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Senator seeks probe into GM purchase of lender

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Senator seeks probe into GM purchase of lender

David Shepardson / Detroit News Washington Bureau

Washington -- An Iowa Republican wants an investigation into General Motors Co.'s decision to acquire a Texas subprime lender.

Sen. Charles Grassley, R-Iowa, asked the special inspector general overseeing the $700 billion Wall Street and auto bailout to investigate GM's $3.5 billion purchase of AmeriCredit Corp.

"If GM has $3.5 billion in cash to buy a financial institution, it seems like it should have paid back taxpayers first," Grassley said in a letter to the Troubled Asset Relief Program's special inspector general. "After GM's experience with GMAC, which left GM seeking a taxpayer bailout, you have to think the company and, in turn, the taxpayers would be better off if GM focused on making cars that people want to buy and stayed clear of repeating its effort to make high-risk car loans."

GMAC, which is now known as Ally Financial Inc., received a $17.2 billion government bailout. The Treasury owns a 56 percent majority stake in Ally Financial.

GM has repaid $6.7 billion in outstanding government loans, but the Treasury swapped $42 billion it loaned GM for a 61 percent equity stake in the Detroit automaker.

GM hopes to launch an initial public offering in the fourth quarter of the year, which will allow the government to begin selling its majority stake.

GM spokesman Greg Martin said the decision to acquire the company made good business sense.

"There's a lot of good, strong Iowa businessmen and dealers who get the point that Sen. Grassley doesn't: This is an important piece of our business and will help us sell good cars to good people. Not only will it help us sell good cars to good people, it also helps us maximize the return on the taxpayers' investment."

Grassley criticized GM earlier this year for running advertisements touting its loan repayment, calling it misleading.

From The Detroit News: http://detnews.com/article/20100722/AUTO01/7220482/1148/auto01/Senator-seeks-probe-into-GM-purchase-of-lender#ixzz0uVdkzq2E

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GM draws Washington scrutiny over purchase of subprime lender

July 23, 2010 - 9:20 am ET

WASHINGTON (Bloomberg) -- General Motors Co., the automaker 61 percent owned by the U.S. Treasury, is facing criticism over its decision to pay $3.5 billion to buy a lender that specializes in auto loans to shoppers with less than top-notch credit.

While GM plans to use its new lending arm to write auto leases and provide a “modest” boost in subprime loans, U.S. Sen. Chuck Grassley, R-Iowa, asked the watchdog of the government’s bank-rescue program to investigate the purchase. And a member of a think tank questioned the wisdom of a company that is majority-owned by the government lending money to people with poor credit after a financial crisis was sparked by risky loans.

“If GM has $3.5 billion in cash to buy a financial institution, it seems like it should have paid back taxpayers first,” Grassley said in a statement on his Web site. “After GM’s experience with GMAC, which left GM seeking a taxpayer bailout, you have to think the company and, in turn, the taxpayers would be better off if GM focused on making cars that people want to buy and stayed clear of repeating its effort to make high-risk car loans.”

GM and Fort Worth, Texas-based AmeriCredit Corp. announced the deal yesterday that is intended to help the automaker sell to more customers with damaged credit ratings or who want to lease a new vehicle.

AmeriCredit is also profitable. It has made money in nine of the last 10 years, earning $1.8 billion. The purchase will be made with some of the $30 billion in cash GM has on hand, said Chief Financial Officer Chris Liddell, who called the deal a “building block” toward an initial public offering.

GMAC losses

GM’s former lending arm, now known as Ally Financial Inc., lost $16.5 billion in its mortgage business from 2007 to 2009. GM sold 51 percent of Detroit-based GMAC to private-equity firm Cerberus Capital Management LP in November 2006 as the nation’s biggest automaker ran low on cash.

Since then, GM has had to rely on outside lenders, including Ally, which is 56 percent owned by the U.S.

“The thing that brought down GMAC was its ResCap subprime mortgage business,” said Joe Phillippi, principal of AutoTrends, a consulting firm in Short Hills, N.J. “But I think they will manage this smartly. This is going to be solid, careful measured growth.”

As long as GM is majority-owned by the U.S., it shouldn’t be in subprime lending, said John Berlau, a policy director at the Washington-based Competitive Enterprise Institute, which promotes limited government.

“When we bailed out GM, what were we bailing out?” Berlau said. “The rationale behind the financial-regulatory bill that just passed was that subprime lending was bad, but the government’s in the subprime business.”

Inquiry requested

The nonpartisan Congressional Budget Office estimates the GM bailout will end up costing taxpayers about $30 billion, Grassley said.

“Because taxpayers still have a large stake in GM, I ask that you conduct an inquiry into the level of due diligence and analysis that went into GM’s acquisition,” Grassley, the senior Republican on the Finance Committee, said in a letter yesterday to Neil Barofsky, special inspector general of the Troubled Asset Relief Program.

CEO Ed Whitacre has been seeking to get GM into auto retail financing since May, said people familiar with the company’s plans. Dealers have told GM they were losing sales for lack of financing options, and the automaker said it sells 7 percent of its cars with leases, compared with 21 percent for the rest of the industry.

GM may increase sales financed with non-prime loans, said Liddell. The company makes 4 percent of sales to consumers in that credit grade, the same as the rest of the industry, GM said. It will continue to work with other lenders and AmeriCredit will provide a “single-digit” percentage of GM’s financing, he said.

‘Modest increase’

“When you look at the population, about 40 percent falls into non-prime,” Liddell said. “We think it will help. Four percent of our sales are to non-prime customers. If you just hit a modest increase from 4 to 5 percent, it’s a significant number.”

AmeriCredit, which focuses on buyers with credit scores of 500 to 650, will continue to do business with non-GM dealers, CEO Daniel Berce said on a conference call.

The purchase fits Whitacre’s plan to sell more cars and get maximum value for GM’s IPO, said Rebecca Lindland, an analyst at IHS Automotive in Lexington, Mass.

“It’s a really good piece to a very complex puzzle,” she said. “This makes a lot of sense.”

While the acquisition will help GM dealers sell more small, affordable cars to subprime customers, “it won’t be a blank check” to buyers because the U.S. government will be scrutinizing lending, she said.

Lending options

GM had considered buying back its former lending unit, starting a bank or working with outside lenders to offer customers more financing options, three people with knowledge of the discussions said this month. Buying GMAC or starting an in- house unit proved too difficult at that point, they said.

Whitacre had wanted to buy or start a lending arm before a fourth-quarter initial public offering, people familiar with the matter said in May. The automaker had decided a deal couldn’t be reached in that time frame, people with direct knowledge said earlier this month.

GM has worked with AmeriCredit since September 2009, boosting its penetration into the subprime consumer market, Liddell said. The two companies started talking a month ago about expanding their relationship and the conversation evolved into acquisition talks, Liddell said.

The acquisition should help dealers sell more cars and trucks, said Mike Jackson, CEO of AutoNation Inc., the top retailer of GM vehicles in the U.S.

“This will help GM improve their sales 10 to 15 percent,” he said in an e-mail. “We see this as a boost to our GM business.”

Read more: http://www.autonews.com/apps/pbcs.dll/article?AID=/20100723/RETAIL02/100729939/1142#ixzz0uXe8eQOT

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I d0on't like this at all...and it could push me from a Cruze to a Focus or fiesta when I go to replace my wife's car....

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hyperv6    774

I think they should be looking more into Freddie, Fannie, Frank and Rangel. Seems these are the roots of the problems.

Loans will be even harder to get next year for even people who should get them. I think GM is just covering their butts for dealers that have problems getting local loans.

The higher taxes, the economy and finacial reform is only going to make loans tougher next year. Not all dealers have good local connections.

My dealer has a good relationship with a credit union and they get some very good deals on loans. Not all dealers have this and will struggle if normal banks tighten things up.

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Camino LS6    866

Grassley is just one of the loudmouth GM haters in the senate, nothing he says on this topic should be taken seriously.

Anyone with a brain knows that GM (like all automakers) needs a semi-captive finance arm to compete effectively.

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regfootball    250

I knew when i saw the article about this purchase they would be grilled for it.

Truth is, GM is getting killed in the market right now, because other mfr's have had way more aggressive financing offers and leases. GM has been laggin behind this for so long now. It's a freaking duh that this will increase sales.

However, I do think the ethics of it are a touch sketchy.

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Camino LS6    866

The ethics are fine.

What would be unethical (and illogical) would be to hamstring a corporation you are "saving" by limiting its ability to recover.

No, this is just the sour grapes of those who opposed saving the domestic industry in the first place.

Ignore the jester behind the curtain.

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regfootball    250

financing is often a critical component of why one car is chosen over another.

GM has to compete in engineering, styling, but none of it can contribute fully unless the financing options are comparable.

If the car sells, it keeps the factory going and keeps the cash flowing.

Otherwise, a buyer will simply choose another brand.

Example, if you are looking at midsize sedans, if there is no big determinant as to which way to go, perhaps cheap interest or an attractive lease sways the deal. GM needs this to be a deal swayer. The market is too competitive to rely on everything else apart from that.

Another reason flexible financing helps is it can help incentivize a slow selling model, to get it to sell, and thus help production planning and optimizing factories.

Edited by regfootball

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Critics question motives behind GM IPO timing

By Mark Kleis

Reports have suggested for weeks that General Motors was anxiously approaching its crucial initial public offering, with sources now citing the automaker’s intentions to begin the process during the week of August 16, 2010.

Two sources familiar with GM’s plans told Reuters that the automaker is planning to begin the IPO process by filing with the Securities and Exchange Commission the week of August 16, which will quickly follow GM’s expected second quarter financial results release.

Reuters says that the same sources, which have asked to remain anonymous, indicated the reason for the filing date was to attempt to complete the IPO process before the November U.S. elections – rather than to complete the IPO based on optimal market conditions.

The case for the IPO being driven by politics

When news first broke that GM was getting far more serious about making its IPO happen in 2010, many economists and automotive industry analysts began to voice their concerns about the timing of the IPO. Many asked if arguably one of the largest IPOs in U.S. history could be supported during questionable economic times, particularly as very recent reports are suggesting the very real possibility of a double-dip recession as the bulk of high-risk mortgage defaults are still ahead.

In a press release following the leak by Reuters which named the November elections as a major factor in the hurried nature of the IPO, Jeremy Anwyl, CEO of Edmunds shared his thoughts on the timing of the IPO, “This is certainly not the economic climate in which I’d want to have an IPO since it is likely to reduce the initial valuation of the stock. Negativity about the economy continues to swirl about and the psychological effect is putting a damper on all things it touches; what may be the most significant IPO in history will not be immune.” Anwyl added, “One can’t help but wonder: what is the rush?”

Similar questioning followed by Anwyl’s colleague, senior editor Bill Visnic, who posed these three questions:

1.) Is there pressure from current shareholders like the government and the UAW VEBA trust who are anxious to liquidate their shares?

2.) Is GM trying to go public while the company has a fair amount of positive momentum in anticipation that the future may not be quite as positive?

3.) Is the timing political, targeted to happen before the next election so that the current administration can take credit for seeing the process from start to finish?

Questions one and three obviously share much in common, and also appear to be the main motive suggested by most critics of the IPO’s timing as the U.S. Treasury owns 61 percent of GM, while the UAW owns 17.5 percent. The second question poses a very fair question, a question answered in part below in the section dedicated to defending the timing of the move.

Regardless of the answer, Anwyl, like many taxpayers, simply seeks answers from GM. “Regardless of whether any of these possibilities hold any weight, GM executives must have reasons for expediting the IPO. The company would benefit from clarifying its reasoning publicly and openly in order to build trust and credibility and to resolve public curiosity.”

Forbes also raised questions surrounding the suspect timing of an IPO at GM, suggesting, “With November’s midterm elections looming, being able to say GM was taken in and out of bankruptcy and back to the public market in just over a year would be a feather in the Obama Administration’s cap, though not necessarily in the best interests of the company or the prospective new shareholders.”

In early July, before the information was leaked to Reuters, Time magazine recently ran an article titled, “A General Motors IPO? Don’t hold your breath.” The article laid out the argument that despite GM’s chairman, Ed Whitacre, voicing “off the record” that he would like to hold the IPO sooner rather than later, that several conditions likely meant the IPO would still be in the somewhat distant future.

Time points out that although GM’s sales are up 14 percent so far in 2010 compared to the rather dismal 2009 figures, GM and others have faltered in recent months. GM’s sales dropped 8 percent in May, and then further dip 10 percent in June. Van Conway, an analyst from Conway McKenzie, which is a restructuring advisory service, told Time that he is confident GM will eventually be capable of holding a successful IPO, but that holding an IPO now as opposed to after auto sales have returned to a more stable and sustainable path could cost GM as much as 30 percent of its potential income from the IPO – a percentage that could represent several billion dollars which would never again be able to be recouped.

Should the motives behind the IPO be found to be based on political favors rather than fiscally responsible, strategically timed decisions aimed at giving the best possible long-term chance at remaining profitable, both General Motors and the Obama administration could suffer terrible blows to their reputations. For GM, it could be a devastating blow to its fight to distance itself from accusations of government control, only further pushing prospective buyers to competitive automakers – particularly Ford – which has already benefited from the government’s role in saving GM and Chrysler.

The case for GM’s IPO being driven by profits

Despite most analysts suggesting poor timing for GM to consider an IPO, some believe that timing may be just right – regardless of elections.

One argument for now being the “right time” for GM’s IPO was presented to Forbes by Peter Morici, a professor in the Robert H. Smith School of Business at the University of Maryland. Morici suggested that the current auto market, despite being lower than very early projections, is still outpacing the housing and job markets.

As such, Morici makes the case that GM may have a very small window in which it might be able to achieve a greater performance from its IPO than the economy should otherwise support, before months go by and the struggling economy potentially brings the auto industry down to the same struggling levels as other sectors. Morici warns that the auto industry may be at its peak for the next 12-18 months, and if GM doesn’t act now, it may be stuck holding onto taxpayer money for another year and half to two years.

GM pleads its case as for an IPO

In the final days of June, several top brass from GM told the AFP that they were extremely optimistic about the automaker’s positioning, suggesting that they were in a strong place should they move towards an IPO.

Chris Liddell, GM’s CFO, suggested that GM was “fantastically positioned” for an IPO while speaking to investors from Wall Street, pointing to the automaker’s ability to reach a break-even for its global operations despite being in the midst of the “bottom” of the market by many analyst’s predictions. “Once you pass the break-even point the marginal contribution from the sale of a vehicle is very high,” said Liddell.

link:

http://www.leftlanenews.com/critics-suggest-political-motives-behind-gm-ipo-timing.html

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GM Draws Washington Scrutiny Over Purchase of Subprime Lender

By David Welch - Jul 23, 2010

July 22 (Bloomberg) -- Chris Liddell, vice chairman and chief financial officer of General Motors Co., talks about the automaker's agreement to buy subprime lender AmeriCredit Corp. for $3.5 billion. GM is 61 percent owned by the U.S. Liddell speaks with Betty Liu and Jon Erlichman on Bloomberg Television's "In the Loop." Mario Gabelli, chief executive officer of Gamco Investors Inc., also speaks. (Source: Bloomberg)

General Motors Co., the automaker 61 percent owned by the U.S. Treasury, is facing criticism over its decision to pay $3.5 billion to buy a lender that specializes in auto loans to shoppers with less than top-notch credit.

While GM plans to use its new lending arm to write auto leases and provide a “modest” boost in subprime loans, U.S. Senator Chuck Grassley asked the watchdog of the government’s bank-rescue program to investigate the purchase. And a member of a think tank questioned the wisdom of a company that is majority-owned by the government lending money to people with poor credit after a financial crisis was sparked by risky loans.

“If GM has $3.5 billion in cash to buy a financial institution, it seems like it should have paid back taxpayers first,” Grassley, a Republican from Iowa, said in a statement on his website. “After GM’s experience with GMAC, which left GM seeking a taxpayer bailout, you have to think the company and, in turn, the taxpayers would be better off if GM focused on making cars that people want to buy and stayed clear of repeating its effort to make high-risk car loans.”

GM and Fort Worth, Texas-based AmeriCredit Corp. announced the deal yesterday that is intended to help the automaker sell to more customers with damaged credit ratings or who want to lease a new vehicle.

AmeriCredit is also profitable. It has made money in nine of the last 10 years, earning $1.8 billion. The purchase will be made with some of the $30 billion in cash GM has on hand, said Chief Financial Officer Chris Liddell, who called the deal a “building block” toward an initial public offering.

GMAC Losses

GM’s former lending arm, now known as Ally Financial Inc., lost $16.5 billion in its mortgage business from 2007 to 2009. GM sold 51 percent of Detroit-based GMAC to private-equity firm Cerberus Capital Management LP in November 2006 as the nation’s biggest automaker ran low on cash. Since then, GM has had to rely on outside lenders, including Ally, which is 56 percent owned by the U.S.

“The thing that brought down GMAC was its ResCap subprime mortgage business,” said Joe Phillippi, principal of AutoTrends, a consulting firm in Short Hills, New Jersey. “But I think they will manage this smartly. This is going to be solid, careful measured growth.”

As long as GM is majority-owned by the U.S., it shouldn’t be in subprime lending, said John Berlau, a policy director at the Washington-based Competitive Enterprise Institute, which promotes limited government.

“When we bailed out GM, what were we bailing out?” Berlau said. “The rationale behind the financial-regulatory bill that just passed was that subprime lending was bad, but the government’s in the subprime business.”

Inquiry Requested

The nonpartisan Congressional Budget Office estimates the GM bailout will end up costing taxpayers about $30 billion, Grassley said.

“Because taxpayers still have a large stake in GM, I ask that you conduct an inquiry into the level of due diligence and analysis that went into GM’s acquisition,” Grassley, the senior Republican on the Finance Committee, said in a letter yesterday to Neil Barofsky, special inspector general of the Troubled Asset Relief Program.

Chief Executive Officer Ed Whitacre has been seeking to get GM into auto retail financing since May, said people familiar with the company’s plans. Dealers have told GM they were losing sales for lack of financing options, and the automaker said it sells 7 percent of its cars with leases, compared with 21 percent for the rest of the industry.

GM may increase sales financed with non-prime loans, said Liddell. The company makes 4 percent of sales to consumers in that credit grade, the same as the rest of the industry, GM said. It will continue to work with other lenders and AmeriCredit will provide a “single-digit” percentage of GM’s financing, he said.

‘Modest Increase’

“When you look at the population, about 40 percent falls into non-prime,” Liddell said. “We think it will help. Four percent of our sales are to non-prime customers. If you just hit a modest increase from 4 to 5 percent, it’s a significant number.”

AmeriCredit, which focuses on buyers with credit scores of 500 to 650, will continue to do business with non-GM dealers, CEO Daniel Berce said on a conference call.

The purchase fits Whitacre’s plan to sell more cars and get maximum value for GM’s IPO, said Rebecca Lindland, an analyst at IHS Automotive in Lexington, Massachusetts.

“It’s a really good piece to a very complex puzzle,” she said. “This makes a lot of sense.”

While the acquisition will help GM dealers sell more small, affordable cars to subprime customers, “it won’t be a blank check” to buyers because the U.S. government will be scrutinizing lending, she said.

Lending Options

GM had considered buying back its former lending unit, starting a bank or working with outside lenders to offer customers more financing options, three people with knowledge of the discussions said this month. Buying GMAC or starting an in- house unit proved too difficult at that point, they said.

Whitacre had wanted to buy or start a lending arm before a fourth-quarter initial public offering, people familiar with the matter said in May. The automaker had decided a deal couldn’t be reached in that time frame, people with direct knowledge said earlier this month.

GM has worked with AmeriCredit since September 2009, boosting its penetration into the subprime consumer market, Liddell said. The two companies started talking a month ago about expanding their relationship and the conversation evolved into acquisition talks, Liddell said.

Sales Boost

The acquisition should help dealers sell more cars and trucks, said Mike Jackson, CEO of AutoNation Inc., the top retailer of GM vehicles in the U.S.

“This will help GM improve their sales 10 to 15 percent,” he said in an e-mail. “We see this as a boost to our GM business.”

GM’s 8.375 percent bonds due July 2033 rose 1.69 cents, or 5.1 percent, to 34.5 cents on the dollar yesterday in New York, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority.

To contact the reporter on this story: David Welch in Southfield, Michigan, at dwelch12@bloomberg.net.

link:

http://www.bloomberg.com/news/2010-07-22/grassley-seeks-probe-of-gm-s-3-5-billion-bid-for-auto-lender-americredit.html

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