Sunday, July 27, 2008

Go Down Mo' Town

The latest round of catastrophic news for American car makers comes from their financial subsidiaries. Detroit has long offered in house financing to capture extra profits from car buyers in the form of high interest car loans. They continued this strategy when leasing became popular, charging a fixed amount monthly, after an often exorbitant and add on fee laden down payment, for the use of a vehicle over a set amount of time. The amount of time that the lease agreement extends to is flexible. As car prices increased, over the years, in order to keep monthly payments under control, so did the length of the average lease. Currently, it is not uncommon for car leases to extend for five or even six years.

In the last year, as gas prices have increased. American automotive preferences have been rapidly changing. Pick-ups, vans and bloated SUVs, often powered by large displacement, gas guzzling, Detroit iron, are no longer coveted by the American commuter. The Big Three have found that there is no longer any market for their in house, previously leased vehicles. Even though they garner a more than fair return on the initial lease agreements, they rely on the resale of these vehicles for the lions share of profit. Since all of these companies are bleeding red ink and have been for decades, the loss of a previously lucrative revenue stream is not welcome news.

Chrysler has already announced that their financial arm will make no more leases. GM and Ford will almost certainly follow. The problem is that over the next several years, as current leases expire, these companies are going to have to write off huge losses on lease returns.

Maybe oil will return to $25 a barrel. Once he gets back to the Oil Patch, George Bush could make it happen, through sheer force of will.

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