CNBC: Flaherty Slams GM Aquisition of AmeriCredit

General Motors will acquire auto-finance company AmeriCredit for $3.5 billion. I discuss the deal with Rebecca Lindland of IHS Automotive, and CNBC hosts Melissa Francis, Larry Kudlow and Amanda Drury. Here’s a transcript:

Melissa Francis:  All right, it is time for our viewer outrage segment.  General Motors, back on the acquisition trail, agreeing to buy auto finance group, AmeriCredit for three and a half billion dollars, this with taxpayer money.  GM’s CFO Chris Liddell defending the deal on Squawk on the Street earlier this morning.

Chris Liddell:  We thank that it helps in a responsible way to increase lending to increase leasing and therefore increase sales.  You know, by definition that makes the company more attractive.  So it helps from a valuation point of view. 

Melissa Francis:  So, not surprisingly, we received lots of emails on this question.  Should GM be allowed to buy AmeriCredit with your money?  Here is what you said.  Julie from Florida said, no way.  It is absolutely absurd for many reasons not the least of which is the fact that lending money to people with bad credit was part of the problem that got us here in the first place.  Kraus from Kentucky says, I think it is a sham…what the US taxpayers had to do with the bail out of GM and now we purchased a sub prime loan provider?  Ridiculous.  James countered, it takes money to make money.  They made a great deal.  Joining us now to discuss the deal is Rebecca Lindland Director of Americas for IHS Automotive and Peter Flaherty, President of the National Legal and Policy Center.  Peter what is your take?

Peter Flaherty:  I think this is a huge mistake that underscores the folly of the auto bailout in the first place.  It should be noted that most GM dealers already finance vehicles through GMAC which is now known as Ally Financial.  What GM is doing is buying a sub prime auto lender so that it can get access to credit for its customers that GMAC would not touch.  Some of these customers have credit scores down to 500.  In the past AmeriCredit has lent to people at interest rates as high as 23%.  As you said, we have seen this movie before.  If AmeriCredit is the Countrywide of auto lending, how is this good for taxpayers?

Larry Kudlow:  So Rebecca, lets continue that. It takes money to make money.  Ok, that is what one of the viewer emails said.  Fine, but whos money Rebecca? GM is still in hock to the taxpayers to about forty five billion dollars, by my account.  And to Peter’s point, they already have a link to a finance arm, GMAC.  So why are they playing with the taxpayers money?

Rebecca Lindland:  Well Larry it is important to remember that the goal here is to maximize the IPO, which in turn then will help taxpayers get their money back.  It is important to also remember that GM, if they don’t sell a car to somebody, they are leaving money on the table because they actually make money selling cars now, which was not the case before.  So, we are also not opening up a free for all for sub prime lenders.  That is not what this is about.  It is about those people whos credit has taken a hit for a variety of reasons.  It does not mean that it is just a random free for all here.

Amanda Drury:  Peter?

Peter Flaherty:  Rebecca, maybe GM’s next acquisition ought to be a repo company.  Now if GM were operating as a private company, under normal circumstances, I’d have less of a problem with this.  But it is not.  It is in a political straight jacket.  It cannot take on the unions, even though many of its competitors have non union work forces.  It has to build the cars that the politicians want, not what consumers want.  Whether it is in terms of these CAFE standards that have been tightened or building electric cars like the Volt that consumers may not want.  If they are not selling Volts, what are the politicians going to do?  They are going to pressure GM to offer better financing terms so they can sell these things and the taxpayers may be ending up as the ultimate owners of the cars.

Amanda Drury:  Peter, how do you respond to Rebecca’s point that this acquisition essentially makes GM more valuable at the time of the IPO when that comes?

Peter Flaherty:  Yes.  Didn’t Barack Obama accuse the GM bondholders who were illegally wiped out by him of being speculators?   If this is just all about speculation, well, do we really want any part of it?  Ed Whittaker is wheeling and dealing with taxpayers money.  He has a credibility problem.  Remember the TV ads in April when he claimed that GM had paid back the US government in full and five years ahead of time, which was flat out false?  GM paid back about seven billion dollars of the fifty two billion it owed for money that it got from TARP. 

Melissa Francis:  OK, Rebecca, how do we know this isn’t a free for all?  That was one of your points, I mean last time around, GMAC inflated the residual value on leases in order to get more cars out the door just sort of kicking the can down the road.  There were a lot of irresponsible decisions in there to help sell cars.  How do we know they are not going to do the same thing?

Rebecca Lindland:  Because the pressure to sell cars isn’t there as much. 

Melissa Francis:  Really?

Rebecca Lindland:  They have been able to consolidate.  It used to be more expensive to not produce cars than it is to produce them.  That is not the case anymore.  It is a very very different balance sheet that we are looking at now.  They have been able to close factories.  They have been able to renegotiate with the unions.  In terms of not building cars that people don’t want – that is a separate issue, but it related as GM has a lot of products that people do want and it is why they have been able maintain their market share even though they have cut core brands.

Amanda Drury:  Rebecca, can you quantify this for us, the potential benefits that you are seeing?  I mean, how much will this acquisition actually increase sales at GM?

Rebecca Lindland:  You know what Melissa, actually my colleague asked that question to Stephen Girsky this morning.  They weren’t necessarily able to put a firm number on it.  But every car that is not sold because somebody cannot get financing is leaving money on the table, because they make money selling cars now.  That is the big difference.

Larry Kudlow:  Well, yeah, but Peter, GM says this category of sub prime borrower would be about four percent of sales, that’s all.  And the cost is three point five billion.  So they are going to put out three and a half billion dollars.  They still owe the taxpayers forty five billion in round numbers for four percent of sales.  I mean, I don’t really like those numbers.  What is your take?

Peter Flaherty:  Well there is the equity argument too.  The AmeriCredit shareholders are getting a nice premium.  Something like twenty four percent and under normal circumstances, I would not have a problem with that.  But look at the GM bond holders who were wiped out completely.  I don’t think they are cheering today.  When you mix government supported politicized entities with private profit making it leaves the door open for corruption and cozy deals.  I am not suggesting that is the case here, but that is certainly the possibility when this much money is sloshing around, when people have different agendas, some of them clearly political.

Amanda Drury:  Rebecca and Peter, thank you very much for that debate.