GMAC's Billion-Dollar Write-Off Shows Ripple Effect of the Used Car Market
Just as an earthquake in Chile can start a tsunami in Hawaii, the used-car business has a profound ripple effect on the new-car business.
For instance, a drop in used-car values forced GMAC to write off $1.2 billion on the value of used cars coming back from leases in 2008, according to the GMAC 2009 annual report, filed today with the SEC.
Thanks in part to those losses and a newfound dedication to avoiding risk, GMAC all but abandoned leasing new cars in late 2008. The company still takes a conservative line toward leasing after re-starting the lease business in late 2009.
In leasing, the auto lender, not the consumer, takes the risk that the car's value at the end of the lease may be less than predicted. High gas prices, low demand and the U.S. recession clobbered used-car values in 2008. That generated billions in losses for major auto lenders, including GMAC, Ford Credit and Chrysler Financial. And in turn, that hurt their ability to make new-car loans and leases. GMAC had a net loss of $10.3 billion for 2009.
The lion's share of GMAC's financial problems can be laid at the feet of its mortgage operation, which cratered in 2007, thanks to the drop in subprime mortgages. That signaled another big ripple effect: the start of a retreat in the housing market, and ultimately the whole financial industry.
That's not to say it's all smooth sailing for auto lending. Overall demand for autos is still low, even though quarter to quarter, GMAC is increasing its number of new loans (see chart). In the fourth quarter of 2009, GMAC's Global Automotive Services unit had net income of $309 million, versus a net loss of $346 million in same period the previous year. For all of 2009, GMAC's automotive sector had net income of $655 million, down from $2 billion in 2008.
For 2010, GMAC said today it expects continued weakness in the overall economic environment, including high unemployment and "stress" in the capital and housing markets.
Chart: GMAC