Word: auto
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Dates: during 2000-2009
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...heart of the program - and the biggest cause of complaints - is an effort to reignite the process by which most banks get the money they use to make consumer loans. To fund credit-card, auto and education lending, banks typically gather up loans they already have made and pass them off to an investment bank. Wall Street firms then package these into bonds that pay interest based on borrowers' loan payments. Completing the money-recycling loop, investors buy the bonds, and investment banks pass most of that money, minus a fee, back to the lenders. The lenders can then...
That's because TALF significantly sweetens the returns that can be earned from buying the AAA-rated bonds. Take a typical auto-loan bond. A top-rated auto ABS bond pays a dividend these days of about 3.5%, or a return of $3.5 million on an investment of $100 million, as long as the bond doesn't go into default. That's actually not a terrible yield right now. Just ask anyone with a savings account. (See 5 reasons for economic optimism...
Under TALF, though, an investor has to make a down payment of just $8 million to get a loan from the government to buy $100 million in auto bonds. The loan costs 1.5% a year, or $1.5 million on $100 million, which lowers the investor's take-home return to $2 million. But remember, the investor had to put up just $8 million. That means the annual return on the much smaller up-front investment zooms to a fat 25%. Lower-rated auto loans can pay as much as 30%, but they have a much higher rate of default...
...stages of car ownership that work to the benefit of the car company and its dealers begin when the consumer buys a car, but often ends when the auto warranty expires. Once car owners have to pay real cash to keep their vehicles running, they often try to find alternatives to dealer-based service. The small business website Manta lists 135, 967 auto repair shops in its directory. There are probably many more than that but getting an accurate count of businesses that may employ only one or two people is almost impossible. The National Automobile Dealers Association, in contrast...
...sales have dropped, the relationship between the manufacturers and dealers has become extremely contentious. The dealers blame the auto companies for a lack of good products and access to consumer credit. The car companies want the dealers to buy more inventory to give them much-needed cash flow. Dealers are going out of business and fairly soon Chrysler and GM may be gone...