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GM Draws Washington Scrutiny Over Purchase of Subprime Lender

GM had considered buying back its former lending unit
Senator Chuck Grassley. Photographer: David Scull/Bloomberg News.

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.

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