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Subprime at the Car Lot


“Can you think of a better business model than being a Wall Street bank? You hand out 500 million credit cards to 118 million households, even though 60 million of the households make less than $50,000. You then create derivatives where you package billions of subprime credit card debt and convince clueless dupes to buy this toxic debt as if it was AAA credit. When the entire Ponzi scheme implodes, you write-off $200 billion of bad debt and have the American taxpayer pick up the tab by having your Ben puppet at the Federal Reserve seize $450 billion of interest income from senior citizens and re-gift it to you through his zero interest rate policy. You then borrow from the Federal Reserve at 0% and charge an average interest rate of 15% on the $800 billion of credit card debt outstanding, generating $120 billion of interest and charging an additional $22 billion of late fees…”

— Jim Quinn, The Burning Platform

Have you ever read a better description of how banking really works? It’s just one big looting operation that’s backstopped by the bandits at the Federal Reserve. Just think about it; millions of hard-working people were taken to the cleaners in an $8 trillion mortgage-laundering scam, and yet, not one of the miscreants who concocted the coup has ever seen the inside of a jail. How’s that for justice?

But that’s all “yesterday’s news”, what we’re interested in is today, and in particular, signs that Wall Street is engineering another debtbomb that will blow more holes in middle class balance sheets. Here’s some background from the Wall Street Journal:

“Companies in general are borrowing more this year, in part because investors are willing to buy riskier securities….Gains in the financial firms’ fixed-income businesses, which can account for as much as half of revenue, are putting companies including Goldman Sachs Group Inc., Morgan Stanley and the J.P. Morgan unit of J.P. Morgan Chase & Co. on track to report their strongest numbers since the first quarter of 2011, said bankers and analysts…. (“Bond Trading Revives Banks”, Wall Street Journal)

Okay, so the big boys are licking their chops because yield-starved investors have begun dipping their toes in the water again. It was only a matter of time. When the Fed keeps rates frozen at zero, it’s like putting a gun to the head of a fund manager who has to prove to his clients that he can inflate their nest egg in time for retirement. Here’s more from the WSJ:

“High-yield companies around the world have sold more than twice as much debt this year compared with the final three months of 2011, according to Dealogic….Rising prices of risky assets in the first quarter enabled large securities dealers to buy around $19 billion of distressed mortgage bonds from the Federal Reserve Bank of New York and to flip much of it to investment firms, making money in the process, said people familiar with the matter.

The bonds, backed by subprime mortgages and other types of home loans, were originally from the government’s 2008 bailout of American International Group Inc.” (“Bond Trading Revives Banks”, WSJ)

Let’s get this straight; the New York Fed–headed by ex-Goldman alum Bill Dudley, orchestrated the sale of AIGs bundle of subprime MBS? And to whom were those toxic bonds sold? The answer can be found on the New York Fed’s website:

“The Federal Reserve Bank of New York (“New York Fed”) today announced that it has sold assets with a current face value of $6.2 billion from its Maiden Lane II LLC (“ML II”) portfolio through a competitive process to Goldman Sachs & Co.”

Surprise, surprise! So, there’s a subprime feeding frenzy and who’s first in the sharktank? You guessed it; G-Sax. I gather that “competitive” in this case, means that the transaction was conducted in the dead of night with just a handful of other well-connected bidders.

All that aside, the gold rush for junk has resumed paving the way for another round of massive speculative leveraging leading to another behemoth credit bubble. But there’s more to this junk-buying spree then meets the eye. This isn’t about high-stakes gamblers flipping a coin and hoping they come up “winners”. Oh, no. This is about Bernanke winking to his buddies so they know what-to-buy before the Fed revs up QE3. Here’s the scoop from the WSJ:

“Investors have piled into mortgage bonds guaranteed by U.S. housing agencies, in a bet that the Federal Reserve will launch a third round of stimulus aimed at the housing market. That buying has sent yields for securities backed by newly originated 30-year mortgages to record lows…

Rates have declined in recent months, driven first by the Fed’s surprise announcement in September that it would start buying mortgage debt again with the proceeds of maturing mortgage bonds. More recently, investors took cues from some Fed officials publicly highlighting the importance of housing to the economic recovery. Speaking to a bankers’ group in Iselin, N.J., on Jan. 6, Federal Reserve Bank of New York President Bill Dudley, considered a close ally of Fed Chairman Ben Bernanke, said “with additional housing policy interventions, we could achieve a better set of economic outcomes.” Other Fed officials recently have raised the call for more action on housing….” (“Investors Place Their Money on Fed”, WSJ)

And, what exactly did Bernanke’s first-round of MBS purchases ($1.25 trillion) do to improve housing, you ask?

Not a thing, although there was a slight blip in housing sales due to the banks withholding inventory. Beyond that, the program was a complete flop. It added no new jobs, did nothing to boost GDP, and did not stem the deluge of foreclosures. It did, however, transform the Fed’s balance sheet into the biggest stinkpile of garbage assets on the planet. (now exceeding $3 trillion) By the way, the Fed still marks its MBS at par when, in fact, their current market value is somewhere in the neighborhood of 50 cents on the dollar. That means, someone is going to get a $600 billion haircut when the last of these turkeys are auctioned off.

Here’s more on Wall Street’s high-yield hysteria from an article titled “Buyers take a Shine to “Junk'”:

“Investors of all stripes are once again piling into “junk” bonds. The buyers are coming from both sides of the investing fence—from bond investors eschewing the low yields of U.S. Treasury debt to stock investors seeking protection from swings in the market….The buzz is building, even though the recent returns from junk bonds have been relatively meager….

“At some point it comes down to simple math,” said Edward Perks, who manages funds that mix stocks and bonds for Franklin Templeton Investments. “When you have a 2% yield on the 10-year, generating even high-single-digit returns is difficult.”…

With interest rates near record lows and unlikely to fall further, neither U.S. Treasury bonds nor investment-grade bonds are expected to deliver meaningful returns this year, fund managers say.” (“Buyers Take a Shine to ‘Junk'”, Wall Street Journal)

It’s all just child’s-play for an old graybeard like Fed chairman Pavlov. All he has to do is dial rates down to zero and wait for the salivating to begin. He knows the bigtime fund managers have to plump up their capital or investors will vamoose. What choice do they have? They either dabble in risky bonds and take their chances or head to Vegas; there’s not much in between.

Lastly, there’s this from an article titled “Auto Bonds drive into the Fast Lane”:

“In their quest to find a haven from Europe’s sovereign-debt troubles, some money-market funds are turning to debt backed by auto loans, spurring a barrage of sales and sending interest costs on the debt toward all-time lows.

Some $15.3 billion in auto-related securities have been sold this year, surpassing the $9 billion issued in the same period in 2011, according to Barclays Capital…

Asset-backed securities have been popular among money funds in part because they are backed by tangible assets, making them potentially less risky than other debt. In the case of auto bonds, they are backed by car loans to consumers and dealers. The interest paid on those loans is pooled to pay bond investors….

The demand from the $2.7 trillion money-market fund industry has helped spur more sales, dealers said. It also has pushed short-term risk premiums, or the amount of interest buyers demand over Treasurys or some other benchmark, lower.” (“Auto Bonds Drive Into the Fast Lane”, Wall Street Journal)

Money markets are chasing yield, too, which is another sign of looming disaster. Remember, it was Reserve Primary Fund– the oldest and largest of the money market funds–that froze redemptions after the value of its shares dropped below $1 (aka–“breaking the buck”) on September 15, 2008 shortly after Lehman Brothers defaulted. The news of Primary’s troubles ignited a bank run that siphoned $40 billion from its $62.6 billion stash and triggered a panic that spread across all asset classes sending equities markets plunging. By the time the Treasury provided guarantees on remaining money market deposits, over $170 billion had been drained from other accounts and the financial system was in full-meltdown phase.

But maybe we are overreacting, after all, the banks have improved the way they screen loan applicants to make sure that only people with regular income, decent collateral and a good FICO-score can buy a car on credit, right?

Wrong. This is from Reuters titled “U.S. auto lenders give easier terms, cheaper money”:

“U.S. lenders made more auto loans in the most recent quarter, but took more risks and charged less interest to get the business, according to a report released on Thursday by credit reporting and market information firm Experian Automotive.

Outstanding car loans increased nearly 4 percent to $658 billion at the end of December from a year earlier as borrowers financed larger amounts per car and lenders accepted lower credit scores and gave people more time to pay….

The portion of all loans made to subprime borrowers rose to 41.5 percent from 38.4 percent.

Lenders made loans for an average 110 percent of the value of new cars, which was two percentage points, and for 130 percent of the value of used cars, about the same as a year earlier. The average amount financed for new cars was $17,404 and for used cars $9,015.” (“U.S. auto lenders give easier terms, cheaper money”)

“130 percent of the value of the car”! So you can walk away with extra money in your pocket?

And here’s the punchline: The “top lender” is Ally Financial, the former financing arm of General Motors that is “74 percent owned by the U.S. government.” So Uncle Sam–who had to bail out the whole freaking financial system after the last subprime fisasco–is now “your friendly subprime auto dealer”?

Bottom line: As the economy improves, more investors will move into riskier assets which will increase the probability of another catastrophe. Maybe we should think about regulating the system again?


MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, forthcoming from AK Press. He can be reached at

More articles by:

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at

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