Thanks Ben Bernanke: Using A Shotgun As Down Payment For A Car

Tyler Durden's picture

Thanks to the Fed's ZIRP, the investing world is on a constant reach for yield; and due to the fact that the last bubble of investor largesse (ignoring leverage and reality) was not 'punished' but in fact 'bailed-out', participants in the financial markets learned nothing. Just as the last crisis was formed on the back of an insatiable mortgage-backed security market desperate for new loans (any loans) of increasingly dubious quality to securitize, so this time it is subprime auto loans that have taken over. As a Reuters review of court records shows, subprime auto lenders are showing up in a lot of personal bankruptcy filings. At car dealers across the United States, loans to subprime borrowers are surging - up 18% in 2012 YoY, to 6.6 million borrowers. Subprime auto lending is just one of several mini-bubbles the bond-buying program has created across a range of assets; "it's the same sort of thing we saw in 2007, people get driven to do riskier and riskier things." Of course, with auto production having been the backbone of so many macro data points that are used to 'show' the real economy recovering (despite the channel-stuffing), now that the growth in auto-sales are stalling, it is for the subprime originators "under extreme pressure to hit goals" in their boiler-room-like dealings to extend loans (at ever higher rates) and securitize while the Fed 'music' is still playing. It seems we truly never learn.

Via Reuters,

How The Fed Fueled An Explosion In Subprime Auto Loans


Thanks largely to the U.S. Federal Reserve, Jeffrey Nelson was able to put up a shotgun as down payment on a car.


Money was tight last year for the school-bus driver and neighborhood constable in Jasper, Alabama, a beaten-down town of 14,000 people. One car had already been repossessed. Medical bills were piling up.


And still, though Nelson's credit history was an unhappy one, local car dealer Maloy Chrysler Dodge Jeep had no problem arranging a $10,294 loan from Wall Street-backed subprime lender Exeter Finance Corp so Nelson and his wife could buy a charcoal gray 2007 Suzuki Grand Vitara.


All the Nelsons had to do was cover the $1,000 down payment. For most of that amount, Maloy accepted Jeffrey's 12-gauge Mossberg & Sons shotgun, valued at about $700 online.


In the ensuing months, Nelson and his wife divorced, he moved into a mobile home, and, unable to cover mounting debts, he filed for personal bankruptcy. His ex-wife, who assumed responsibility for the $324-a-month car payment, said she will probably file for bankruptcy in a couple of months.


When they got the Exeter loan, Jeffrey, 44 years old, was happy "someone took a chance on us." Now, he sees it as a contributor to his financial downfall. "Was it feasible? No," he said.


At car dealers across the United States, loans to subprime borrowers like Nelson are surging - up 18 percent in 2012 from a year earlier, to 6.6 million borrowers, according to credit-reporting agency Equifax Inc. And as a Reuters review of court records shows, subprime auto lenders are showing up in a lot of personal bankruptcy filings, too.


It's the Federal Reserve that's made it all possible.




The Fed's program, while aimed at bolstering the U.S. housing and labor markets, has also steered billions of dollars into riskier, more speculative corners of the economy. That's because, with low interest rates pinching yields on their traditional investments, insurance companies, hedge funds and other institutional investors hunger for riskier, higher-yielding securities - bonds backed by subprime auto loans, for instance.




Lenders like Exeter have rushed to meet that demand. Backed by Wall Street banks and big private-equity firms, they have been selling ever-greater amounts of subprime auto loans in the form of relatively high-yield securities and using the proceeds to fund even more lending to more subprime borrowers.




Consider that in 2012, lenders sold $18.5 billion in securities backed by subprime auto loans, compared with $11.75 billion in 2011, according to ratings firm Standard & Poor's. The pace has continued so far this year, with $5.7 billion of the securities issued, compared with $4.4 billion for the same period last year, according to Deutsche Bank AG. On Monday alone, three deals totaling $1.6 billion of subprime auto securities were announced by Wall Street banks.


To make up for the risk of taking on increasing numbers of high-risk borrowers, subprime auto lenders charge annual interest rates that can top 20 percent.


The Exeter loan Nelson and his wife got, for example, carried a 21.95-percent rate.




Critics of the Fed say the growth in subprime auto lending is just one of several mini-bubbles the bond-buying program has created across a range of assets - junk bonds, subprime mortgage securities, and others.




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




"We are sailing deeper into uncharted waters," Fisher said in a speech six days after the Fed's September 13 announcement of QE3. "Why would the Fed provision to shovel billions in additional liquidity into the economy's boiler when so much is presently lying fallow?"




Subprime auto loans may seem like an obscure corner of finance, but the names behind the expansion are familiar.


Santander Consumer USA Inc, a unit of giant Spanish bank Banco Santander SA, is one of the biggest sellers of securities backed by subprime auto loans, according to S&P. In 2011, KKR & Co, Warburg Pincus and Centerbridge Partners bought a 25 percent stake in the Santander unit for $1 billion.


Capital One Financial Corp, General Motors Co and Ally Financial Inc are also steadily increasing loans to subprime borrowers.




Less well-known upstart Exeter, founded in 2006 and based in Irving, Texas, is run by executives from AmeriCredit Corp, an auto-finance company acquired by General Motors in 2010. It reported $100 million in originations in May 2010. It expected to hit $1 billion in 2012 and $2.2 billion by 2015




In 2008, a Goldman Sachs Group Inc fund, through an investment in a private-equity fund, helped infuse money into Exeter. Then, in 2011, Blackstone bought its controlling stake




After the Blackstone deal, in particular, the push was on for Exeter to expand its loan book, according to a former employee. "Everybody was under extreme pressure to hit goals," this person said. "Your job is in jeopardy. It was not sugar-coated."




Exeter touts the firm's "highly sophisticated risk management process," which employs a "decision science" system underpinned by "predictive models." The marketing book adds: "The end result is to deploy tools to management allowing for precision control over credit performance."




This process results in customers with an average credit score of 556 and average annual income of $38,393, according to the pitch book. These borrowers pay an average interest rate of 21.4 percent a year.




Moody's Investors Service, in a move rare among ratings agencies, issued a report in March 2012 saying it would not have assigned a high investment-grade rating to the notes. "Exeter is small and unrated, with limited experience and little asset performance history," it said.




Regardless of the relative safety of such securities, a rapidly growing lending business that bakes into its assumptions a 25 percent failure rate is almost certain to result in more people defaulting on more loans. In 2011, Exeter Finance was listed as a creditor or participant in 252 bankruptcy proceedings. In 2012, the number increased to 1,144.




...bulk of the filings he works on involve subprime debt - loans his clients shouldn't have gotten in the first place. "Most of them that's getting those types of loans are the same ones who's getting the cash loans or payday loans or title loans," Wadsworth said.


Charles Thomas, an electrician in Park Forest, Illinois, filed for Chapter 7 bankruptcy only four months before he took out loans from Exeter and Santander in November 2011.


Efforts to buy a car failed at six different dealers, but an online car-loan application he had filled out prompted an employee from Family Hyundai to call: Thomas had been preapproved... (Thomas's bankruptcy court filing lists personal property of $25 in a checking account, $1,000 in household goods and $300 in clothing).




Despite the risk that borrowers like Thomas present, investors have proved increasingly willing to put their money into subprime auto debt for lower relative returns. According to Barclays Plc, the average spread - a measure of investors' risk tolerance - between top-rated securities underpinned by prime and subprime auto loans and a benchmark interest rate hit 0.32 percentage point in February. That represents a remarkable increase in risk appetite from the 8.85-percentage-point spread at the peak of the financial crisis in autumn 2008.




With so much investor money backing subprime auto loans, and the resulting expansion of lending to questionable borrowers, some market watchers are beginning to sound alarms - albeit muted ones. Fitch Ratings in March said it was "concerned that the competitive landscape is creating an environment that encourages lenders to compete by easing credit terms."

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Kaiser Sousa's picture

they didnt mention this caveat on CNBC so you must be lying Tyler's!!!!!!!!!!!!!!!

20% interst rate....what a fucking bargain...

goin out and get me a Hemi.......



DJ Happy Ending's picture

This dovetails perfectly with Biden's advice to buy a shotgun. Coincidence? I don't think so.

Cult_of_Reason's picture

Rumor says that Stanley "Stan" Fischer has advised Ben "Money Printer" Bernanke to secretly apply for asylum in Israel, "just in case as a back-up plan B". What is the probability this rumor is true?

Also, allegedly, Alan "Asshole" Greenspan has already obtained dual Israeli citizenship. What is the probability this rumor is true?

otto skorzeny's picture

mayors rahm and jewberg already have it

Cult_of_Reason's picture

Banksters Blankfein & Dimon probably already have it too.

AlaricBalth's picture

Very good paper from NBER. Although written in 2007, it remains statistically relevant.

Why Subprime Auto Loans Default

"The average purchaser finances around 90 percent of the price of the automobile, with the average loan size being around $11,000. Repayment is highly uncertain: more than half of the loans default, and the majority of these default within the first year of repayment."


ghandi's picture



"...After the Blackstone deal..."

Shitttttt, you know a company is gonna die or burst infected with disease if Blackstone (aka Satan) gets involved.

prodigious_idea's picture

"20% interst rate....what a fucking bargain"


20% is as good as it gets - and that's generally just for new vehicles.  Used car rates are nearly always greater than 20% and 30+ isn't unusual.  The only number that matters to the borrower is the monthly payment.

johnQpublic's picture

just wait til people are using their car as down payment on a shotgun

Shizzmoney's picture


What is the probability this rumor is true?

1% - but I'm giddy at the prospect of all of these assholes leaving.

TheFourthStooge-ing's picture

So did the shady corporate person known as Exeter Finance pass a background check for that shotgun?

StychoKiller's picture

So, the car dealer got a shotgun to blow away zombies in the future?  Kewl! :>D

GOSPLAN HERO's picture

Gun = cash.

Gold = cash.

Silver = cash.

Ammo = cash.


DoneThis2Long's picture

And the gooberment wants to control or ban all of them!!!

Ironically, all gun-grab schemes are pimped and pumped by Bloomberg, Rham, Feinstein, Bloomenthal, Schumer, etc etc etc. You'd think they know better. Even Reid stayed the fuck out of this one. Interesting. Of course, they all have their own protection and heat.

malikai's picture

No worries, the fed will be buying these too, at par, from your favorite PD.

McMolotov's picture

This country is fucked up beyond repair. A nation of debt slaves cannot survive.

otto skorzeny's picture

debtor's prison for the debtors-guarding them will bring employment-WINNING

foodstampbarry's picture

I saw the writing on the wall in 08 when the Marxist was elected. This was the plan from day 1 of his administration - Over burden the system with extreme debt. The communists have won.

General Decline's picture

Do you really think so?  I believe he calls all the shots.  Afterall, he is the most powerful man in the world.



torak's picture

"It seems we truly never learn."

Please use the word "THEY" instead of "WE".   'We' don't have much of anything to do with this never-ending stupidity. 

Urban Redneck's picture

OVER A DECADE AGO I got told in no uncertain terms to stuff my reservations and sign off on a lending product roll-out because I wanted to see the underlying formulas Fair Isaac was using for its "highly sophisticated risk management process," which employed a "decision science" system underpinned by "predictive models." allowing us  "precision control over credit performance."  Not surprisingly I got out, and they got a bailout.


Rinse, Repeat.


However, since a handful of bankers are capable of pushing a few billion of product into the quivering hands of the debt-addicts, I think the democratic "we" is sickeningly appropriate.

MisterMousePotato's picture

aka: I get the kind of government that THEY deserve.

mr1963's picture

You see cars running in parking lots all over. Reason, you turn it off the lender can shut it down, then repo it. You leave it running, they can't shut it down. We see it all the time.

prodigious_idea's picture

Running or not, those devices almost always have GPS so they can find the vehicle practically anywhere.  Never turning off the ignition doesn't do anything to avoid repo.  Probably makes it easier since the keys are in the ignition when the repo crew shows up. 

TeamDepends's picture

Does Hyundai make a van big enough to live in?

Buckaroo Banzai's picture

It all depends on how big you are. The good news is, it's my understanding that you can park it down by the river.

McMolotov's picture

I miss Chris Farley. It's a shame we lose so many fat, funny guys instead of bankers and politicians.

TeamDepends's picture

Indeed.  His "motivational speaker" was all-time.

TeamDepends's picture

Perhaps one of you interweb gurus could provide a video link.  Might brighten someones day.

Buckaroo Banzai's picture

His brother, Kevin Farley, does stand-up. Opens for David Spade.

General Decline's picture

I met Chris down on Rush street one night many moons ago.  What a cool, down-to-earth guy. 

vulcanraven's picture

Ok I gotta step in here for a second....


I met Chris Farley too, about a month before he overdosed. I was born and raised in Los Angeles (yes I know, I live in hell on earth) so celebrity citings are pretty common. Was at this bar called Hollywood Moguls one night and went up to get a drink, found myself standing next to a completely coked out and belligerent Chris Farley. Our conversation follows:



Me: Yeah man, what movie?

Chris: OH..... It's called "SHIT MONSTERS"

Me: What? Never heard of it, what is it about?


Me: Sounds awesome dude, can't wait to see it


Then he was wisked away by the two porn broads he happened to be hanging with.

Cool story bro.

TeamDepends's picture

Moral of the story:  Cocaine is evil.

StychoKiller's picture

Yet, pr0n broads seem to like it...

Bodhi's picture

This will end in tears.

Cursive's picture


The crying has already begun.  The Nelson's marriage already ended in divorce (she kept the Suzuki) and the Constable is driving a potential repo and looking for a new iPhone.

Stoploss's picture

Without a shotgun too.

duo's picture

It will end in a lot of nice cars coming off lease in about 4 years.

otto skorzeny's picture

by then we will be in a "Road Warrior" type situation to fill them with gas

McMolotov's picture

Long shoulder pads and assless chaps.

otto skorzeny's picture

how did you know what I am wearing right now?

duo's picture

you'll probably need kneepads in that case

catacl1sm's picture

Something about doing the same thing over and over and expecting different results... oh yeah.. YOU'RE CRAZY!

GeezerGeek's picture

At least the enlightened elitists and the TBTF banksters will never revisit subprime loans on houses, because we all know how that turned out. Right?



ghostfaceinvestah's picture

Not to mention piggyback loans:

Piggyback HELOCs May Be Staging a Post-Crisis Comeback By  APR 3, 2013 11:05am ET

Piggyback mortgages all but disappeared following the housing bust but they appear to be staging a comeback as lenders continue to gain confidence in the housing recovery.

bearish1's picture

But, but, but......It will work this time!!