They're Doing It Again

What follows are excerpts from a NY Times article, "Easy Credit, Hard to Repay", published 7/20/14.  Buster knows a little bit about the auto financing/leasing arena.  A collateralized debt obligation (CDO) secured with high-quality auto loan paper is one thing, but mixing in large quantities of bad "special finance" paper is quite another.  It's the same sort of risky business that caused the Crash of 2008, and they're doing it again.  It's shameful.  I don't want to invest in that crap, and neither do you.
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Millions of Americans with shoddy credit are easily obtaining auto loans from car dealers, including some who fabricate or ignore borrowers' abilities to repay and take advantage of the most desperate, least financially sophisticated customers.  The surge in this sort of lending and the lack of caution resembles the frenzied subprime mortgage market before its implosion set off the 2008 financial crisis.

Just like those toxic subprime mortgages before them, now many subprime auto loans are bundled into complex bonds and sold by banks as securities.  Just like before, they market these "investments" to insurance companies, mutual funds and public pension funds -- a process that creates ever-greater demand for loans.

Investors recently flocked to buy a bond issue from Prestige Financial Services of Utah.  Orders to invest in the $390 million debt deal were four times greater than the amount of available securities.  Prestige specializes in making auto loans to people in bankruptcy, packaging them into securities and then selling them to investors.

"It's been a hot space," said the firm's COO.  Since 2009, total auto loan securitizations have surged 150%. 

Much like mortgages, subprime auto loans go through Wall Street's securitization machine:  Thousands of loans are pooled into bonds.  Rating agencies assess the quality of the bonds.  Just like before, these agencies are helping fuel the boom by 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, Standard & Poor's blessed most of Prestige's bond with a triple-A rating.
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For the full article plus a good video, click the link.  The article includes several accounts of unsuspecting saps who were conned, swindled, hoodwinked and hornswaggled into buying far more car than they could ever hope to repay.  It's not really their fault, but their car loans are shit.  And now they're probably part of a BlackRock mutual fund.  Goody.

http://dealbook.nytimes.com/2014/07/19/in-a-subprime-bubble-for-used-cars-unfit-borrowers-pay-sky-high-rates/?_php=true&_type=blogs&_r=0