America Needs Access to Auto Credit

Posted by Michael A. Kamperman on May 13, 2009

With all the focus on auto bail-outs it seems Washington can’t see the forest for the trees.  It is true that General Motors, Ford and Chrysler have long-term legacy employment costs that render them less competitive than foreign auto manufacturers that do not bear those same costs.  It is also true that General Motors and Chrysler were financially unprepared to weather the severe downturn in the economy forcing them to go hat in hand to the federal government.  But Washington is missing the point in its handling of the auto industry.  Right now even foreign auto makers without legacy costs are losing money.  The reason is American citizens, and others around the world, do not have adequate access to available auto credit on reasonable terms.  How can we know whether or not GM, Ford, or Chrysler can become competitive if the environment is such that no one can succeed?

It is possible total auto sales in the U.S. will be close to 8 million units in 2009.  This would be only half of the number of cars that were sold in 2007.   Washington’s auto task force should be focusing on restoring access to auto credit for businesses and consumers rather than on their current myopic focus of cutting costs to the bone on the backs of workers, retirees,  and bond holders at GM and Chrysler.  The goal of the auto task force should not be trying to figure out how GM and Chrysler can survive in an environment where less than 10 million cars and light trucks are sold in the U.S.  It should be to create access to affordable auto credit for consumers and businesses.  Currently over half of the country has a subprime credit score.  If we don’t find a way for these borrowers to access auto credit we may sell even fewer cars in 2010.  Every auto dealership in the country knows this.  The solution is to increase the pie and not ration slices.

What Washington should do is offer guarantees on newly issued auto-backed securities allowing lenders to sell their auto loans into the marketplace.  When a lender sells an auto loan they then have the cash to make a new auto loan.  This simple process greatly expands the availability of auto credit.  But the asset-backed securities market has been virtually closed due to the scandalous AAA ratings given to subprime borrowers who put no money down and had no verification of income or assets.  Right now the market doesn’t accept AAA ratings as a reason to invest in newly issued auto-backed securities.  The federal government needs to step up and place the ultimate sign of safety on newly issued auto-backed securities, which is the guarantee of the full faith and credit of the United States.  We already do this with mortgage loans.  For some people owning a car is more important than owning a home because it represents their only mode of transportation to work, to receive an education, and to receive health care.  Taxpayers would prefer to subsidize auto-backed securities that help someone go to work instead of bail-outs for businesses that are uncompetitive.   Let’s focus on creating an environment where an auto company has a chance to succeed before we decide who is and isn’t worth rescuing.