U.S. Auto Makers Seek Bailout for Bad Car Loans

Relief Plan, Part of Original Wall Street Rescue Package, Could Free Up Loans for Car Dealers as Well as Their Customers

As Congress revises a bailout plan for Wall Street, U.S. auto companies hope the new package will stem a growing credit crisis that threatens to further crimp their industry.

The original $700 billion Wall Street deal, which was rejected by the House on Monday, included a substantial bailout for auto lenders. These companies hold a stable of bad auto loans that could shrink in value and hurt both the lenders and the vehicle makers. This bailout would have been separate from the $25 billion in low-cost loans for U.S. auto makers that President Bush signed into law Tuesday.

Unsold Ford pickup trucks sit at a dealership in Centennial, Colo. Ford is among big auto makers seeking a bailout for car loans that went bad.

Because of constrained capital, GMAC LLC, partially owned by General Motors Corp.; Ford Motor Credit; and Chrysler Financial, which finances Chrysler LLC's vehicles, have tightened lending standards in recent months. The tightening happened just as the lenders decided to pull out of the risky practice of leasing vehicles, which had long represented about 20% of new-vehicle financing arrangements. The combination of tougher-to-get loans and absence of leasing stung auto makers during the summer selling season.

A Washington bailout of bad car loans could loosen the flow of financing for potential car buyers and spark demand for new cars and trucks. It likely would free up funds that could be invested in securities backed by auto loans, bringing down borrowing costs for auto lenders.

In August, tight credit caused General Motors to lose sales of roughly 10,000 to 12,000 vehicles, the car maker said. When extrapolated across the entire U.S. industry, that was the equivalent of 40,000 lost sales, or about $1 billion in revenue.

The growing credit crunch in the auto industry is expected to have wreaked havoc on September vehicle sales, which will be reported Wednesday. Research firm J.D. Power & Associates expects a 26% volume decline compared with the same month in 2007.

"There are still quite a few deals getting done, but they require a lot more work and a lot more back-and-forth between the bank and the dealer," said Earl Hesterberg, chief executive of Houston-based dealer chain Group 1 Automotive Inc. "It's become significantly more difficult, particularly in the last month."

John Bergstrom, owner of the Bergstrom Automotive Group dealership chain in Wisconsin, said the buyers having the most trouble are those who are trading in a car they have owned for just a few years. Because they don't have much equity in their vehicle, or may even owe more on the loan than the car is worth, banks increasingly are requiring these buyers to produce hefty down payments.

"The challenge is affordability," Mr. Bergstrom said. "People's bills are getting higher, and then they're squeezed on gasoline and they're squeezed on milk and so forth. When they look at a car, they say they can't really afford them."

The tightening also has hit dealers as the car makers' finance arms raise the cost of the "floor plan" credit they offer dealers to buy cars for their inventory. Dealers typically repay lenders for these loans as each vehicle is sold.

Existing bonds made up of floor-plan loans of the three auto-finance arms total $25.8 billion, according to data provider ABSNet. Ford Motor Credit and GMAC lead with $12.7 billion and $10.6 billion, respectively. Both companies have had unprecedented trouble attracting investors in floor-plan assets in recent months, people familiar with the matter have said.

That has prompted the finance companies to get tougher on dealers with weak finances, raising their rates and fees for some. This makes it costlier for dealers to buy cars, eroding their margins. In addition, dealer inventories are getting leaner, meaning potential car buyers have fewer options to choose from.

And since GMAC and Chrysler Financial are both controlled by private-equity group Cerberus Capital Management LP, each is now being run to maximize profits, not auto sales. Last week, one of GM's largest Chevrolet dealers, Bill Heard Enterprises, closed all 14 of its dealerships after GMAC canceled the dealer's credit line.

By: Aparajita Saha-Bubna
Wall Street Journal; October 1, 2008