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