One of President Obama's supposed strengths heading into this year's
election is his decision to bail out automakers, in particular General
Motors. GM made record profits in 2011, though that success has slumped a bit in 2012. A story published Friday in Investors Business Daily suggests part of GM growth can be attributed to increased use of subprime auto loans.
As with home financing, a potential car buyer's credit score is rated on a scale between 300 and 850.
In 2010, GM bought "subprime specialist" Americredit and renamed it GM
Financial. GM Financial provides more than 8 percent of loans offered by
GM. And of those, 93 percent are to buyers with credit scores below 660,
the cutoff between prime and subprime.
Not only is government-owned GM making more subprime loans than before, the loans it is making are increasingly going to those with worse credit scores. IBD notes "From Q4 2010 to Q1 2012, GM Financial loans to customers with the worst
FICO scores — below 540 — shot up 79% to more than $2.3 billion."
A GM spokesman says credit losses "have not risen above 5.5% since late
2010." However, that would certainly change if the country was to enter
another recession. As we learned in 2008, risky loans don't appear to be
a problem when the market is growing. It's only when the music stops
that risky investments becomes losses. Given that the taxpayers still
own 500 million shares of GM, this is a risk that concerns all of us.