In the financing world, an old saw about risk managers is that they‚Äôre the ones who take away the booze and the music when the party gets going.
Whether party poopers or economic circumstances or both stopped the fun, well, a lot of auto people now are rubbing their temples.
Going way back, excess gets people into trouble. It gave the Bible some great material. Did we think this go-around would be the exception? The six most dangerous words on Wall Street are: ‚ÄúThis time it will be different.‚ÄĚ
A high-octane blend of excess fueled the auto industry, driving it darn near off a cliff.
Auto makers created excess capacity, prompting them to force cars on dealers, causing bloated inventories and creating a push market.
That worked, kind of, until the endless summer of easy financing gave way to frozen credit. Until that ice age arrived, without so much as a weather warning, lenders gleefully gave loans to consumers who bought cars they really couldn‚Äôt afford.
‚ÄúThere was a feeding frenzy for transactions,‚ÄĚ Mike Kane, senior vice president-client services for CitiFinancial Auto, says at a recent Auto Finance Summit. ‚ÄúWall Street was saying, ‚ÄėGive us more loans, we‚Äôll bundle them up and sell them to investors.‚Äô‚ÄĚ
But, he says, ‚Äúwhen you have millions, not thousands, of loans out there, you don‚Äôt have enough people to call customers and say, ‚ÄėHey, you know how we financed thatF-150 pickup that you wanted last year? How about paying us back?‚Äô‚ÄĚ
Now lenders have become tightfisted. It‚Äôs playing with a lot of auto dealers‚Äô minds.
‚ÄúI used to wake up in the morning and know what a deal was,‚ÄĚ says Scott Vickery, finance director at Cardinalewayin Mesa, AZ. ‚ÄúNow, I don‚Äôt know.‚ÄĚ
That‚Äôs because he doesn‚Äôt know what lender, or if any lender, will finance a particular deal. Dealers across the country face the same woes in today‚Äôs toxic economic environment.
‚ÄúManufacturers want to stick us with as much inventory as they can, because they built it,‚ÄĚ Vickery says. ‚ÄúThen we have to worry about the capital to pay for it.
‚ÄúThen once we do get customers, they are skeptical about spending their money, if they have any left. Then the finance companies are reluctant to lend.‚ÄĚ
What a perfect mess.
It‚Äôs almost a feat that any cars were sold in 2008, let alone 3 million fewer than 2007. There‚Äôs a Latin term that applies to 2008: Annus horribilis. Translation: ‚ÄúHorrible year.‚ÄĚ
Not that 2009 is expected to be a hootenanny. But let‚Äôs look at the positives. Some good things are upon us.
One, the government finally stepped in, not only to helpand , but also GMAC. What‚Äôs the point of making cars if there is no way to finance the selling of them? If it didn‚Äôt help GMAC, too, the government would have been wasting its money on the auto makers.
Two, the art of the structured deal is back. That ends 100% financing, let alone 110% financing to also cover add-ons. Customers now must cough up a down payment. The goal is to put the right customer in the right car, one that doesn‚Äôt exceed the limits of personal budgets. Otherwise, no deal.
Three, tighter credit gives dealers the iron-clad excuse for resisting auto makers‚Äô efforts to push unwanted product on them: ‚ÄúI can‚Äôt afford it.‚ÄĚ Serious inventory management has arrived. Finally.
Four, auto makers slowly but surely are making real efforts to cut capacity. Even in the boon years of this decade (and there were six years with vehicle sales of 16.9 million units and higher), total capacity far outpaced demand. Something had to give. And did.
So let‚Äôs sweep up and fix the holes in the walls. The rowdy party is over. But that doesn‚Äôt mean the funeral is next.