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January 2nd, 2009

Unintended Consequences, Part Next

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A lot of investors were cheered by the Fed’s decision last week to throw more money at GM so the automaker could offer zero-percent financing to (mostly) creditworthy borrowers. And, indeed, it might seem to be a laudable idea, since the premise behind the bailout was, and is, to get the Detroit Three to move product again.

But The Wall Street Journal points out the problem when one participant is favored over others:

When the Bush Treasury decided to bail out Detroit, GM and Chrysler quickly said yes to the taxpayer cash, but Ford Motor Co. said it didn’t need the money and declined. Ford’s reward for this show of self-reliance? Treasury is now helping GM again by giving it a credit pricing advantage against Ford in the marketplace.

That’s one little-noted result of Treasury’s action earlier this week to rescue GMAC, the GM credit arm that, as it happens, is 51% owned by the Cerberus private-equity shop that also owns Chrysler. With $5 billion in taxpayer cash in its pocket, GMAC quickly decided to offer 0% financing on several of its models. “I think it would be fair to say that without this change … we would not be able to do this today,” explained GM Vice President Mark LaNeve in a conference call with reporters this week. …

The messy little policy issue is that these GM products compete with those sold by Ford, Toyota, Honda and numerous other car makers that won’t benefit from GMAC’s cash infusion. And with the cost of financing often crucial to buyer decisions, the feds have now put the muscle of the state behind one company’s products.

…This is always what happens when politicians decide to muck around in private industry. Even when made with the best intentions, their policy decisions have unintended consequences that help some companies at the expense of others.

That’s true enough, but let’s add a couple of observations. First, Chrysler is owned by Cerberus Capital Management, a private equity investment firm which also has a majority stake in GMAC Financial Services (which is now becoming a bank holding company). Making cars isn’t their primary business. Ford, however, is first and foremost a car company that, well, sells cars, and has been more successful selling its product than the other Detroit automakers. Make of that what you will.

Second, it’s far from clear that GM’s zero-percent financing will do much for business. It didn’t do a lot for them previously, and not moving product is a big reason why GM’s in the taxpayer-bailout boat. Is this a case of throwing more money at an intractable problem?

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One Response to “Unintended Consequences, Part Next”

  1. Tim Manni Says: January 5th, 2009 at 9:48 am

    Huh, you know that didn’t cross my mind at first — the government continues to makes things more difficult for those who are behaving responsibly. Whether it’s homeowners or automakers, there is less and less help, and in this case more competition, for those who have proven to be viable. This in essence could be making Ford, not to mention other automakers, weaker.

    According to one source I cited from a previous post, the 0% financing was said to only be offered for the length of one week. Sounds a whole lot better than it is. Nice post Paul.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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