Your comment should be the topic of its own thread lol. I’m going to dip into Eric-levels of text-walls because I really want to crash the LH servers too.
There’s a ton of analysis looking at vehicle vintages to assess their target residuals over X number of months and miles on the odometer. To your comment, sometimes the lessor subvents the RV with a higher number to boost volume via leases. It is definitely a form of a untaxed rebate, even if the average buyer never sees it as such. But since it’s an insidious incentive, it’s too easy for the automaker and its captive financing arm to get addicted.
If the Financial Services side starts to rapidly drop/correct the resids, it pisses off the sales side since now leases become seriously unattractive (see the Merc EQS). And if sales is pissed they don’t order new units to be delivered to the showroom. So the financial services side is under constant pressure to mark up resids since the problem of the lease return bombing the lease portfolio is seen as a kicked can down the road.
Unfortunately, leases usually aren’t all equity financed sitting on the captive automaker’s balance sheet. Many leases are sold off, or the liability side of the lease balance sheet is propped up with advance/debt coming out of financial warehouses and other asset backed lines of credit. The folks ultimately financing the leases have access to a ton of tools tool.
Eventually the leases being originated with garbage MFs and Resids become very undesirable or no longer fit in the financial warehouses. If the leases become trash collateral it causes a problem really fast since liquidity freezes. Trashing good collateral with trash collateral isn’t as easy as it once was, and I feel like these EQS leases are exceptionally bad given how rapidly the vehicles are losing real-world RV.
During the 08/09 financial crisis, the USA (thanks Bush AND Obama!) had to push $80 Bn into GM and Chrysler. While most attention was paid to the balance sheets on the R&D/manufacturing side, the captive financing side needed monstrous support too. GMAC alone took $17 Bn; Chrysler Financial only $1.5 Bn.
The damage to the loan portfolio was staggering delinquencies and losses that crushed the “0% for 72 months” trash being originated. The damage to the lease portfolio was mostly in the resid where the collateral on the leases was nowhere near as valuable as what was originated.
By 2012, Chrysler Financial had struck a deal with TD Bank and also found ways to stem the collapse of their vehicle values… which helped neutralize their overall losses from TARP to $0. I think the government actually made a slight gain overall from this tranche.
GMAC went through Ally financial, and with all the shenanigan’s you would expect from any mega-deal, everyone eventually “came out fine” with respect to how TARP was assessed. Whether or not this was just a can-kick down the road is debatable. But the US Treasury claims an overall $15 Bn gain from the total TARP program and its liquidation of holdings of Ally financial. So again, thanks Bush AND Obama!
