GMAC---Mike (fast)
>> general motors, the world’s largest automaker is relying heavily on its financial unit to bring in profits. they earned far more lending money, writing mortgages and selling securities than the parent company did selling cars and trucks. unit’s profit was 87.5% of g.m.’s total. if interest rates start to rise, their ability to help its patients performance, though, might be in jeopardy. we’ve been looking into that story. john, how important is gmac to the world’s largest automaker. seems like they cann’t live without it right now.
>> right now anyway, $278 billion of the $3.2 billion g.m.a. earned last year came from gmac. i guess that’s pretty substantial.
>> i guess it would be silly to say the autoperformance is bad and the finance performance is really that good otherwise g.m. would get out of the car business. how do they work snorg
>> when gmac makes a zero% loan a lot of their ability to do that comes from a subsidy of the motor company at the company reports as a marketing expense. basically, wall street, these companies, gmac and ford credit charges for underwriting. anytime gmac goes to sell a portion of its loan portfolio, wall street is lining up to buy it. so they give pretty good margins for underrite writhing.
>> how does this figure into an investor’s strategy? the fact that they’re giving out these 0% loans is cutting into the bottom line, isn’t it?
>> there’s a certain amount of fantasticed costs that general motors couldn’t cover any other way, but it’s really interesting from an investment point of view. all the stories we write here and all the tv interviews you do about whether general motors can get their act together in terms of quality, in some ways investors don’t care, because as long as the bondholders feel sort of protected, which they do, and as long as the premium that gmac pays on bonds is higher than comparable boppeds, people are lining up. so we have it figured today, only about $44 billion of equity existed in ford and general motors combined last summer. about $364 billion were invested in the dead instruments of gmac and ford credit. so basically, people are saying if i can get my hands on a gmac bond i’m going to do it.
>> that assumes on the investor’s part this is going to continue. how long do they plan to keep going with the zero percent loans? didn’t we see them try to get people off of that?
>> they keep trying to get people off of it and they can’t. not anytime soon. one of the problems people are talking about now is negative equity. more and more car buyers are showing up, still owing money on a prior car when they want to buy a new car and that’s sort of accelerating and people are starting to get nervous about i. but so far, the loan performance of gmac and ford credit have been holding pretty steady. the question is, if we do get into a higher interest rate environment, we quoted steve lambetter of nissan acceptance corp saying because of that ratchetting up of interest rates, you could wind up enstead instead of 60.7 million car sales in the u.s., you could wind up with 15.5 in a year or two. that would cause a lot of people to lose a lot of money if that happens.
>> we’ve seen toyota challenge the big three auto makers. they’ve actually become one of the big three, i guess, ousting ford. what are they doing in the financing area?
>> well, they’re starting to target―traditionally, gmac would go a little lower into the credit sector and borrowers would wind up in chevrolets and buicks. now toyota is going after that. toyota has increased rebates twice as fast in the last year as the rest of the automakers. not because they have too many factories or too many people on a pension or something. toyota is pumping money through the finance unit because they’re taking market share and profit away from detroit that’s going to be an even bigger story over time now.
>> all right. thank you very much.
>> thanks, mike.
>> under the federal government’s fed call program, hospital payments for older americans will exceed income for the first time, nine years earlier than expected. john snow talked about why cash flow will turn negative this year.
>> hospital pames to the elderly under the u.s. medicare program will exceed income for the first time this year. medicare report shows the program will run out of funds in 2019. that’s seven years earlier than expected.
>> serious as the issues are facing social security, the medicare trustees report reveals that the problems confronting the medicare system is even greater. the challenge is there, much more significant in terms of their impact on general revenues, and the deficit and the economy as a whoa.
>> john snow said the rising costs of healthcare is the primary reason cash flow will turn negative this year. the trustees said the social security program of retirement benefits will start running out of money in 2018.
