What Wall St Costs America: New subprime boom, same old scam. Now people have stopped paying their auto loans

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Photo by Devra

 

After the subprime mortgage fraud scam exploded, Wall Street was left scrambling for new securities machines that would generate the same guaranteed record profit. They looked for and found other corners of the loan industry to infect. One of these chosen dark corners is the auto industry. The greed mentality of Wall Street coupled with the lack of any serious punishment for wrong doing drives fraud even to the point of collapsing the economy. Since Wall Street has repeatedly demonstrated it's devoid of any consideration of public good, we must create alternatives that are dedicated to it: Public Banks.

As Bloomberg calls it, the scam is "classic subprime: hasty loans, rapid defaults, and at times outright fraud." 

Dealers partnered with financing engines, such as the partnership Fiat Chrysler made with Banco Santander, to create powerful subprime machines. 

Predictably, Wall Street rewarded loans given without verifying incomes or jobs.

For instance, Santander checked incomes on fewer than 1 out of every 10 loans packaged into $1 billion of bonds, according to Moody's. The largest portion were for, you guessed it, Chryslers. 

Auto loan fraud, unsurprisingly, is also approaching levels seen in mortgages during the bubble. You know how this goes: Santander enabled a group of "fraud dealers" to put buyers into cars they couldn't afford, with loans it knew they couldn't repay, lawsuits allege. Dealers would add in imaginary options like sunroofs or alloy wheels to inflate a car's value. 

Santander, in step 3 of the scam, then resold the debt, which often had rates over 15 percent, feeding them to greedy, don't-ask-questions ABS investors. Securities made up of such debt can offer yields as high as 5 percent — triple that of Treasuries.

Now, as expected, comes the crash. The rate of delinquencies in subprime auto loans originated by auto finance companies has nearly doubled since 2011. Asset-backed securities are showing signs of stress.

The 90-plus-day delinquent rate for subprime auto loans originated by auto finance companies is now close to 10% —  higher than the highest rate after the dot-com crash and near the highs of 2009 after the financial crisis.

The industry has little reason to change given the success of Wall Street's securitization machine. 

Wall Street's appetite for high-yield investments and embrace of the bundled instruments that bury fraud will continue to keep the loan scams going until we decide enough is enough. 

[Read full Bloomberg article]

[Latest numbers via Business Insider]

[NY Fed warning]


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