Counterparties: Electric car loans
Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.
Rising demand for cars is manifesting itself at both ends of the auto spectrum.
Carrick Mollenkamp has a great long read today detailing the recent surge in subprime auto loans across the country. 6.6 million borrowers took out subprime auto loans from car dealers in 2012, an 18% increase from the prior year. More and more of those loans are being bundled, sliced and sold to yield-hungry fixed-income investors: so far this year, lenders have sold $5.7 billion in securities backed by subprime auto loans, up 13% over the same period in 2012.
It’s not just the school-bus drivers and local cooks that Mollenkamp interviewed who are behind the auto boom. Electric carmaker Tesla Motors — whose marquee customers include Matt Damon, George Clooney, and Leonardo DiCaprio — announced on Tuesday that it’s rolling out a “revolutionary new finance product” that the company says will turn the “true net out of pocket cost” for one of its mid-range Model S sedans to less than $500 per month. It was an initiative that Tesla CEO Elon Musk had been teasing on Twitter for days, calling it “really exciting.”
Investors found Musk’s announcement to be a bit wanting; as the Wall Street Journal said it in a headline: “Tweets Lift Tesla’s Shares; Lease Offer Deflates Them.” Part of the tepid reaction had to do with what Joe Weisenthal said were the “ridiculous assumptions” underpinning that under $500/month estimate. To get monthly payments down that low, you must:
- Reside in one of six states (e.g., California, West Virginia) that offers a generous incentive for buying an electric car
- Be able to deduct your Tesla as a business expense
- Assume that the hour that you would have spent going to the gas station each month is worth $100
Absent those conditions, the effective monthly cost of the car more than doubles to $940 per month.
The episode also highlights Musk’s proclivity for making bold but ultimately underwhelming proclamations. To paraphrase Musk’s PayPal co-founder Peter Thiel: We wanted a colony on Mars. Instead, we got the option to receive the same trade-in value as a Mercedes-Benz S-class sedan after 36 months. — Peter Rudegeair
On to today’s links:
Your Daily Outrage
A 25-year sentence for a nonviolent, first-time drug offender – Conor Friedersdorf
“Marijuana possession arrests are a scandal, like Love Canal and the Ford Pinto were scandals” – New Inquiry
And, of course, there are many more links at Counterparties.