Dear ,
General Motors, the United States, and Predatory Lending
We hear the term Predatory Lending all the time but I'm not sure many people could actually tell you the definition so let's start there.
"But what is predatory lending? And what are the conditions that make it flourish? "Predatory lending is a term that is used a lot now, but people mean different things by it," says David K. Musto, a finance professor at Wharton and co-author of a paper titled, "Predatory Lending in a Rational World,"with finance professors Philip Bond and Bilge Yilmaz. The paper is an analysis of the theoretical incentives for lenders to issue predatory loans.
"What we take it to mean is [a situation where] I make a loan to you that reduces your expected welfare," Musto says. "That is an example of me being a predatory lender.... I, the lender, know something extra about how this loan is going to play out."" (Source: Victimizing the Borrowers: Predatory Lending's Role in the Subprime Mortgage Crisis)
To put it another way, predatory lending usually means a loan that is bad for the borrower.
OK, now that we are clear on the definition, let's take a look at why I am even talking about this.
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I find this very troubling on several levels. First and foremost, it is just another example of the fact that nothing has changed. Making loans to people that couldn't really afford them didn't work last decade and I don't think that it will turn out well this decade either.
But there is something else that I find troubling on a deeper level. Take a look at this chart.
As you can see from this chart, 78.5% of the loans generated by GM's financial arm have been "extreme subprime", meaning those with a FICO (credit) score of 540 or less.
"Predatory lending usually means a loan that is bad for the borrower"
Why would someone have a FICO score of 540 or less? Would it be because they don't make much money? Not necessarily. Let's say you are just starting out, you live at home, don't make much money, but you get a small loan to buy a stereo or something. Because you have very few expenses and you make all of your loan payments on time, you would have a pretty good FICO score even if you don't have much money.
What does the FICO score actually measure? It gives your history of how well you have paid back previous loans and bills, it shows how much of your available credit you are using, and it gives some insight into whether you can pay back any additional debt. One other thing about the FICO score. It helps establish what interest rate you will be charged. The lower your credit score, the higher the interest rate you will be charged because of the extra risk the lending institution is taking in loaning you the money.
A FICO score of 540 or less tells us that that person probably can't realistically take on more debt and pay it off successfully. So let me ask a question. Do you think giving a high interest loan to someone with a FICO score of 540 or less is really in that person's best interest? Will their life be made better with the burden of another bill that they can't pay?
"Predatory lending usually means a loan that is bad for the borrower"
Now to the point that makes this so troubling to me. Who is the biggest shareholder in GM? That's right, the US Government. According to the Treasury Department, the government still owns 26% of GM. So while the government doesn't tell GM how to run the company, the government certainly has to know that this is going on because that chart came right from GM company reports.
Why is the government allowing GM to victimize its customers like this? Isn't it the governments job to protect its citizens from predatory lending practices like this?
Can you say "conflict of interest?"
This is what happens when you have the same entity involved in ownership and regulation of that ownership. On the one hand the government is supposed to protect its citizens. On the other hand, the government needs GM stock to get over $50 a share (currently $19.67) so the government can get its money back without a loss.
And lest you think this is just a one off, let me give you another quick example. Leading up to and throughout the financial crash there have been a myriad of allegations of wrong doing. Not just petty stuff but outright fraud, things like the Robo-document signing controversy, etc. And yet three to four years later, hardly anyone has been prosecuted. The government's response when asked is that while all these folks made "mistakes" none of those mistakes rose to the criminal level.
Yet with the Libor Scandal in Europe, the US government is already preparing indictments of foreign banks just weeks after the scandal came to light. Why couldn't they do that with our financial scandals? What could be the difference? Could it again be that conflict of interest between owner and regulator? The government has such a financial stake in the US banks now that they can't take a chance on having the banking system made any weaker by a bunch of prosecutions, can they? They can't perform their number one role as regulator because it would harm their financial interests!
Now let me be very clear here. I'm not aiming this criticism at one particular party or the other. It's the inherent conflict of interest between financial interest and regulator here that I want to spotlight. I think it is unrealistic to expect the government to be able to fill both roles at the same time and so the sooner they get back to their number one role of governing instead of owning the better in my opinion!
Looking to the Future in Manufacturing
Would you like some good news for a change? As we play defense (from an economic stand point) right now it can be easy to get discouraged. One of the things I do to try and combat that is to start planning strategies now for when things do finally start to improve, because I have no doubt that eventually they will.
One of the ways I develop those strategies is by reading a lot and doing a lot of research. I look for articles about interesting things going on in different industries. Those articles help me to see what companies are leading the innovations and therefore most likely to benefit in our changing world. Doesn't mean that all of those companies will be a great investment but it gives me a place to start analyzing.
Anyway, I ran across this article the other day from ForeignPolicy.com.
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The future of manufacturing is in America? How can that be? Folks, this is a really interesting article and well worth reading. Let me give you one example.
"A type of manufacturing called "additive manufacturing" is now making it possible to cost-effectively "print" products. In conventional manufacturing, parts are produced by humans using power-driven machine tools, such as saws, lathes, milling machines, and drill presses, to physically remove material until you're left with the shape desired. This is a cumbersome process that becomes more difficult and time-consuming with increasing complexity. In other words, the more complex the product you want to create, the more labor is required and the greater the effort.
In additive manufacturing, parts are produced by melting successive layers of materials based on three-dimensional models -- adding materials rather than subtracting them. The "3D printers" that produce these parts use powered metal, droplets of plastic, and other materials -- much like the toner cartridges that go into laser printers. This allows the creation of objects without any sort of tools or fixtures. The process doesn't produce any waste material, and there is no additional cost for complexity. Just as, thanks to laser printers, a page filled with graphics doesn't cost much more than one with text (other than the cost of toner), with 3D printers we can print a sophisticated 3D structure for what it would cost to print something simple. "
I would encourage you to give the whole article a read. If even half of the stuff in this article pans out the future is going to be very exciting!
Until next week , Protect Your Wealth!
Sincerely,
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