The Risk Merry-Go-Round Spins Again

There is a good story by JESSICA SILVER-GREENBERG and MICHAEL CORKERY in the NYT this morning about the current boom in sub-prime auto loans. I’ve noted this phenomenon in another post (, and it’s interesting to see that it only continued to increase.

Image Source: NY Times
Image Source: NY Times

As the authors note:

Auto loans to people with tarnished credit have risen more than 130 percent in the five years since the immediate aftermath of the financial crisis, with roughly one in four new auto loans last year going to borrowers considered subprime — people with credit scores at or below 640.

The explosive growth is being driven by some of the same dynamics that were at work in subprime mortgages. A wave of money is pouring into subprime autos, as the high rates and steady profits of the loans attract investors. Just as Wall Street stoked the boom in mortgages, some of the nation’s biggest banks and private equity firms are feeding the growth in subprime auto loans by investing in lenders and making money available for loans.


In a moment of deja vu, the story notes the role that rating agonies are once again playing:

Much like mortgages, subprime auto loans go through Wall Street’s securitization machine: Once lenders make the loans, they pool thousands of them into bonds that are sold in slices to investors like mutual funds, pensions and hedge funds. The slices that include loans to the riskiest borrowers offer the highest returns.

Rating agencies, which assess the quality of the bonds, are helping fuel the boom. They are giving many of these securities top ratings, which clears the way for major investors, from pension funds to employee retirement accounts, to buy the bonds. In March, for example, Standard & Poor’s blessed most of Prestige’s bond with a triple-A rating. Slices of a similar bond that Prestige sold last year also fetched the highest rating from S.&P.

These types of loans are important sources of revenue to many large financial institutions, apparently. Wells Fargo, for example, “made $7.8 billion in auto loans in the second quarter, up 9 percent from a year earlier.” In fact, the bank recently noted that “had $52.6 billion in outstanding car loans. The majority of those loans are made through dealerships. The bank also said that as of the end of last year, 17 percent of the total auto loans went to borrowers with credit scores of 600 or less.”

In other words, just a few years after the Great Recession started, one of the nation’s largest banks is has decided to lend almost $9B to a high-risk population to buy an asset that is easily stolen or destroyed.

I have been reading Timothy Geitner’s book, Stress Test, lately, and page after page shows that none of the CEO’s who oversaw the near-destruction of our financial system ever really thought they had done anything wrong. They had just made some “bad bets” here and there, and what happened next was just bad luck — the vagaries of a life in finance. This conclusion only guarantees that what happened then will happen again. Reading this NYT piece this morning only re-confirmed that as long as there is money to be made, the risk merry-go-round will continue to spin.

Read more:

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: