Subprime ABS Securitizations Are Back As Absolute Worst Of The Credit Bubble Returns

Tyler Durden's picture

Back in 2007, at the peak of the credit and housing bubble, Wall Street knew very well the securitization (and every other) party was ending, which is why the internal names used for most of the Collateralized Debt Obligations - securitized products designed to provide a last dash trace of yield in a market in which all the upside had already been taken out - sold to less sophisticated, primarily European, investors were as follows: "Subprime Meltdown," "Hitman," "Nuclear Holocaust," "Mike Tyson's Punchout," and, naturally, "Shitbag."

Yet even in the last days of the bubble, Wall Street had a certain integrity - it sold securitized products collateralized by houses, which as S&P, and certainly Moody's, will attest were expected to never drop in price again. But one thing that was hardly ever sold even in the peak days of the 2007 credit bubble were securitizations based on personal-loans, the reason being even back then everyone's memory was still fresh with the recollection that it was precisely personal-loan securitization that was at the core of the previous, and in some ways worse, credit bubble - that of the late 1990s, which resulted with the bankruptcy of Conseco Finance. Well, in a few short days, those stalwarts of suicidal financial innovation Fortress and AIG, are about to unleash on the market (or at least those who invest other people's money in the absolutely worst possible trash to preserve their Wall Street careers while chasing a few basis points of yield) the second coming of the very worst of the last two credit bubbles.

WSJ has the details:

The $604 million issue from consumer lender Springleaf Financial, the former American General Finance, will bundle together about $662 million of loans secured by assets such as cars, boats, furniture and jewelry into ABS, according to a term sheet. Some loans have no collateral.


Personal loans haven't been a part of the mainstream ABS market since securitizations from Conseco Finance Corp. in the late 1990s, according to Michael Dean, co-head of Fitch Ratings' ABS group. That market dried up as the recession hit and, under the weight of bad subprime loans, Conseco filed for bankruptcy in 2002.


Springleaf's issue comes as prices on traditional issues backed by auto loans, credit cards and student loans have soared as investors pile into debt with extra yield over Treasurys. As those yields fall, ABS investors have been giving unusual assets that were previously shunned a second look.

The quality of the "assets" behind this securitization is simply and utterly atrocious.

The 190,627 loans in the Springleaf deal have an average FICO credit score of 602, in line with many subprime auto ABS. But the average coupon of 25% on Springleaf's personal loans is above that on even "deep subprime" auto loans, probably because there is no collateral for 10% of the issue, an analyst said.


The "A" rated slice of the debt may yield near 2.5%, or 2 percentage points over an interest-rate benchmark, according to price talk circulated to investors. Similarly-rated but slightly longer-term debt within Santander's issue sold at a 1.775% yield.

In other words, unlike mortgage-backed, where there should be at least in principal some liquidation value of the underlying asset, here there is essentially no collateral, and what collateral is behind these personal loans is absolutely worthless. Sure enough, a rational voice or two will emerge warning that investing in this bag of dogshit will lead to tears...

By some measures, the quality of personal loans is similar to those subprime auto loans that have been drawing increased concern from investors. Demand for ABS and competition from new, private equity-backed lenders are causing standards to ease from the tight conditions that followed the financial crisis.


Some investors, including Thomas Ho, a director at MetLife, say they won't buy subprime auto ABS from certain issuers because the bonds don't yield enough over top-quality names. But deals still sell briskly across the spectrum, with the latest from Santander Consumer USA selling at a record low aggregate yield.


"That investors are scavenging around for yield isn't a good sign because it puts people in position to take risks they don't understand," said Clifford Rossi, an executive-in-residence a the University of Maryland business school and former chief risk officer for Citigroup's consumer lending group.

... but most won't care: after all it is not their money. It is "someone else's money" that will ultimately be lost. All that matters for the investors is to collect a year of yield at which point it is not only saionara, but the worthless bag of crap will become someone else's unrecoverable problem.

Sure enough, demand is already frothy:

 Dealers led by Citigroup Inc. announced the deal less than a week after 5,500 investment professionals gathered for the American Securitization Forum's annual meeting, where investors focused more on finding the assets than on expectations for modest erosion in credit quality, said strategists at Bank of America Merrill Lynch.


Spokesmen for AIG and Citigroup declined to comment on the issue, which is offered only to large institutional investors. A Fortress spokesman didn't have an immediate comment.


"On the heels of the conference and a search for makes sense that less-frequent issuers and collateral types are hitting the market," said Brian Loo, a portfolio manager at TCW.

And with that, Bernanke's job here is done: he has managed to reflate not only the housing and credit bubbles to epic proportions, but has thrown in the tech bubble for good measure, where companies like AMZN and ZNGA trade higher the worse their results are.

How anyone can possibly doubt how this all ends, is a mystery. But like last time, and the time before, and the time before that, as long as the music is playing those whose bonuses are dependent on finding the last trace of yield, regardless of how it is derived in his centrally-planned market, must all dance.

And after this latest bubble pops, it is "well-known" that the selling will be fair and orderly, with a buyer matching every seller. Or maybe not.

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Glass Seagull's picture




true brain's picture

Securitization is how big banks plan for exiting and shifting risks onto the pension funds, government, or you six packs rednecks.

when shtf, they'll have unloaded it on off on you or bernanke, which really means you.

But it's different this time. Obummer and Eric Assholder will prosecute any wrong doing. So go back to sleep, nothing to see here.

Say What Again's picture

B... B...  B... BULLISH


ES to 1550 by next week

INDU to 14500 by next week


Dear Grandma & Grandpa,

Please loan me some moar money, cause I'm gonna get rich in the market.  When I do I'll buy you a condo in FL.


CPL's picture

If you keep it in gold.


You get to buy Florida.

Irelevant's picture

FED will buy anything I guess... if not, Abe sure will.

Neethgie's picture

Zynga should release a flash game listing all household items, shares, bonds ect. users have to guess what abe wont buy.

Yen Cross's picture

Abe needs his own show on the "History Channel", right after " Pawn Stars".

AUD's picture

They'll also clear payment in anything, no matter the quality. Thus simply and utterly atrocious quality "assets" are magically made 'money good'.

It's alchemy. Gods they are.

Joe Davola's picture

Calling all underfunded state sponsored pension plans, step right up and save your governor's ass!

Gromit's picture

I attended the CMSA annual conference in Miami Beach January 2007. I remember a CDO cubed presentation, basically a way to package the worst of the worst and receive a  AAA rating on an unreasonably large "super senior" tranche.

I chatted with some of the salesman attendees, basically asking them how they thought it would end.

Various responses......distilled down to "used to make 60 K, last year I made 600K, and you are asking me to criticize such a wonderful system?"

Neethgie's picture

im totally buying into this, these things are always great.. until they aren't

blindman's picture

it is just like a derivative of printing so it must have value.
what was that definition of insanity?
it is a way of life .

blindman's picture

Mad TV - Randy Newman Sings Songs About Star Wars

blindman's picture

Randy Newman - It's money that I love
the comment section is always refreshing too.
Randy Newman - Texas Girl at the Funeral of Her Father

Here I am lost in the wind
'Round in circles sailing
Like a ship that never comes in
Sailin' by myself

Sing a sad song for a good man
Sing a sad song for me
A sad song for the sailor
A thousand miles from the sea

Here I am alone on the plain
Sun's going down
It's starting to rain
Papa we'll go sailing

Shell Game's picture

'... but most won't care: after all it is not their money. It is "someone else's money" that will ultimately be lost.'

LongSoupLine, please bring it home, this thread needs some too...


Dr. Engali's picture

Unbelievable! We really are a nation of retards. I'm glad we have the Bernank to buy them back at par when these fuckers go to zero!

long-shorty's picture

Your comment is unfair to people with legitimate disabilities.

secret_sam's picture

The pendulum swings back.  At the moment, it's the borrowers who are geniuses and the "investors" who are retards.

For a long time, it was the other way 'round.  Put your faith in cycles.

NoWayJose's picture

Hey, the banks are using their own real money for this, instead they are using make believe free Fed money that gets created out of thin air.  It's only appropriate that this phantom money be used to buy phantom investment products.  The only 'real' thing you need is taxpayer backing in case you actually lose money.

tradewithdave's picture

With the price of a new Toyota falling it makes the old Toyotas worth more because their initial cost was more. People make their car payments no matter what happens, especially when their car becomes their house.

Conman's picture

Do they? is htat why the car repo business is booming?

CPL's picture

Yeah, eventually the car makers go bust holding all the repoed inventory and the tow and go's have no pay master.


I often wonder how much stuff is sitting in there and how much of it is scraped and how much is resold as is.  There has to be something that tracks it?  

Anyone know how to track shadow inventory in the repo after market trade?  A Theory.

If repo's increase over a quarter, how are the returned vehicles that the car maker acts as the credit lender.  Assuming clients opt for a lease or insane personal car loan rate.  

Wouldn't that depreciation of the asset hold the same value of cash lost equivalent on the loan over the term?  Either in retail or cost.

In turn would this not also open the door to a similar robot-signing show and dance?

klockwerks's picture

I smelled repos in the air when big brother had GM buy Ally Financial. I would like to know where and how you can pick up a nice repo say 50 cents on the dollar. I knew we would be seeing a boatload of them coming online but aren't most picked up at auction and avg joe never gets a crack at them. Just wondering like you how do you get a list with prices etc. Still driving my 03 Durango but can't last forever

CPL's picture

That's what I'm trying to figure out.  What is the number of repo's vechiles total because the repos go back on half value, unlike the removal of mark to market on a house.  Does the auto dealer get to suspend mark to market until they are sold.

There should be shit loads on these things falling off lots for pennies on the dollar, but there isn't.  Of course the same auto makers would end up in the poor house fast because you could get a repo with okay miles and practically new, partially paid for by someone else plus the curb depreciation.

Yet, haven't seen one blowout sale of repos.  Don't even care of the colour.  Cheap will do me to.

JP McManus's picture

Most larger banks, credit unions, and servicers of securitized paper typically auction off repossessed collateral within 30 - 60 days.  Is the 50 cents on the dollar number you're talking about the collateral value at auction to the amount remaining on the loan?

goldenbuddha454's picture

You can thank the WH for the unintended consequences of "Cash-for-Clunkers" for that.  When you take millions of vehicles out of the system which are perfectly fine and driveable and crush them, that created an immediate shortage of supply and drove the used car prices sky-high overnight for the small independent dealers and general public that feed off of those trade-ins at the Franchise Dealerships.  Supply is still lacking from that BS.  Just another govt. boondoggle that has led to countless closings of small, independent car dealerships throughout the U.S. 

fonzannoon's picture

How do we short these things? Let's all get in early this time.

CPL's picture

Okay.  If you feel like throwing money away.


If you need more brake pads. to a short that will stay down.



This will be an instant replay.  The market tanks and the pension eggs are all cracked open in unison.  So you make DAMN sure you aren't trading through a 401k or an RRSP because once they take it, what's your WILL BE theirs.  Don't mistake the massive cash withdrawls over the past month as anything but knowledge of other things happening.  

Trade only through your direct accounts if you must.  But be plenty forewarned, you might not get a chance to spend it.

fonzannoon's picture

Thanks but I want to bet directly on the shit products themselves. Not on the market. I'm sure I get the same access as GS right?

Whiteshadowmovement's picture

Yup just spoke to Blankfein and apparently theyre good with that but only if you do your own mark to market...

Big Ben's picture

Consider that a US Treasury note is an unsecured loan to a big, dangerous dude with an attic full of debt and a printing press in his basement.

waterhorse's picture

ABS?  A Bagga Shit?  Oh Asset-Backed...but not really.  I think I'll go with the first definition.

TheFourthStooge-ing's picture


ABS?  A Bagga Shit?  Oh Asset-Backed...but not really.  I think I'll go with the first definition.

The first definition is indeed the accurate call. From TFA:

Sure enough, a rational voice or two will emerge warning that investing in this bag of dogshit will lead to tears...

"You guys are gonna end up pissing off someone pretty bad with your pranks."

...but most won't care: after all it is not their money. It is "someone else's money" that will ultimately be lost.

"Hey, I'm just carrying the bag to the house and putting it on the doorstep. You guys take it from there."

All that matters for the investors is to collect a year of yield at which point it is not only saionara, but the worthless bag of crap will become someone else's unrecoverable problem.

"OK, light the bag and get it burning good. When I ring the doorbell, run and hide behind those bushes."

And after this latest bubble pops, it is "well-known" that the selling will be fair and orderly, with a buyer matching every seller. Or maybe not.

"When the guy comes to the door, he'll see the burning bag, prompty retrieve his recently inspected and charged fire extinguisher from the kitchen, and calmly put out the fire. Or he'll stomp it out immediately and not realize it was full of dog shit untli he's tracking it across his carpet."

Curiously_Crazy's picture

You've got them both correct.

It's Asset Backed Shit. The backing itself is the Bagga Shit. Except some of the bags don't even contain the shit.

Poor Grogman's picture

Exciting opportunities once again, time to sell PMs before the price goes back to 280 usd/ oz (hat tip kitco) and load the boat with obscure weapons of financial destruction.

The market has been incredibly slow to respond to ZIRP but now that it has, it's time to release the animal spirits...

Oh did I mention, money on the sidelines, or mum and dad investors, or wealth effect...


Groundhog Day's picture

wait Metlife, the company which carries other peoples life insuarance and annuity contracts is actually considering this garbage but not from certain carriers? WTF  They shouldnt be buying any subprome abs. Now i know how they can guarantee all those ridiculous riders of 4 and 5% on their annuity contracts. Does anyone know how Life insurance contracts will play put in the final stage of this epic clusterfuck?

Dr. Engali's picture

Why shouldn't they be buying them? Metlife will collect a coupon then as soon as they go bad Ben will scoop them up at par. It's a great system if you're connected. When you're "too big to fail" you get all the perks.

D-2's picture

Groan. My company's 401k plan has one and only one money market fund, naturally run by MetLife. I got out of the stock funds  when the bubble first burst. Now what can I do, cuz this don't look good to me.

Dr. Engali's picture

I would be very concerned. Met has stopped the flow of new money into some of their old existing contracts. On others they stopped paying commissions to discourage brokers from directing money into those contracts. Met has made quite a few blunders in their variable contracts, and if I wasn't in a rush I'd give you a few more examples. If it were me though, I'd look for alternatives. But hey, they may be deemed a systematic risk and "too big to fail" so you may be okay.

slightlyskeptical's picture

If you are met life see if they have an option for a variable annuity. Put it 100% in small caps. Market does well, you win. Market sucks you have the guaranteed rate. I wouldn't really do that but it has to be better than cash.

fonzannoon's picture

What about the part where Met can't pay the guarantees because they are choking on guarantees made 5 years ago? That would be my concern. I think that is what Doc is alluding to.

a 401k in a Variable annuity....gotta love that. Hey lets wrap some useless benefits around your retirement plan, give you a rolling surrender charge and charge you 3% plus. My advice would be to ask your benefit's department to define the term "fiduciary" to you.

I wonder when Reggie Middleton will take a peek at this future wreck?

Dr. Engali's picture

Shit Met is 4pts. With just the living benefit.

Dr. Engali's picture

No you don't have a guaranteed rate. You have a living benefit guarantee that you can take an income stream off of later. Plus Met has some of the highest internal costs in the business. A total piece of shit product.

fonzannoon's picture

LOL I was being nice. The poor guy seems like he is stuck with it.

Be sure to ask the young whippersnapper who runs around signing everyone up about Doc's thoughts. Then ask him if his compensation is directly tied to selling proprietery products. Watch for the squirm movement and how he looks down and to the left when he answers you.

Then go talk to Marge in HR. She on the other hand will go tell you to go fk yourself without much concern.

CPL's picture

That is an awful idea.  You lose your shirt in the inflation in a quarter now.  What the hell is that?   Hide in the if.  If you haven't figured out that regardless of the scheme that you will not be entitled to what you paid in.  Ever.  That's the 411.

There's even a rider attached to the budget for employers into paying for ROTH IRA's to keep the lie running for maybe an extra day.  Think those are untouchable?  401k's or IRA's?  Says who?

Nobody now.  That's the situation.

secret_sam's picture

The only reason to want to invest in 401Ks or IRAs these days is for the tax relief, but you're making a deal with the devil.  Do what you must, but don't expect it to work out to your benefit in the long run.

I suppose there could possibly still be some employers matching funds.  That does add to the difficulty of the decision, I guess, but hell, do you really believe a dollar today is not worth a LOT MORE than $0.97 next year?

CPL's picture

They weren't ever built but for one thing.  Stash money out of the money supply to hedge inflation, they are a net minus to ALL investments because of the penalities they carry and the fact you don't manage the money.  It's an illusion.

Once something happens to the market the Fed will announce it's tapped out and crack open every piggy bank.  Or whatever the excuse will be.  Mark my words, nobody but those that decided to take the hit early win this one, even if at some assinine taxrate and penalities.  I believe that after the law is there, because the will certainly is, it will all be wrung dry.  While draining the civil servant coffers and government employment offered IRA's.

Have some cash on the side for a bit of protection.  Silver/Gold.  Actually having goods now that are cheap (food, light bulbs, TP, anything you can store) to last you for a while is better.  What is happening in argentina isn't that far from happening the western hemisphere.  What's $20 buy you for groceries now?  Not a lot.  Think the truth is posted anywhere anymore?  Only time you get the truth is shopping for basics, and ten bucks more on a gallon of milk should just about do it. 

Just hedge a bit better, the US is getting lined up for something, have a couple of guesses but nothing concrete.  The 'tax' savings isn't a savings if you aren't getting that cash back ever and at the same time earing less than real inflation in an easy credit world.

Curiously_Crazy's picture

OT but I've a question about 401k's

How difficult is it for you guys to access it over there? I've been looking into getting my superannuation out for some time now and I can tell you it's an absolute nightmare down here in Oz.

Along with the tax hit and all the paperwork, I have to prove financial hardship to even get a cent. Talk about fucked up. I mean it's *my money* and it pisses me off no end I've got to jump through hoops to get it.