Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Gold among Negative-Yielding Bonds - 20th Sep 19
Panicky Fed Flooding Overnight Markets with Cash - 20th Sep 19
Uber Stock Price Will Crash on November 6 - 20th Sep 19
Semiconductor Stocks Sector Market & Economic Leader - 20th Sep 19
Learning Artificial Intelligence - What is a Neural Network? - 20th Sep 19
Precious Metals Setting Up Another Momentum Base/Bottom - 20th Sep 19
Small Marketing Budget? No Problem! - 20th Sep 19
The Many Forex Trading Opportunities the Fed Day Has Dealt Us - 19th Sep 19
Fed Cuts Interest Rates and Gold Drops. Again - 19th Sep 19
Silver Still Cheap Relative to Gold, Trend Forecast Update Video - 19th Sep 19
Baby Boomers Are the Worst Investors in the World - 19th Sep 19
Your $1,229 FREE Tticket to Elliott Market Analysis & Trading Set-ups - 19th Sep 19
Is The Stock Market Other Shoe About To Drop With Fed News? - 19th Sep 19
Bitcoin Price 2019 Trend Current State - 18th Sep 19
No More Realtors… These Start-ups Will Buy Your House in Less than 20 Days - 18th Sep 19
Gold Bugs And Manipulation Theorists Unite – Another “Manipulation” Indictment - 18th Sep 19
Central Bankers' Desperate Grab for Power - 18th Sep 19
Oil Shock! Will War Drums, Inflation Fears Ignite Gold and Silver Markets? - 18th Sep 19
Importance Of Internal Rate Of Return For A Business - 18th Sep 19
Gold Bull Market Ultimate Upside Target - 17th Sep 19
Gold Spikes on the Saudi Oil Attacks: Can It Last? - 17th Sep 19
Stock Market VIX To Begin A New Uptrend and What it Means - 17th Sep 19
Philippines, China and US: Joint Exploration Vs Rearmament and Nuclear Weapons - 17th Sep 19
What Are The Real Upside Targets For Crude Oil Price Post Drone Attack? - 17th Sep 19
Curse of Technology Weapons - 17th Sep 19
Media Hypes Recession Whilst Trump Proposes a Tax on Savings - 17th Sep 19
Understanding Ways To Stretch Your Investments Further - 17th Sep 19
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19
Boris Johnson's "Do or Die, Dead in a Ditch" Brexit Strategy - 11th Sep 19
Precious Metals, US Dollar: How It All Relates – Part I - 11th Sep 19
Bank of England’s Carney Delivers Dollar Shocker at Jackson Hole meeting - 11th Sep 19
Gold and Silver Wounded Animals, Indeed - 11th Sep 19
Boris Johnson a Crippled Prime Minister - 11th Sep 19
Gold Significant Correction Has Started - 11th Sep 19
Reasons To Follow Experienced Traders In Automated Trading - 11th Sep 19
Silver's Sharp Reaction Back - 11th Sep 19
2020 Will Be the Most Volatile Market Year in History - 11th Sep 19
Westminister BrExit Extreme Chaos Puts Britain into a Pre-Civil War State - 10th Sep 19
Gold to Correct as Stocks Rally - 10th Sep 19
Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - 10th Sep 19
Stock Market Sector Rotation Giving Mixed Signals About The Future - 10th Sep 19
The Online Gaming Industry is Going Up - 10th Sep 19

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Welcome to the Next Subprime Bubble

Interest-Rates / US Debt Apr 29, 2013 - 11:12 AM GMT

By: Money_Morning

Interest-Rates

Greg Madison writes: Who could forget the subprime mortgage crisis of just a few years ago?

If there's one good thing that came out of that nightmare, it's that we - borrowers, lenders, financial institutions all - learned that securitizing bad loans and letting them spread like poison throughout the financial system was a bad thing.

We can look back at the subprime crisis with the wisdom of afterthought, and see all the mistakes laid bare.


We'd never let that happen again, right?

Well...

Welcome to the start of the next subprime crisis: Subprime auto loans.

The Auto Subprime Bubble
Banks have once again cast a greedy eye to the lower middle class - who are already leveraged up to their collective eyeballs. This demographic, call it the "easy prey class," is being targeted for auto loans at usurious prices, in most cases north of 20%.

Reuters recently reported the all-too-familiar story of a school bus driver in Alabama who fell into precisely this trap.

Jeffrey Nelson, of Jasper, AL, had one car repossessed, along with serious medical bills. His credit history was checkered indeed.

Yet, he was able to put up his Mossberg shotgun, worth about $700, along with $300 in cash, to come up with the $1,000 down payment that Maloy Chrysler Dodge Jeep said was needed to get him behind the wheel.

The car was not flashy - it was Japanese and had four wheels. According to Reuters, Nelson took out a $10,294 loan to buy a 2007 Suzuki Grand Vitara.

But that $10,294 loan carried a sky-high interest rate, at 21.9%. The true cost was over $12,500.

Of course, after this ill-advised deal, Nelson couldn't keep up the monthly payments.

Reuters said that, in the months that followed, Nelson and his wife divorced. Nelson moved into a mobile home. Unable to cover the rapidly mounting debts, he filed for personal bankruptcy.

His ex-wife, who assumed responsibility for the $324 car payment, said she expects to file for bankruptcy in a few months.

Reuters found that Nelson's loan was provided by Exeter Finance Corporation - a Wall Street-backed subprime lender, which is majority-owned by Blackstone Group - one of the biggest fish in the private equity sea.

According to Reuters, Exeter Finance was listed as a creditor or participant in 1,144 bankruptcy cases in 2012, up from 252 in 2011.

Jeffrey Nelson's loss was unquestionably Wall Street's gain.

If this scenario seems familiar to you, that's because it's been less than five years since the last one of these blew up.

Here's how it's done.

How the Next Subprime Bubble is Forming
Since Jeffrey Nelson was a risky borrower, the lending company, partnered with the private equity firm, bundled his subprime loan up and turned it into a marketable, asset-backed security (ABS) with a nice, fat yield for investors. The securities are sold in risk-based tranches, just as subprime mortgages were.

A riskier loan means a higher yield for speculators, so they're loading up on the riskiest tranches. In most cases, after demand works itself out and drives yields south of 2%, two-year subprime auto ABSs yield 1%.

That looks very attractive compared with 0.5% on prime auto loan ABSs and 0.3% on two-year Treasuries.

Investors can't get enough of these subprime ABSs, so the market for them has grown.

And grown...

And grown...

From 2011 through today, close to $36 billion worth of these securities have been sold on the market. Just this week, a few Wall Street banks announced a subprime auto loan securities deal worth $1.6 billion.

That deal, from Spain's Banco Santander's Santander Consumer USA, is the largest such ABS deal since 2007, just before the subprime mortgage bubble exploded - and poisoned the world financial system.

And on and on it goes until the music stops, just like it did in 2008. Just like the toxic mortgage-backed securities of the last decade, these are spreading all over, and spreading fast.

As with nearly all the I-can't-believe-this-is-legal financial shenanigans, you have the Federal Reserve to thank for it.

Ever since QE Infinity, when the Fed took interest rates to near zero, investors large and small have been clamoring for something - anything ­- with a yield above, well, zero.

William White, a former economist at the Bank for International Settlements, told Reuters, "It's the same sort of thing we saw in 2007. People get driven to do riskier and riskier things."

Looking at who stands to lose and who stands to gain shows us why this vicious subprime cycle will continue.

Source :http://moneymorning.com/2013/04/25/welcome-to-the-next-subprime-bubble/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules