higher interest rates.

While 67 percent of those consumers were approved for loans in 2007, only 22 percent are getting them this year, according to CNW.

“The subprime market has, for all intents and purposes, dried up,” said Mr. Spinella.

Automakers have already experienced a drastic drop in sales of larger vehicles like pickups and sport utility vehicles because of gas prices that hit $4 a gallon this spring.

But Mark LaNeve, head of North American sales for General Motors, estimates that G.M. is losing 10,000 to 12,000 sales a month because of tighter lending practices.

“It’s a bigger problem than $4-a-gallon gas,” said James Press, a Chrysler vice chairman. “We have buyers coming in, but they can’t get a loan.”

[zete]

Credit will eventually ease up. However, until then folks will have to lower their sights as to what they can buy. I'm sure a lot of folks are walking in and wanting a fully loaded minivan, but they're going to have to settle for what they can actually afford. This is the difference. Cheap credit for everyone is gone. It's pre-1990s all over again. If you have to ask how much it costs, you probably can't afford it.

[tgagneguam]

It's funny, there's all this talk-propagated by WS types who mostly stand to benefit from Congress' corporate socialism-about frighteningly tightening credit lines, yet there's no clear hard evidence to back up these statements. Sure, people and businesses with poor credit-GM and Ford among them-are being denied easy access to credit, but I have to wonder, doesn't that make sense? Should GM and Ford be given low-interest loans and easy access to credit? Seems like they've very readily displayed their penchant for mismanaging money; all you need to do is look at simplified cash flow statements to figure that one out.

And with respect to individual consumers, if you have a FICO score of 450, should an Expedition really be in play for a purchase? It's my understanding that as you move up along the FICO food change, credit is much easier to come by... and doesn't that make sense, too?

I'm not saying that credit isn't tighter than it was in the recent past, but I do have to imagine that to some degree credit needs to be tighter. After all, I think it played an enormous role in the current mortgage crisis, and it will soon raise its ugly head when auto loans start to default in huge numbers, too. I'm sure if that problem pops up before early November, Congress will be sporting its checkbook, er taxpayer credit line, once again.

Somehow, denying money to some people and businesses will place this country in much better financial stead in the long-term. But, it's an election year, and even the alleged conservative, free-market Republicans don't have the cubes to do what's right for the country. We're resolved to more of the same.

[steinravnik]

Originally Posted by tgagneguam

It's funny, there's all this talk-propagated by WS types who mostly stand to benefit from Congress' corporate socialism-about frighteningly tightening credit lines, yet there's no clear hard evidence to back up these statements.

The real problem right now is in the commercial paper markets. This is evidenced by the LIBOR-OIS spread, which is at a record 421 basis points. The LIBOR-OIS spread is the difference between the rate banks charge for loans in London relative to the overnight index swap rate. The wider the spread, the less banks are willing to lend to each other. This is widely used as a barometer to measure cash scarcity amongst banks. To put this number in perspective, the spread peaked last year at 110 basis points on Dec. 4, and averaged 52 basis points for the final five months of 2007. It averaged 6 basis points for the two years prior. This is very alarming. If the spread is not reduced, companies, even sound ones, will run out of liquidity quick.

http://www.bloomberg.com/apps/news?p...d=avcUzkUD7vWs

Alas, I don't believe this bailout is going to solve the systemic issues that our economy faces right now. Therefore, I don't believe that we should waste taxpayer money in this regard.

[texassierradude]

Originally Posted by steinravnik

The real problem right now is in the commercial paper markets. This is evidenced by the LIBOR-OIS spread, which is at a record 421 basis points. The LIBOR-OIS spread is the difference between the rate banks charge for loans in London relative to the overnight index swap rate. The wider the spread, the less banks are willing to lend to each other. This is widely used as a barometer to measure cash scarcity amongst banks. To put this number in perspective, the spread peaked last year at 110 basis points on Dec. 4, and averaged 52 basis points for the final five months of 2007. It averaged 6 basis points for the two years prior. This is very alarming. If the spread is not reduced, companies, even sound ones, will run out of liquidity quick.

http://www.bloomberg.com/apps/news?p...d=avcUzkUD7vWs

Alas, I don't believe this bailout is going to solve the systemic issues that our economy faces right now. Therefore, I don't believe that we should waste taxpayer money in this regard.

So true. The markets have a remarkable way of sorting themselves out. More government intervention is only going to prolong the inevitable. Let's just take our medicine now and get on with it.

[mrgto]

Toyota is offering 0% on 11 cars.....

[PhishPhood]

Originally Posted by tgagneguam

It's funny, there's all this talk-propagated by WS types who mostly stand to benefit from Congress' corporate socialism-about frighteningly tightening credit lines, yet there's no clear hard evidence to back up these statements. Sure, people and businesses with poor credit-GM and Ford among them-are being denied easy access to credit, but I have to wonder, doesn't that make sense? Should GM and Ford be given low-interest loans and easy access to credit? Seems like they've very readily displayed their penchant for mismanaging money; all you need to do is look at simplified cash flow statements to figure that one out.

And with respect to individual consumers, if you have a FICO score of 450, should an Expedition really be in play for a purchase? It's my understanding that as you move up along the FICO food change, credit is much easier to come by... and doesn't that make sense, too?

I'm not saying that credit isn't tighter than it was in the recent past, but I do have to imagine that to some degree credit needs to be tighter. After all, I think it played an enormous role in the current mortgage crisis, and it will soon raise its ugly head when auto loans start to default in huge numbers, too. I'm sure if that problem pops up before early November, Congress will be sporting its checkbook, er taxpayer credit line, once again.

Somehow, denying money to some people and businesses will place this country in much better financial stead in the long-term. But, it's an election year, and even the alleged conservative, free-market Republicans don't have the cubes to do what's right for the country. We're resolved to more of the same.

Yes I don't think many would disagree with this assessment that we all have to realign our thinking along the lines of staying within a budget. This is obviously where everyone is at fault in this mess.

However looking it at it from a industry-wide sales basis this would mean shrinking the annual sales from +/-16 million units to say 12 million. Implicit in this is that 4 million buyers annually should not be in the market to buy a new vehicle...they simply can't afford it.

People with decent credit and normal budgets should not be buying $30K trucks and $45K SUVs. Rather they should be buying $15000-$24000 autos and small crossovers. Subvented lease/purchase rates allowed buyers with good to marginal credit to get into much more vehicle than they should be in. These buyers should be looking to downsize to stay within budget.

To the retail sales outlet it means that they have to reassess their organization to make money on a smaller volume and/or focus more and more on Used Vehicles to maintain volume.

To the manufacturers which were geared to 16-17 million unit years the 20% decline now to 14 million units annually might mean reassessing production and investments to take into account an additional 10% contraction to a solid 12 million units annually. In addition for the detroiters and Toyota which are solidly in expensive BOF vehicles it may mean a further contraction away from trucks and SUVs. These are likely to be too expensive for the normal buyer and they cost too much to fuel up with rising fuel prices.