When the mortgage crisis hit, many people thought that it couldn’t take down the entire economy and bring about recession. They were wrong.
So I have no way of knowing just how much damage the subprime bubble in used car loans is going to do. It could be less traumatic than the crash of 2008. But it could also be much worse as far as I know.
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.
And, like subprime mortgages before the financial crisis, many subprime auto loans are bundled into complex bonds and sold as securities by banks to insurance companies, mutual funds and public pension funds — a process that creates ever-greater demand for loans.
The list of problems includes outright fraud—though the story backs off from that direct language, choosing instead to write, “In some cases […] the tactics veer toward outright fraud.”
The worst thing about this report is that, even when offering helpful information about the coming storm, it still refuses to acknowledge how politics has made this happen.
“It appears that investors have not learned the lessons of Lehman Brothers and continue to chase risky subprime-backed bonds,” said Mark T. Williams, a former bank examiner with the Federal Reserve.
Excuse me? The lesson of Lehman Brothers was that no financial institution would ever be permitted to go bankrupt again. Any lesson that could have been learned from it was deliberately squashed by Hank Paulson and Ben Bernanke.
In addition to the subprime bubble in auto loans, we also have signs of another mortgage crisis brewing. With our incredible levels of debt, there are many ways the entire system could go into crisis.