Detroit's Bailout: Who Really Needs the Money?

Detroit wants $25 billion from Washington to fix itself but the real problem is that without easy credit many Americans can't afford new cars

By Ed Wallace

"And this one, this is my personal favorite: One Wall Street analyst to another wrote, quote, 'Let's hope we are all wealthy and retired by the time this house of cards falters.'"—60 Minutes correspondent Scott Pelly, reading a 2006 e-mail to Treasury Secretary Hank Paulson

"This is another fine mess you've gotten us into."—Oliver Hardy to Stan Laurel

For a decade the business mantra has been that the American economy had finally evolved. From its "old line" way of performance, that being manufacturing and sales, we had transformed into a far more modern and prosperous service and financial society. For the financial pundits to prove their point, they needed to look no further than Detroit's continuing [old line] problems in making any profits whatsoever, regardless of its overall sales volumes. Meanwhile, the analysts claimed that the half-decade-long housing boom proved the new wealth of all Americans. No one caught the fact that housing construction was also an old-line industry.

The nation was told the old rules that once determined the health of the nation's economy had at last been overturned. As manufacturing shed nearly 4 million jobs and Detroit posted tens of billions of dollars in losses, the stock market soared. The nation's GDP followed, and Wall Street crowed that a new day was dawning for American wealth and financial power.

Only something was seriously amiss. And had anyone bothered to ask Detroit what its fundamental problems were, instead of dismissing General Motors (GM), Ford (F), and Chrysler as yesterday's news, much of what the nation is now going through in the seizing up of our credit markets could have been avoided.

Because many car buyers went subprime before homeowners did.

Deteriorating Standards

Long before the term "subprime mortgage" entered the American language, Detroit knew that as each decade passed more and more of its potential buyers' credit scores were starting to suffer. In 1975, if someone walked into a new car showroom with horrific credit, there was little any finance manager could do to secure him a new loan. By the late 1980s, lenders were more sympathetic to those who had fallen on hard times; with the proper down payment and a good story about their past financial woes, many with poor credit had a good chance of getting financing for their new car. And by the mid-'90s, an entire industry had sprung up to deal with car buyers with seriously challenged credit scores.

However, as the nation lost more of its manufacturing base—whose employees were buyers for Detroit's products—in this same decade household incomes remained stagnant for most, while personal expenses for food, energy, and gasoline rocketed skyward. Yet those controlling the financial news in this country had only to point at the massive increase in homeownership as proof the economy was in great shape; in fact, it was claimed to be magnificent. Of course, we know now that much of the decade's housing boom was nothing more than a mirage, powered by subprime mortgages and the potentially even more toxic Alt-A mortgages that are already starting to reset, causing even more damage to our financial system. (Note to Congress: Has anyone asked about that coming mortgage crisis?)

One thing is inevitable: Many who have stayed employed will soon be homeless, because when their interest-only, negative amortization, or interest-rollover mortgages are reset, their monthly house payment will be more than they can pay. And that will throw untold hundreds of thousands into the ranks of the nation's future subprime borrowers.