GMAC immediately announced looser credit lending standards that could make approximately 60 million Americans eligible for its car loans and leases. The company also said it would expand further into the retail banking industry with plans to access even more funds from the Treasury’s Troubled Asset Relief Program (TARP).

GMAC will “continue to pursue” other ways to boost liquidity, including applying for a Federal Deposit Insurance Corp. guaranty program and attracting retail deposits from consumers, Toni Simonetti a spokeswoman for GMAC told Bloomberg News.

“This is part of our strategy to position GMAC for long-term stability,” said Simonetti. “The reason we’re doing this is so we can provide credit to consumers; we’ll put these funds to use right away.”

The Federal Reserve granted approval on Christmas Eve for GMAC to become a bank holding company – if it could prove it had at least $30 billion in capital. The approval gives GMAC access to financing under the $700 billion TARP Program. To raise that $30 billion, GMAC – owned by GM and Cerberus Capital Management L.P. – convinced about 75% of its bondholders to restructure outstanding debt. Details of that deal were not released.

The agreement represents another new bailout from the Treasury’s TARP program – this time for the auto finance industry. The rescue plan was originally approved by Congress to buy troubled assets from banks. It has since been tapped by the Treasury to prop up investment banks, troubled insurers, and now carmakers and their finance companies.

“Philosophically, I’m not very happy about the fact that the government has to save an auto-finance company because management ran it into the ground,” Thomas Atterberry, who helps manage $3.5 billion in fixed-income assets at First Pacific Advisors in Los Angeles, told Bloomberg News. “The relationship with GM is probably a key reason it’s being bailed out.”

But some analysts applauded the government’s move.

“If you bail out GM, but no one can afford to buy the cars or get financing on the cars, the cars will just sit there on dealers’ lots,” Scott Talbott, senior vice president of government affairs for The Financial Services Roundtable told USA Today. “This is the other end of the bailout deal.”

The new credit standards could allow an additional 60 million borrowers, or approximately 20% of the U.S. population, to qualify for loans.

GMAC said that it would now provide retail financing for car buyers with a score of 621 or more on the FICO scale, a widely-used measure of Americans’ creditworthiness, according to the Financial Times.  Credit scores generally range between 300 and 850.

Many analysts draw a line in the sand at 620, considering a score lower than that to be “subprime.”  Scores higher than that are considered to be more creditworthy. GMAC had tightened its lending standards two months ago, limiting its financing to customers with credit scores higher than 700.

With its credit rating mired in “junk” territory, GMAC has been locked out of credit markets in recent months. The company only financed 6% of GM’s retail sales in November, as compared to almost 50% a year ago. GMAC did not write a single lease in November.

GM also sought to capitalize on the GMAC rescue by announcing new low-interest and interest-free offers on many of its vehicles, but only if they’re financed by GMAC. Mark LaNeve, the carmaker’s North American marketing chief, said the company is using the incentives “to encourage our customers to get back into the game.”

The new financing is the second step in the government’s General Motors’ rescue plan — a crucial hurdle that could have forced it into bankruptcy even after the company received a massive loan approved by the Bush administration.

The investment in GMAC is “part of a broader program to assist the domestic automotive industry in becoming financially viable,” the Treasury said in a statement yesterday (Tuesday).

The funds come on top of the $13.4 billion in loans the government promised General Motors and Chrysler earlier this month.

GMAC will pay an 8% dividend on the Treasury’s $5 billion of senior preferred equity. The company will also issue warrants in the form of additional preferred equity that will equal 5% of the preferred-stock purchase and pay a 9% dividend if exercised.

Source: GMAC Loosens Credit Reins After $6 Billion Treasury Loan

But it doesn’t feel like we’re there just yet…

So far, the Treasury Department, Federal Reserve and FDIC have cobbled together about $2 trillion worth of bailout programs, along with an unknown-trillion-dollars worth of implied and actual guarantees. What do we have to show for all of this financial firepower? Nothing more than a smoldering pile market capitalization and implausible declarations of victory.

Bailouts aren’t all bad, they’re just mostly bad. They’re bad because they tend to subsidize failure, rather than to underwrite future success. Failure consumes capital investment, success multiplies it. Like UN food programs, bailouts tend to land in the hands of crafty despots, rather than needy orphans. In other words, bailouts tend to produce exactly the sort of capital misallocation that prolongs economic stasis and impedes recovery.

When the TARP tosses billions of dollars at a hodgepodge of finance companies, for example, does it actually save anything of long-term economic value or does it merely preserve museum pieces?

The Treasury has funneled $150 billion into the AIG cesspool, but the beleaguered insurance company continues to stink up the place. The company just posted a fresh $25 billion loss in the third quarter, and is probably amassing another multi-billion-dollar losses for next quarter. And yet, somehow, in the tortured logic of the powers that be, it’s okay to waste $150 billion on AIG, but not to waste $25 billion on GM, Chrysler and Ford.

The logic, if you can follow this, is that AIG’s failure would be a “systemic risk,” GM’s failure would merely be a catastrophic. To be clear, GM doesn’t deserve a bailout any more than AIG does…or any less. AIG miscalculated in such a spectacular fashion that it will receive six times the money that GM will NOT receive. Does that make sense?

In some ways, yes. No one wants a systemic risk walking around on the streets. But at the same time, what do we gain over the long term by resuscitating a model of incompetence like AIG, when we could be investing billions in lots of competent enterprises.

If the brain trust at AIG did not realize that policy-holders sometimes file a claim, too bad for AIG. It should go bankrupt. A blind monkey could write an insurance policy without considering the risk of a claim. A blind monkey could also figure out that if you write lots of policies on the identical risk – or family of related risks – you can kiss your actuarial assumptions goodbye. But blind monkeys almost never rise to the top ranks of a major insurance company.

We’ve got nothing against blind monkeys, but we don’t believe they should receive multi-billion bailouts from the Federal Government. Because, you see, when blind monkeys fail, sighted mammals can take their place, and usually operate a business more successfully. That’s called, “Economic Darwinism”…and we could probably use a little more of that about now.

If we’re going to waste $700 billion…or $2 trillion…let’s waste it on the folks who are building successful businesses…not on the folks who have demonstrated a penchant for colossal failure. Alternatively, let’s waste it on the folks who are trying to save their homes. In other words, let’s waste it on the effort to restructure existing mortgages. As a last resort, we could waste $2 trillion subsidizing journalists who write daily financial columns containing the words, “Rude Awakening.” But this would truly be a last resort.

If the government really wanted to INVEST the TARP funds, rather than squander them, it would buy a $25 billion interest in America’s nine BEST companies (whatever those might be). But that’s not the TARP’s mission. The TARP’s mission is to throw good money after bad, with the hope that the bad money becomes good again.

Good luck.

The TARP, itself, is a troubled asset. In fact, this particular tarp is beginning to look an awful lot like a shroud – an ornately embroidered gossamer that the Treasury Department is wrapping around the lifeless remains of the financial sector. The Treasury Department continues to insist that this shroud…er, tarp…will restore the financial sector to new life and vitality. We don’t believe it.

The financial sector is more King Tut than Lazarus. It will not come back to life, at least not in anything resembling its current form; it is dead already. The pyramids and the gold and the perfumes did not make King Tut any less dead. His 5-star Egyptian mummification/spa treatment did not bring him back to life. Likewise, dressing the ashen frame of brain-dead finance companies in $700 billion worth of bailout baubles will serve only one purpose – to send $700 billion into the afterlife as well.

Don’t send your money there too. Beware the financial sector…still.

Source: Bailout Fatigue Syndrome

Villains are created, emotions are stirred, and then the simple solution is offered. And the people think, “What idiots we were not to think of this idea before. Yes, surely if we kill all the Jews or Christians or Muslims or Buddhists or Hindus or the Red Indians or yellow-skinned or white-skinned or brown-skinned or black-skinned people the world will be a better place. Such a simple solution.”

Politicians and rulers appeal to the emotion of hatred. Societies that breed on these motions end up soul-less and eventually die. Historians are left to uncover and catalogue the mass graves and scarred hearts. A man in love does not appeal to the emotion of hatred. In fact, quite the opposite. The beautiful young lady casts a halo of possibilities to the impossible.

His income may be small, her spending habits may be large, but – when you are in love – it does not matter. Eating at expensive restaurants every day and shopping in the well-lit malls may not be affordable, but the person in love ignores it. This is only the courtship period, he consoles himself. Visiting her family and seeing her immersed in a life of luxury does not deter him. His love – their love – will see them through.

She will change, he thinks and we will move to a more modest lifestyle. He must have some hidden wealth to keep us going, she thinks, as she clings on to her lifestyle. Meanwhile, they cling to each other. And they cling to hope. When the lights are on, they are in love. When the lights are switched off, they swim in emotions of hope and optimism for the future.

But one day, the lover boy wakes up. He has bills to pay. Conquering his weakness for his love, he begins to suggest that they eat out less often, at more modest places. How about some home cooked meals? Very soon, love evaporates. Other emotions set in. The bills are still to be paid.

And the peasants wake up. They have no one left to kill. They have knocked out all the people they were told were their enemies. But they are still poor. The rulers are still rich. They begin to think of who the real enemies are. They think rationally. And a new emotion sets in.

So there is nothing surprising when investors use their emotions to make money. After all, we use our emotions to vote, to fall in love and find our life partners. So why not use our emotions to make money. Emotions are the reasons we have failures. “Life”, said the divine Buddha “is suffering.” It is these emotions and expectations that we have which cause that suffering.

But who cares what the late Buddha has to say. We all need our quick fix. We all have our dreams. If someone walks in and sells you a dream, you will grab it. You will buy it. You will then preach it for him. Your greed will take you in that direction. Buddha or no Buddha, you have chosen the path.

Markets, they say, are ruled by fear and greed. And they are. Everyone wants to make money. A lot of it. And not work for it. So when the TV news channel tells you to tune in for the “expert’s best buy or strong recommendation”, everyone stands around waiting. With great expectations. Emotions are charged. Greed rules. Salvation is soon to be upon us.

And the expert gives his view. They give you a name of a hot stock. And it rises. Money has been made. The expert becomes a guru. More followers flock to him for counsel. His calls get more outrageous. More bold.

In a “bull” market – which, by definition means that everything you buy is going up – all the calls of the great guru will always rise in value and give profits to his followers. The guru becomes a mega guru – the TV channels beg for his presence. And then the tide turns. For reasons out of the guru’s control, the markets turn sour. There are more sellers than buyers. More people have fear, they wish to sell. The number of people who are greedy declines, there are fewer buyers.

When there are more sellers of anything and less buyers, the price of that product will always decline. The same logic of demand and supply applies to the price of a share.

The followers lose money. Sometimes they lose all their money. The mega guru’s views are no longer hailed by anyone. But the TV channels have to keep their 24×7 electronic bombarding of our brains. They analyse the history of the guru. What did he say, what made him right, what did he get wrong? The analysis is meaningless. It merely helps the TV channel fill in another 30 minutes of garbage to numb your senses. Meanwhile, they look for another guru to present to their viewers. Surely there must be some guru who can make money for all of us when markets are going down?

The internet makes everyone vulnerable to deceptively easy ways to make money. And the invitations to get rich pour in via email. Of the 500 million people with internet email ids, you have the honour of being discovered as a “badly needed friend”. Someone in Africa – who was the wife of some deceased leading politician – writes to you. “I know you will help me”, she writes,” recover the money that my late husband left for me in a bank account in Switzerland. Please send me your bank account details”, she urges you.
“I can use your bank account to get the money out of there and then share those millions with you”, she writes with honest simplicity. “By the way”, she asks innocently, “can you also send me your credit card details?”

The email promises you the impossible. It appeals to your emotion of greed. Just like the guru’s hot tips appeal to your desire to make millions and do no work for it. There is a sucker born every minute, said the legendary circus master, P T Barnum. The gurus know that. The brokers know that. The 24×7 TV channels know that. That is why the TV channels have to always chatter and promise you something. They have to appeal to the greed in you.

Emotions are more powerful than rational thinking. Emotions are more powerful than a calculated risk. For every fool who accidentally made it rich by being a sucker, there will be hundreds with tales of woe – those who lost all they had. For every fool who accidentally made it rich by being a sucker, there will be many more people who followed a simple disciplined approach to investing. That is why you will never find a disciplined investor who is poor. The disciplined investors leave their emotions out of investing. The disciplined investors know that making money is hard work.

Keeping emotions out of investments is hard work. But who wants to work hard these days? There is so much money to be made every where. So much easy money. Look at the geniuses on Wall Street. They lost billions for the banks and finance companies they work for but they got their rewards and their personal profits.

Maybe people are waking up from these illusions. They are poorer, we suspect. And hopefully wiser.