Thursday, November 3, 2011

Wolves That Eat Wolf (And Then Sell Wolf Sandwiches To Other Wolves)

This comes from Bob Cesca’s Awesome Blog (

What Could Go Wrong?
Posted on 11/02/2011 at 3:50 pm by JM Ashby

The subprime loan market is making a come back, but with a twist.
This time we will package subprime auto loans at risk of default into triple A-rated securities, rather than home loans.

The Los Angeles Times today noted that investors are pouring money into car dealerships that provide high-cost loans to those with poor credit. The dealers are assembling these loans — about one in four of which defaults — into securities, selling them off much like subprime mortgage securities were sold around the world. In fact, “in the last two years, investors have bought more than $15 billion in subprime auto securities.” The Times noted that “although they’re backed mainly by installment contracts signed by people who can’t even qualify for a credit card, most of these bonds have been rated investment grade.

The subprime auto securities are receiving AAA ratings and being sold in the same manner as the mortgage-backed securities that lead to the 2008 financial crisis.

Meanwhile, Standards & Poor’s does not even consider the United States to be worthy of a AAA rating. Chew on that.

End of re-post.

I love the title, “What Could Go Wrong?” But we all do know, don’t we? Oh, yeah, not all of us, evidently.

Perhaps overlooked is the fact that this kind of lending is unethical in the first place, even if you don’t bundle the dubious loans and pawn off the risk immediately onto credulous morons. It’s just an excuse to gouge an extra ten percentage points or so of interest out of people who can barely afford the car in the first place, the car which they probably need to go to the job where they don’t get paid enough. The wages are low, and the interest high, for the same reason: it’s legal these days to take advantage of powerless fellow citizens, and fewer among us find it immoral to do so.

Back in the 1990’s I worked for a time around the edges of a similar business. It was a small private bank that was involved with real estate loans. They had a lot of good loans, some they held themselves and some were in partnership with private investors. They also did a brisk trade in high risk loans. Second and third mortgages, some totally unsecured because the value of the house wouldn’t even cover the senior mortgages. For the most dangerous of these they could extract over thirty percent interest. Lots of people really love their houses, and they will grasp at any straw to keep them.

The failure rate on these mortgages was understandably high. You could be forgiven to wonder how they made any money on them. The amounts were usually pretty low, almost all under ten thousand dollars. With the interest so high, even a couple of years of payments cut down on the exposure. When the inevitable end came, and the house went into foreclosure, and no money from the sale went to the “washed-out junior,” they were still not without recourse.

At that point, they turned the loan over to collections. This was done by a friend of mine, and my involvement was doing grunt work for him, appearances and paperwork on an hourly basis. I say “collections,” but the cases never generated any cash. The idea was to win the case and record the judgment with the county. That way, the judgment would show up in the escrow if that person ever got back on their feet and bought another house, which happens frequently. The judgment would then need to be paid before the next house deal could proceed. My friend, I can tell you, is a good man, but I still didn’t hang around that crowd too long.

These days companies don’t even have the decency to service their own predatory loans. They quickly bundle them for sale to “investors” who assume a risk that they may or may not fully understand.

These are cruel businesses, selling high interest loans to people with few resources and little demonstrated ability to repay. Instead of helping people who have been driven to near destitution by circumstances, we throw them on the tender mercies of the “free market,” the modern equivalent of “the wolves.” Now, even the wolves feed on each other. Ethics and morals seem to be outdated ideas in our brave, new world. Sometimes I wonder if the red, white and blue isn’t too colorful for our new America. Maybe our new economic reality, this fervent monetism, needs a darker banner. Black, I’m thinking, with a skull and some bones on it. Maybe a wolf’s skull. Even a human skull might be too good for us anymore.

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