In the US, the debate is hotting up over the automobile industry’s access to state aid. The WSJ reports today that Dems are seeking to outflank the immobile Republican administration with a broadside from the Hill; pushing legislation for a Detroit bailout as early as next week.
All this, of course, comes on the heels of a worsening outlook for General Motors, which by most accounts, does not have the cash to survive the year.
There are naturally broader issues at stake, though. Automakers might be an iconic US industry, but they’re not the only US industy, and they’re certainly not the healthiest industry, crunch or no crunch. The truth of the matter is that Detroit has been languishing for years as a result of a structurally altered economic world. And bailing out the carmakers has, with that altered reality, always been lurking in the background as a Democratic political totem, hitherto dormant, now suddenly awakened. Saving GM is Democratic wish-fulfilment.
What then will happen when the next all-American industry hits the wall? Because surely some will. Can we expect a bailout of WalMart? Boeing?
The briefest of glances at US corporate bond spreads will tell you something pretty clearly: there is indiscriminate carnage in the debt market, which may well drag a host of large companies down and damage others for years.
The auto-industry though, does look like it’s next. Over in Europe, BBC business editor Robert Peston writes on Wednesday:
For me, the most interesting story of the past 24 hours is that VW, the stressed German carmaker, is trying to raise €2.8bn (£2.2bn) from the European Central Bank.
It plans to raise cash from the ECB in exchange for €2.8bn of securities backed by car loans.
In effect, the ECB – and ultimately taxpayers in the eurozone – would be financing purchases of automobiles.
Crikey, is all that comes to mind.
What next?
Perhaps Marks & Spencer will be able to dump its unsold jumpers and knickers on the Bank of England…
Auto-loans, as an asset class, have long been popular in securitisations. (That’s why many carmakers have their own banking businesses.) Cars are probably the single most expensive items consumers purchase after their homes: making loans against them not that dissimilar to the mortgages which go into mortgage-backed securities. You could even say the auto-loan securitisation industy was more sensible, since it didn’t take as an unintended primary assumption the notion that underlying assets would always appreciate in value.
When you think about it, it’s not that unusual then that VW is going to the ECB. On an institutional level, VW is doing this through its registered banking arm. Non-carmakers are using auto-loan backed securities in liquidity operations too. Macquarie – wholly a bank – did it in July. To turn things around: if accepting autoloans as collateral in liquidity ops is tantamount to bailing out the automakers, then accepting MBS as collateral could equally be said to be bailing out the housebuilders.
As for M&S and knickers…the only reason there isn’t such a thing as intimate-loan securitisations is because underwear doesn’t cost much. If a pair of pants cost £10,000, you’d probably need to take out a loan to buy them, a loan which would probably be securitised. Even so, clothes are securitised: through credit card recievables. Which incidentally, should also be eligible as collateral at the ECB (see 6.2.1 for details). And a few years ago, before selling it to HSBC, M&S indeed did operate its own customer credit card operation, financing for which came through securitisation.
The point to this rather tangental meander being that any business which uses securitisation to raise cash is in trouble and will either need liquidity support or be at severe risk at going bust in the coming months.
So it isn’t really all that incredible that VW is looking for liquidity support from the ECB. The incredible thing is that nearly the entire consumer-debt economy will need liquidity support and it probably won’t be able to get it.
The credit-card unwind is coming.
Related link:
The mystery box – FT Alphaville
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