#266 - When Banks Go Bust w/ Tim Lawrence

You are listening to the Independent Dealer.

Podcast with hosts Luke Godwin and Jeff Watson.

Hello and welcome to the Independent Dealer Podcast brought to you by Buckeye Dealership Consulting. Luke, it is rainy and dreary and it is cold and wet here, man.

Is that the reason you sound so weird?

It is cold and wet everywhere. It's cold and wet in my bank account. It's cold and wet in my collections portfolio. It's cold and wet in the bank weeks.

I mean, I don't know, it's a, it's a gloomy time. That it is, Jeff. That it is. But, but luckily we have somebody who's going to explain it to us dumb car dealers, because I tell you, it's moved so fast in the last three weeks. All this credit kind of running out and runs on banks and, and big time dealerships closing. I can't get my head around everything that's going on. But I think Mr. Tim Lawrence from Lease Here Pay Here Capital can kind of shed some light, right?

I hope so.

I hope so too, because I'm lost.

I'm lost.

So, Tim, thanks for being here. You're in almost sunny Southern California. It's been raining there a little bit. And you are in the, the credit markets. I mean, that's kind of what you do, right? You lend money to, to us poor car dealers so we can make a buck and, and you know, that's what we do. We're not investing in crypto. We're not.

We make one buck, Tim makes two. Yeah, yeah, that's how it goes.

Five, whatever. Really.

You know, I had, I had a salvage guy that I deal with said that the other day. He's like, man, I just love the salvage business. I just love turning one buck into ten. And I'm like, well, I'm in the wrong business. I'm only turning one buck, maybe like a buck and a half. He's turning one buck into ten.

Man.

I need to be in salvage.

That's called, that's because he's taking $5 of cash and putting it in his pocket so that way he doesn't have to pay taxes.

Tim.

But you have some real insight. You know, we talked a little bit about the America Car credit situation last week and that's kind of like, it was almost like kind of the first domino to fall within the used car industry. And some of the capital markets when they couldn't send out their, you know, their debt funding to get securitized, there was just no appetite for this, you know, subprime auto loan package that was out there.

These, well, these.

It's still, it's still going.

Explain to us, Tim, exactly what happened because I tried to explain to the audience or maybe to Jeff and maybe I just don't even know. So if you can.

I think we did a good job.

Yeah.

Insider term, Tim.

Well, so first, we have always watched American Car center because they do leasing and we have a vested interest in leasing. And for their public securitizations through the kbra, the Kroll bond rating agency, they would publicize the data on each pool and the business structure and the backup servicing and all that. And so it gave us a lot of key performance indicators to lean on as we're lending. So it's been something that we've been tracking for a long time. I think it's important to just recognize their story because they started with a few stores by Mike Shivers back before the financial crisis, and then they slowly began to expand and in I think it was 2014, David Norton was the CEO who was brought on with some other key executives to grow the business. And they had private equity funding at that time and they grew from six stores, I think to 67 in 2020. And then they were able to securitize to help finance that over time. And in that process they had really good performance, which helped their ratings and their interest rates go down over time. And at one point they had, I think it was a rating on some of the bond pools to where the interest rates that were being paid out were like 1.9% because they were so safe. And as it got closer to Covid, then those increased. I think the ones during 2020 got as high as, I think the weighted average got as high as like 3 and a half or 4% with some of the pools being like 6% being paid out on some of the lower tiered ratings. But as most private equity firms function when they see profitability is starting to diminish, then they can cut bait whenever they want. And what happened in between 2020 and 2000, now 23, is they were looking at it from a bean counter perspective, it appears, and they changed a lot of the executives to be unrelated to auto. And then we all know what happened on the inventory side. Inventory costs went really high. They had a specific pool of ACVs that they were playing in, which previously was awesome. They were doing like 3 to 6 year old Hyundai Elantras and cars that were going to last really long that they were getting off rent with these great contracts. And so they were super highly profitable and that seemed to change in some of their more recent securitizations. They were, they were saying, hey, we can only get these pool these cars now. And they didn't know how they were going to perform. As the performance started to deteriorate, they got on the watch lists and weren't able to securitize. And then they shuttered it.

Tim, do you know what the last bond, what the interest was paid on the last bond?

I did. I don't, but it was, it was definitely up there on the weighted side, I want to guess in the 6%, which is pretty high, honestly.

And so when you talk about the percentage paid on that bond at 6%, is that, is that essentially what they are paying for their capital? Is that it? Or is there something there that we're not thinking about?

Yeah, no, that, that's exactly it. And, and the way that a, that a bond works. So securitization is a collection of individual bonds that are sol investors. And a bond is essentially a note that's principal and interest that is being paid out to the investor who fronted the cash. And the way that securitizations work is they, they tier it out. So like tier one might be 2% return because it's the safest and is protected by the other tiers below it. Tier 2 might be like 4%. Tier 3 might be like 6%. And Tier 4, the D rated, the ones that Neo would say don't do these, those ones might be like 10%. And so they're sold off to investors who have whatever risk tolerance for those bonds.

But, but if one of us were getting a 6% rate, we could make that happen 10 times a week. Right? I mean that, that makes sense to me. What am I missing here?

Well, you have to consider all the other costs that are associated with it. And this is speculation. After reading about their business and seeing it in the bond agency ratings, there's a cost for the servicing and the way that they're structured is they have all these different entities to be able to protect themselves for each of their business units because the expenses are higher there. And you all know, you dealers who are listening, that the expenses on your vehicles to acquire, to recondition, to service, and then losses are higher. It really impacts the ability to be profitable. So yeah, 6% could have been meaningful if everything was priced that way from the origination of the lease contracts, but they were using the old structure with older vehicles expecting the same results.

That makes more sense. And, and what's interesting is that I Wouldn't even have thought about this process. The, the whole domino starting to fall by one, rental car companies essentially shuttering in in two in 2020. And when that happened, there was. They sold off the rental cars immediately, which created a lot of profit. But then now they can't buy those same cars. And so that was like the original domino in this whole process.

I mean, Right, that's, that's the way I see it.

Huh.

I guess I'm confused, Lou, because aren't we all having the exact same problems? You know, I guess, yeah. I'm not getting the cars I used to. I'm not getting them for the price I used to. And yes, you know, dealers that are leveraged or have adjustable rates are paying more. So is the only variable that they have, they had bloated overhead and administrative costs.

Tim?

Well, yeah, think about it this way. Private equity firms function totally different. When they invest in a business, they're expecting a certain return because they have investors that they need to appease. And so that return is usually between 15 and 25%. And they put together these portfolios, these larger portfolios to hit that yield. And those portfolios typically last five to seven years, from the beginning to the wind down. And so it's very likely that this portfolio hit its stride. It produced a ton of profit for them. And when that started to dip below their threshold, they said, you know what, it's going to be more advantageous to us to liquidate it. Let's move on to the next one.

Interesting. So interesting. You look at these as cautionary tales and you just think, okay, where are we seeing the similarities? And so much of that is like, you know, that, that growth and what they call like duration matching, right? Like I've got a, I can't have, I can't do a whole bunch of cars right now at today's cost price, interest rate built in my capital structure. And then if that changes in 12 months or six months, I'm tied into all those three to four year, you know, loans and, or leases under the old structure, under the old cost of car, under the old, you know, it's almost a great argument to have higher turn time and shorter terms on all your loans, right? Because you want to make sure you're matching the current market environment.

Hard to do that, which is what.

Happened with the whole Silicon Valley bank, right? And we'll get into that later. But Silicon Valley banks, one of their biggest issues was all those long term, you know, bonds, securities that they bought.

They got stuck with, let's stay on this AC American car credit situation just for a second because if we think about, about the problems they, they saw that that ended up with bankruptcy. And we all know that those loans are not going to perform nearly as well with their dealership closed down. Right. Man, this is a really, really. It should, it should scare the bejesus out of people who are highly leveraged and, and have cost structures that are not, you know, not going to, you know, that aren't reliable. I think, I think. So what is a, what does a dealer do, Tim?

Yeah, I think there's a, there's a lot of lessons to be learned in this if you're looking at it from a larger picture. And some of this is cool because it's directly related to the content from the DPG event that we were at in January where we were hearing from David Brotherton on the benchmarks that they had produced where the costs are increasing significantly in dealerships. Payroll costs are up, interest are up, parts are up, the ACVs are up, but you can't really put that much more on your consumers. So you have to do something. What are you going to do to manage the higher expenses if you can't get more revenue? And so it sort of pushes the fittest dealers to focus on ways that they can create efficiencies and reduce expenses and focus on the areas where that are going to make them the most profitable. And that takes a little bit of planning and sophistication to be able to do. And those dealers that are able to do it are the ones that are going to be the most successful and have the least losses in that. I think it also leads towards, well, how am I underwriting all of these deals now? And I love that NEO is one of your supporters. We've always been a fan of NEO because they help you get some of Those D and Cs to the A's and B's credit that you really want for the performance. And the more A's and B's you have, the more profitable you're going to be. The more Cs and Ds you have, the more costly it's going to be. And this is the time, as in this space, we have been all aiming towards, oh, the next recession is going to be great for us. We can't wait. We're not quite in a recession, but this has a lot of the feels of that. And since we're in that place, what often happens is there's a better credit quality customer who has a diminished credit score or ability to get a loan dips down into this subprime space. And so the more that you dealers can capitalize on those customers versus the real C's and D's, the better it's going to be.

Hey everybody, Sorry to break in, but Jeff and I want to tell you all about Buckeye. Buckeye Dealership consulting. Jeff. Reinsurance. Reinsurance. Reinsurance. Reinsurance, Correct.

Yeah, yeah. Diversification. Put that money into another account. I don't know if our offshore accounts and, or accounts on reservations, are they FDIC insured?

Well, the money's not, money's not offshore, but yes, the money's onshore, so you don't have to.

Oh, the money's onshore but the entity is domiciled offshore.

Yeah.

So would you be worried that that entity is FDIC insured?

It would be.

Okay, let's get with them and talk about it. But in the meantime, I don't even have that much money in there yet, so I'm going to work on that and I'm going to fund it this year up to the 250,000 max.

I've been funding mine for a long time, Jeff. It doesn't take long to get that 250 in there. So when you do, you can start moving around. And the other thing you can do with rising interest rates, you can loan that money to yourself at a much better rate than you can get at a lot of these other banks lending it.

Very good point.

Reinsurance can help you do so many things. And we keep telling you over and over again, call the folks of Buckeye and get this done immediately.

Don't wait like a forced shape, a forced savings account, a forced rainy day fund.

Yep.

Give them a call.

Yeah, we, we love these times. I mean the credit crisis was great, the, you know, the last big deal here. But typically when, when you slip into a recession, interest rates go lower and all we continue to see is the higher interest rates. And I've talked to dealers out there, Tim, who's whose monthly interest has increased on their line of credit has increased 40 and $50,000 a month. And there's no way to cut costs and expenses enough to compensate for that increase. So what do those people do?

Yeah, and it's kind of a self fulfilling prophecy in some ways because most dealers are on a variable rate borrowing based structure. So the interest rate goes up right away, their interest payment goes up right away. And they have covenants, usually like an interest coverage type of covenant where you're supposed to meet, let's say it's one and a half times your interest coverage. So what that means is you have to have enough revenue, or bottom line revenue, net income to accommodate at least 1 1/2 times your monthly interest payment. And so if that's the case and interest rates just went up, did you have the ability to generate more net income in that period of time? You did not. Not even close. It's all of a sudden less, and then it's sort of downward spiraling after that. And one impacts the other, which impacts the other. Your interest coverage dips and then you're in default with your lender who's saying, hey, how are you going to cure this? And you're saying, how can I cure this?

Yeah.

What, what can I do in this circumstance? And then your bank calls your note, and then you're out of business. Just like acc.

There's so many, so many similarities between that and the current banking crisis. Right. And being banks being insolvent, but, you know, and they've been insolvent for, you know, weeks or months. And then it comes to light. So. Or it eventually comes to a head, let's say. So lenders like yourselves may say, hey, you know, mister, you know, car dealer, you are out of covenant. We're going to give you some time because we don't want to take over your portfolio. Please fix this. Hey, Mr. Dealer, you're out of covenant. We gave you some time. You didn't fix it. Oh, guess what? We got to pull the plug on this sucker. How many of those are on your list right now?

We don't have a lot that are on the, like, we're going to pull the plug list, but there are more on the watch list because it's just the natural progression when interest rates come up. Now, our model's a little bit different because we provide fixed loans at the time of the origination of the lease. And so we still have a lot of loans that are back in the 2000, late 2020s and 2021s that have helped the dealer make it a lot further along the way in their portfolio. Manage their expenses better along the way.

Yeah, you're doing it as it's originated. Yeah. Like Luke said, kind of tranches or.

You'Re tranching those as they go. Okay.

But a lot of lenders, most of the time it's, you know, you got a $5 million portfolio, here's two and a half. We're going to come audit you monthly or quarterly to make sure you stay within range. And those are the ones that are probably really going to have a hard time as they start to slide more and more out of debt coverage ratios.

Exactly.

About the only way to get out of that, Tim, I mean, unless you get on a hamster wheel that in the end is going to crush you is to somehow stop buying inventory. Whatever you have to do. To not have to borrow my money and start paying down principal. Correct. I mean, that's the only way around it, I would think. I don't know.

Yeah. So some of the ways are going to be trimming expenses where you can. And it's. It's really easy during the good times to just not pay attention as well. And I think we. Every business does that. You have the money, so you spend it. And this is just one of those times that it makes sense to tighten the belt where you can and be a little bit more diligent in the inventory you select so that you don't have to put as much reconditioning in or whatever it is to get to your money on the street cost so that it's not absorbent. And then try to weather the storm. Communicate with your lender, like immediately and constantly. Hey, this is what our plan is. In fact, just. Just because I'm here and talking in general, it's important when all these things happen to come up with a plan. Come up with a plan. It's probably new because of what's happened in the last three or four weeks. And then I like what Ray Dalio says, the CIO of Bridgewater, he says, come up with different scenarios. That in these different scenarios, here's the plan that you're going to default to. So then it's not emotional. There's nothing else related to it. Except now scenario C is happening. So we're going to deploy this plan. And part of that is communicating with your lender and saying, hey, here's when I expect that I will miss my covenant. It's in seven months. And I just want you to know, let's start working on that now.

Ray Dalio's book, Principles is good. Really good book.

There's.

Yeah. What about those dealers that are maybe going out looking for capital, whether it's for, you know, to purchase their car lot or whether it's a line of credit or whether it's even to get into leasing, because they're like, oh, I see the writing on the wall. We're going to have a ton of good people with bad credit. How easy are those capital markets to get into and get opened up Right now?

I think in general, the capital markets are shrinking a little bit because there is hesitancy. Something like ACC happens, and that scares away some of the private equity firms from the pools that they were playing in it. Also, there was a period of time, especially during COVID and thereafter, where there was a lot of liquidity that was looking for the yield. And we saw a lot of different weird competitors show up that were, or dealers who were coming to us saying, hey, I have $5 million with this, you know, our regional bank, and I'm doing leasing right now, and I want to take it to 10, but they'll only keep me at 5. Can you give me 5% pricing? It's like, well, you know, that's not really. Our wheelhouse is 5%, but I can see, you know, stay with the bank that you're at. Those little banks, they're, they're going to pull out. And we are seeing really good quality customers pop up right now who are saying, hey, I had all this capital before, but I don't now. Can you guys help us?

I think that was a great segue into regional bank issues right this second, Tim. I mean, that is. I mean, that's the key word for the last two weeks, ever since Signature bank and SVB kind of, kind of had hiccups and Signature Bank.

I don't know about a hiccup.

The Signature Signature Bank. I just love that Barney Frank was on the board of Signature Bank. It's just, it's just apropos for everything. Anyway, let's talk about the problems that you know about in, in these regional banks. And specifically, I think SVB is a good, is a good one to, to talk about.

Yeah. So Silicon Valley bank is interesting because they had 94% of their, their deposit accounts weren't insured. So what, that means that the FDIC, the Federal Deposit Insurance Corporation, will insure up to 250,000 of your bank account. That means if it's over 250,000 and something happens with your bank like Silicon Valley, then that money is at risk. The 250,000 is okay. Everything else is not. And Silicon Valley had a focus in crypto and tech companies, venture capitalists, that sort of of pool, which meant there was a lot of bank accounts that were over that amount because they were operating accounts for business and investments and all of those things. So it's totally different than like your normal regional bank. They just had a different focus in their business model. And that shouldn't be scared away from or that shouldn't frighten us away Right.

But we hear this word contagion. I mean, and I think it's really a. I mean, if you have your normal regional bank that you're doing business with and all of a sudden somebody pulls 250 grand out and moves it to, to Wells Fargo or something like this, that limits the amount of money they have to lend to the rest of us, correct?

That is exactly right.

So enough of these runs on these regional banks and they, they've got to pull back somewhere to stay within covenants of them, their selves. Right?

Yeah. And it. So in general, if you're watching the watch lists, then you can keep, keep an eye on your bank and where they're at. It's kind of interesting because small banks are like, hey, don't even look at us. We're not a part of this mess. We're okay. Our, our, we don't dabble in any of this stuff. Please don't include us in this regional bank conversation. Regional banks are that interesting in between where they get a little bit more high touch, like they're a big bank with their customer contacts. But because big banks typically pay attention to the bigger companies, the regional banks, they still fall within that same threshold. So like the Dodd Frank act in 2010 set those thresholds and stress testing at 50 billion and above in assets. And in 2018 was when some of that got rolled back and that threshold got pushed up to 250 billion. SVB was what, 242 billion. So is that one of the reasons why they failed? Because they didn't have that same regulatory oversight? That's yet to be determined. A lot of these regional banks, they couldn't really support the cost to be able to do that though, and, but they were still trying to adhere to those stress testing. So that's all, that's all good. That's a positive thing because it means that most regional banks are probably. Okay, what are the things that you can look at your regional bank, what are they invested in? How much money do I have in there? Is it over 250,000 in each of my accounts? Should I spread that out? Should I open up a couple other accounts and move the money when it comes exceeds 250,000? Yes, yes, you should, should you be worried? You know, probably not. The more worried we are and the more we move the money, the more this becomes a cascading event. And then it lands on that word that you said, which is contagion, which was the whole point in 1933 when, when Franklin Delano Roosevelt signed the you know, the FDIC insurance thing.

Hey guys, real quick. Talking about capital markets and needing money. The guys at Primal End, they are still there to help you out. Give them a call, talk to them about your capital needs and get the conversation started. We said this, it was like six or eight months ago, we put this out in the newsletter that you needed to be talking to your lenders, your local banks, your larger lenders like primaland, and get the conversation started because you might want a line of credit at some point. And you never know. Tougher and tougher.

Yep, you never know. They primaland is not a regional bank. They still got capital land and they want to lend it. So make sure if you need to buy your dealership that you're on currently, you need to buy another location, whatever you need, give them a call. They'll lend on your portfolio and they'll lend on you.

My argument is this is, it's like, okay, so it's a self fulfilling prophecy, right? And that's the whole argument with SVB is a bunch of venture capitalists came out and said, you know, on Wednesday and said, hey, we think SVB is insolvent. You guys better move your capital out. So by Thursday, you know, 100, whatever billion or 84 billion had been transferred out. And so by Friday, they are insolvent. FDIC's in there shutting the doors, right? So there's the whole self fulfilling prophecy thing or yelling fire in a theater when there's not a fire, hoping that on the way out someone knocks over a candle and creates a fire, right? So but there's also the being cautious and being smart thing, right? So when you see the writing on the wall and you see that there is smoke, there's probably a fire somewhere, right? And I want to make sure I have a fire extinguisher. So for me, yes, that Friday morning I was moving money out of the accounts that were over 250,000 at my local community bank, which is, like you said, probably not at risk. Probably not, but I wasn't going to take that chance, right? I evened out funds, I moved things around, I paid off a bunch of credit cards and my Manheim covering things. I'm like, look, I just don't want the cash there. I just don't want to have any debts. It's probably ridiculous, but it's the way I want it to run. And then I bought a bunch of Zion bank stock just in case.

So Jeff was saying he's one of the reasons why there's been runs on These banks, he's moving his money around, he's scaring everybody.

Yeah, yeah, totally, 100%. But there's something to be said about just being cautious, I think. So that's my word for it is hope for the best, prepare for the worst. Right? All dealers need to be prepared. If you don't have money, you shouldn't have all your money in one bank account at one bank. I mean, bottom line, just, that's my opinion. Why not have two bank accounts at two separate banks? If it's your dealership and your rfc, if it's your dealership in your property that you sit on, that's a separate LLC that you pay. If it's some other, you know, whatever. It just, it seems to make sense from a.

Well, so some of us have covenants that, that make all of our accounts stay with certain things which.

And that's the problem SVB had. That's what, what, that's also what led to. Part of SVB's issue, right, is it's like, oh, hey Mr. Customer, yeah, you're going out and get all these venture funds. If you open up your account here, we can match your $10 million with $5 million of debt. But your accounts need to stay here with us because then we're going to take all that money and go stick it into some 10 year note with the US government. That turned out to be a horrible idea, you know, because again, duration, when.

Is, when does that, yeah, when does that ever happen before where the safest possible investment you could, you could have.

Was, well, when the Fed jacks the rate by five points in six months, that's when that happens. So again, they print a ton of money, they inject it all into the system and then they force you to go put all that money somewhere to get, or forced svb, quote unquote, to put that money into a long term asset. That's quote unquote safe. And now that asset is not because it's no longer a good investment today, it's an underperforming investment.

Yeah. You know, the interesting thing with SVB is that they basically had a book loss at the time because the assets that they had were undervalued. But it didn't have the impact until they decided to sell them. And when they got the advice from Goldman Sachs, hey, sell this and go public.

Well, the only reason they had to sell them, I mean, the only reason they had to was because they were having to run on the bank. Right? They needed cash.

I love that. Goldman took $400,400 million in fee to sell that anyway. Anyway.

But I mean, that was it, right? Like they had to sell it to cover the cash run that was happening. I don't know.

I think, I think.

So. What I say is because the bank wasn't being forced to mark those securities to market because they can have the Dodd Frank of hold to maturity. So they didn't actually have to say, oh, this, this assets actually impaired now because it's not worth today's value. So same thing for us, right. As dealers, let's drive this home. Shouldn't we look at our portfolios? And I don't know if this applies for leasing. I'm sure it applies for buy here, pay here. What is my actual collateral recovery rate? And if I apply that to my current portfolio based on a 30 or 60 day static, if I extrapolate that against my entire portfolio, what is my actual mark to market? What is my portfolio worth today with today's losses and today's overhead out on the open market? You know, it's not 80 cents on the dollar, even if I think I am. What is my actual portfolio worth out on the open market against my debt? Am I insolvent? Am I flipped?

And Tim, have you seen any decrease in what assets are worth in the open market right now when it comes to.

No, we have. We haven't seen any decrease at all and in our portfolio. And we've also seen delinquencies improving as they typically do during tax season. So there's been no real indicators that the ground is shifting.

But you've got to argue that it's not worth as much. Right. Because look at Santander not being able to get their debt, so. Or not selling their debt at what was out there. Right. Is that not the same thing that there's.

No, I don't. I think it's different. I mean, it depends. If you're a huge institution like Santander that's relying on outside investors to be able to finance your originations, that's one thing. If you have your dealership and you're operating it so that you as the owner, the investor, receive a certain yield, then you have a lot more control outside of any of that and you can set your own return on investment that you want to see. You know what, I'm okay during this particular time to take a little bit lower return because I see the long term and I'm looking at my collateral recovery rate and it looks okay. So I'm feeling confident or I'm just weathering the Storm.

Hey, I get it. 20, 23. I ain't going to make any money. I'm going to break even. Right?

So.

But wouldn't you say, like, as a lender, you would look at that institution like me and say, hey, Jeff's got a $5 million portfolio on paper. But if I had to liquidate this thing within two to three months, it's only worth 50 cents on the dollar right now because there is no appetite for this subprime paper out there. I couldn't sell it to Texas Capital or Primal. End or Lease Here, Pay here. Right.

Or Westlake.

Not an argument. Or Westlake.

Yeah, what's like I'll buy anything.

Yeah, at the right discount. I'll buy it at the right discount. Hey everybody, we are looking forward to seeing you at the end of June at Buy Here, Pay Here, United in Las Vegas.

Not the end of June, Jeff.

No, not the end of June.

No, the end of April 1st.

Oh, man, the end of April. Guys, you have got even less time to act on this than I thought. You got to go now.

Gotta go nowhere.

United.com get signed up, get your room reserved. Be there.

Yep. You know, today I just was with four other dealers on a Zoom call and we went over our presentation. Jeff, it's going to be great. The Bellagio May 1st is our presentation. It's going to be awesome. See you there.

I, I think it's, you know, it's a moderate, very low to moderate risk. I think there's a couple things to look at, what it would look like in a wind down situation. So if somebody needed to take over your portfolio, I think as a lender we're always wondering, hey, if we needed to wind this down, could this work out? And so the way that we structure it, we set ourselves up for that because we match a loan to a lease and so each one will make their way to the end with and seems to work out. We also look at the black book average compared to the money that we lend on the principal balance out to the dealer and we try to hover between the black book rough and black book average in terms of the, you know, the liquidation value. And in a worst case, you know, we get the vehicle back and we have to liquidate it. Are we going to be okay?

You know, that's what's so funny and that's, that almost seems like the silver lining to all this nonsense. And this, the one thing that will save these portfolios is that asset to loan to value ratio, because the value of these cars has Held up because of the COVID shutdown, because of the parts supplies issues, because new cars are just more expensive. I mean, what did they said the average new car is like 42,000 or something? It's like wild. Okay, so we're never going back to cheap cars, and the cheap cars are not getting any cheaper. I mean, I'm trying to buy today, and it's freaking nonsense. Right. And that's been the case. So as long as those values stay up because there's no supply in the market. That's like the weird little Cliff note to this whole thing. Like you said, you look at black book. Oh, yeah. I'm better off than I was yesterday. And it just keeps going up.

Or it was. It was for a while. Yeah.

I think it's going to. There's no way it's going up any more than current. It's. It's on the trajectory now.

Well, it went up through the end of last year, and then it waned a little bit in December, January, and now it's.

It's. Well, it's.

It's always going right back up right now.

Well, it's always up right now. But I promise you, in. In two months, we're going to be. We're going to be heading back down. And in my opinion, I just seen this way too many times.

Yeah, I'm with you, Luke.

Yeah. I'd be interested to see if it goes back down to any. I mean, it might go back to a normal depreciation curve. I highly doubt you're going to have a drop. I don't. I just.

Just.

Cars are never going to get cheaper. And then if you factor in all this other stuff and you look at any kind of inflation, real inflation numbers getting out of hand, when they do go in to rescue these banks, the FDIC steps in, and then the FDIC gets tapped out, because, I mean, they can't backstop every regional bank if it cascades. So then the central bank or the Federal Reserve have to step in and start printing more money to go secure all, you know, to all, backstop all these deposits. Then what? Hyperinflation, my friend. Hyperinflation. You want your money in gold, silver, ammo and vehicles. Ammo and 2016 Honda Accords, my friend.

Oh, gosh, I've been ken deep.

I've been to your pantry and seen.

How much food you have in your pantry, so I know where you're coming from here.

Well, that's just being smart, man. This is smart. All right, Luke, if your bank account was Shut off today. If all the electricity was shut off today, the grocery stores, you could not go out and get food. How long could you and your family survive inside your house?

Well, I would probably pack up and move to the country where I grew up. And then there's no.

No, I'm just saying, like, what on hand, Food on hand. How long could you live?

Probably, yeah, 15 days, maybe a week.

10 to 15 at the last five. You'd be eating like dried beans and your wine, your wine collection.

Yeah, I could drink wine. I could drink wine for a while, I promise you.

Wow, we got way off topic.

All right, well, Tim, thank you so much for being here. Any parting words to dealers out there?

Yeah, I do think there's a few things that are probably worth recommending. The first is this can impact any business. This, these sort of liquidity crunches, these cash crunches. And so it's, I think it's important to be aware of the, the other businesses that you're working with that you would consider stakeholders, like the lender you're working with, the service centers that you're outsourcing to, whatever it is, the repo companies, your GPS companies. And be on the lookout for signs of stress, like, am I seeing a more assertive collections approach from this company because they're short on cash? Am I hearing about layoffs? Am I seeing less in their marketing? Um, I think there's a. There's a lot of things to be on the lookout for that could impact your business that you might not be being vigil of. So that on top of coming up with a plan, like any plan is better than no plan. So think through it. Come up with a high level plan that you could deploy and don't move your money. Like Jeff.

Yeah, that's it.

But you. That is such a good point though, when you talk about the, the, the second effects, right. Or that contagion even outside of the banking community, like for us, if we so a, you said before, like, watch your expenses, watch your overhead, right? So, yes, as dealers, we need to cut our burn rate. Are we overstaffed? Are we spending on things we don't need to? You know, we all got fat and happy in the last couple years and we've got 15 dot coms that we pay for every service under the sun, right? So now as we start to get wise and we look at our vendors and we're like, man, I really don't use that, you know, car gurus thing or I'm getting no leads from cars.com or I don't need this extra five widgets on my website. And we start cutting those back, that creates that snowball, right? And now all of a sudden, that vendor isn't maybe a dot com themselves that is struggling to raise the next round of funding, and then, boom, they're gone. Right? So we've got to make sure that we aren't the ones holding the bag for. For either those vendors, whether they owe us money or they owe us some sort of service or something, we don't want to be the ones that are like, oh, yeah, man, that, that, that. I had all my eggs in that basket, and that basket just got ran over by a truck.

Yep, exactly.

Yeah. It's so smart. But I think burn rate and overhead is. Is. It's. Again, it's that thing, man. I'm sorry. I get that that could cause a run, but I'm going to do it. I'm going to trim. Trim the fat, you know? Sorry, man.

Well, Doomsday Jeff, anything else? Any more parting wisdom for.

I got a ton, but we'll save that for the next one. Not so wise. But yes, the sky is falling. It looks like it. It won't stop. The rain's got to have something to do with it.

All right, buddy.

All right, guys.

Appreciate it.

Dealers helping dealers.

Please leave us a review and subscribe.

The independent dealer podcast.