Chrysler announced Friday that it was closing down its auto lease business. This is the beginning of sub prime like write downs for auto companies. SUV’s bought three years ago, now being returned to dealers with a true value probably 50% below the auto company’s book value. Nobody want to buy a used SUV getting 15 MPG.They will be lucky if they can sell them for scrap. Ford took a $2.1 billion dollar write down on the value of its lease portfolio for just one quarter’s worth of returned cars. So we are talking about perhaps $9 billion in Ford financing losses for the year. Let’s assume both Chrysler and GM have similar problems and that the two big banks in auto leasing Well Fargo and Citibank have equally heavy portfolios filled with heavily marked down SUV’s. Could this be another $40 billion of finance writedowns this year?
Of course there is the other side of the auto finance business which is the straight auto loan business, where the bank is holding the car title as collateral for the loan. Here the sound of jingle mail (customers walking away from the payments and mailing in the keys to the bank) is getting painfully loud.
Former Fed Vice Chair Alan Blinder has a suggestion for a federal bailout of older more polluting cars, he calls “Cash for Clunkers.”
Cash for Clunkers is a generic name for a variety of programs under which the government buys up some of the oldest, most polluting vehicles and scraps them. If done successfully, it holds the promise of performing a remarkable public policy trifecta — stimulating the economy, improving the environment and reducing income inequality all at the same time.
Fairly wild idea, but we will need imagination in the next few months. Worth considering.