Three out of four cars leased all the way to term are returned to the lessors for a loss as the assumption was made that residual values would be higher than they ended up being. Moreover, a recent Forbes magazine article argues that too much accounting flexibility has overstated the profitability of finance companies for the last two years. High risk lending always looks profitable during the boom, but big losses come with an economic downturn. In a sign that the market is beginning to discount coming trouble, the yield spread on bonds of Associates First Capital, America's financing juggernaut, recently doubled. Yet the leveraging continues.
Strange things happen in a credit bubble.
In the face of gloomy talk of Y2K, American consumers are dutifully preparing for the best. The chart of America's savings rate looks like a Beanie Baby thrown off a cliff. A key point that is not understood is how the entire economy has been transformed to satisfy US consumption. With savings falling and debt rising, the consumer's ability to keep spending is in great doubt, even with a Fed intent on sustaining the credit bubble. The day may not be far way when the marginal borrower no longer has easy access to credit.