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Subprime Is Back With A Vengeance
Submitted by Raul Ilargi Meijer via The Automatic Earth blog,
Christopher Helin Franklin car on slope, San Francisco. 1920
A few days ago, I wrote an essay about how ECB head Mario Draghi seeks to redefine the definitions of certain words and terms, like the one that define financial instruments, because he needs to find hundreds of billions in new spending money in Europe without adding to the behemoth existing debt (Germany won’t let him do that). And yes, that is indeed as impossible and meaningless as you think it is. But these are desperate times.
Thing is, I called that essay Draghi To Save Europe With Semantics , and maybe I shouldn’t have, because it’s obviously not the most sexy and catchy title on the planet, but my problem there was, it captures what I was talking about. And it’s all much broader and bigger than that, but then that’s what the article tries to explain.
Moreover, the financial press also catches up. To the fact that semantics and re-defining are the flavor du jour, once again, just like they were in 2005-6-7. When ratings agencies used the confusion about what things actually mean to stamp AAA ratings on everything including your kids’ snot nose tissues and toilet paper. And that is an important development, if you care about preserving some of your remaining wealth. Which I think you’d like to do, so please bear with me.
Three months ago, Tracy Alloway stated the obvious at FT:
Doubts Raised Over Rating Agency Reform
Fitch, one of three big rating agencies, this week criticised credit ratings given by its competitors to a securitisation containing a loan secured by the Westin – the latest instance of agencies sparring with each other over so-called structured finance deals. Such deals bundle together a wide variety of loans into bonds that can be sold to large fund managers who use the evaluations of credit rating agencies to help inform their investment decisions.
Typically, these opinions are paid for by the financial firms that create the deals. But, since the financial crisis, regulators have encouraged credit rating agencies to give “unsolicited” opinions on deals that they are not hired to evaluate, as part of an effort to avoid the “ratings shopping” that proliferated before 2008.
However, as the rating agencies trade public barbs amid a resurgence of certain types of structured products, questions are being raised as to whether these unsolicited opinions actually have much effect on investors’ thinking. And are the banks that securitise loans simply taking their deals to the agencies likely to give them the highest ratings?
Translation: nothing has changed. The ratings agencies are too powerful, because the parties that pay them to issue ratings pay them too much to get rid of or even reform.
Which seamlessly takes us to Tracy Alloway today:
‘Ratings Shopping’ Makes A Comeback In The US
Sales of subprime mortgage bonds have withered since the financial crisis, but fresh concerns are arising as issuance of some other types of securitisations surges. Sales of bonds backed by loans used to finance car purchases undertaken by the least creditworthy borrowers have reached pre-crisis levels in the US, prompting a Department of Justice investigation. While losses on subprime auto asset-backed securities (ABS) remained low during the crisis, there are concerns that new specialised lending companies are making riskier loans which are then being bundled into the bonds.
Fitch Ratings has been hired to rate only four of the 29 subprime auto ABS deals sold so far this year, after telling issuers that the vast majority of the bonds did not deserve the triple-A ratings reserved for the highest-quality credits. Fitch – one of the “big three” agencies alongside Moody’s and Standard & Poor’s – warns that a flood of new entrants into the subprime auto lending market are lending to riskier borrowers as they seek to establish a foothold in the market. The creators of such securitisations typically pad the debt with extra cash or introduce other safety features – known as “credit enhancement” – to generate higher ratings on bonds comprised of riskier loans.
“The idea that recent loss history plus credit enhancement ‘heals all wounds’ can be short-sighted,” said Kevin Duignan, global head of securitisation at Fitch. “It’s often last one in, first one out in subprime.” He added: “We believe the risks associated with small lender sustainability are being underestimated by the market and some other rating agencies.”
US sales of commercial mortgage-backed securities, or CMBS, have also staged a recovery with $102bn worth of the deals sold last year – the highest amount since the $231bn issued in 2007, according to Dealogic data. At the same time, some market participants have been warning that the quality of the loans that underpin the bonds – typically secured by shopping malls, office buildings and other commercial properties – has been slipping.
You don’t have to be particularly smart to see here this is going. The floodgates are open, once more, and nothing at all, other than semantics and lip service, has been done to make them more secure. Because that would risk the flow of credit, which is the same as debt, and today gets habitually mistaken for money.
The boys in the banks are at it again, and this time their biggest supporters, if not clients, are central banks and treasury departments. If they can bring down investment requirements for pension funds enough from AAA, and they can at the same time – once again – label mezzanine (aka subprime) tranches of complex instruments ‘AAA’, they got it made. How can you go wrong when you have Mario Draghi himself begging you to to play this game?
Germany refuses to allow Draghi to buy sovereign bonds and add to the taxpayers’ risk, but what if you can simply shift it all to pension funds by moving the goalposts on what AAA really means?
We went through this 2007-8, and it ended badly, but apparently it’s just too tempting to leave alone. What is there to say? Insanity takes on entirely new proportions. It’s not just doing the same thing time and again, and expecting a different outcome, it’s doing the same thing and pretend it’s something new, because you give it a different name.
So now we get this concerted effort, the central banks are involved, the ratings agencies are too, to just about force pensions funds, the only store of real wealth left on the planet, to put their trillions into opaque and extremely risky instruments. Because Mario Draghi needs to find money, or whatever we should label it.
Draghi’s ABS-Market Revival Set for Boost From Global Regulators
Mario Draghi is trying to rebuild the market for asset-backed securities in Europe. Global regulators are set to lend him a hand. The International Organization of Securities Commissions will present criteria for marketable ABS to finance ministers from the Group of 20 nations this week, said Chairman Greg Medcraft.
Iosco wants to help create standards that would encourage non-bank investors to buy. A broader ABS market could improve companies’ access to financing and spur growth. That’s the goal behind the European Central Bank’s plan to purchase “simple and transparent” bundled securities with underlying assets including residential mortgages, Draghi said this month.
“What we’ve done is develop criteria of what we consider to be simple, transparent and consistent securitization,” Medcraft said. “We’re looking at providing a framework that actually assists the market.”
The European market for ABS, like that in the U.S., was brought close to extinction in the financial panic of 2008, which was fueled in part by banks taking heavy losses on securitized U.S. subprime mortgage debt even though the tranches they held had been considered high quality. It has been slow to recover. Draghi said on Sept. 4 that the ECB will buy senior tranches – the least risky – of simple and transparent packaged securities. “We want to make sure that these ABS are being used to extend credit to the real economy,” he said.
[..] Medcraft said ABS in the right hands is a “fabulous technology.” “You look at the U.S., the auto-loan sector is booming in securitization,” he said. “I think the market is maturing, but it’s about winning back investors. We don’t want to regulate it. We want to provide a nudge.”
“ABS is a fabulous technology”. As we saw in 2008. Absolutely Fabulous. “The auto-loan sector is booming in securitization”, says one of the Three Stooges. And yes, US subprime auto loans are way up. True enough. Whether we should be happy about that is an entirely different story. It’s still subprime, homes or cars. You’re still lending to people with a huge risk that they can’t pay you back. Because they may be fired from their jobs as burger flippers. But yeah, until they are, the numbers look good.
That’s what Draghi’s policy is, going forward: squeeze the money Merkel won’t let him create out of thin air, out of fixed income, by moving the goalposts on definitions and semantics. It’s a poor man’s game played by one of the world’s post eminent central bankers, and all the rest, the ratings agencies and Wall Street banks, just play along. Draghi gives credence to anything they do. He’s a desperate man.
And by the way, the excesses and insanity of cheap credit don’t stop there either.
Banks See ‘Art of Possible’ in $100 Billion Deal
One year after pulling off the largest bond offering ever, Wall Street debt underwriters are pitching their clients on the possibility of something even bigger.
With investors clamoring for higher-yielding assets and companies on the biggest acquisition spree since 2007, bankers are talking up the ability of credit markets to fund a “mega deal” that Citigroup Inc. says could be backed by $100 billion or more of financing. That’s stoking speculation debt investors stand ready to fund potential takeovers such as a purchase by Anheuser-Busch InBev of rival beermaker SABMiller.
“We are prompting issuers to think outside of the box – in terms of the art of the possible,” said Tom Cassin, co-head of investment-grade finance at JPMorgan, the biggest underwriter of corporate bonds worldwide. “We have got clients that are certainly intrigued by it and interested in it.”
Bankers are pitching the “mega deal” even as investors brace for the 30-year rally in bonds to come to an end. They are telling companies that after fueling $18 trillion in corporate bond sales globally the past six years, including single deals bigger than the gross domestic product of countries from Slovenia to Iceland, appetite isn’t tapering.
Investors have poured about $49.4 billion into mutual funds that buy taxable bonds this year after pulling $20.6 billion in 2013, according to the Investment Company Institute. The added cash has helped shrink the extra yield that investment-grade debt worldwide pays above government securities by 15 basis points to 109 basis points, or 4 basis points from a seven-year low, according to Bank of America Merrill Lynch index data.
I doubt that anyone will have any trouble understanding what this is, and where it goes. The whole shebang is busy re-interpreting and re-defining until there are no more legal barriers for your pension money to be ‘invested’ in subprime loans packaged in ‘securities’ of whatever shape and from. So some trader in the Hamptons can make more wads of cash, through ultra low rates, off of beer brewers buying each other where they would never even have thought of that that at normal interest rates.
This is where our economies are perverted. It’s the final excesses and steps of a broke society. It’s madness to the power of infinity. The only thing that’s certain is that in the end, your money will all be gone. That’s how Mario Draghi ‘saves’ the EU for a few more weeks, and that’s how the big boys of finance squeeze more from what little you have left (which is already much less than you think).
A world headed for nowhere.
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WELCOME TO THE PARTY PAL !!!!!
Nothing new here--these type of loans have been around forever. There will always be people feeding off the desperation of the poor (Payday loans, furniture rentals, pawn shops, etc).
Remember Cal Worthington and his dog Spot? Go see Cal!
A repo man's got all night, every night.
https://www.youtube.com/watch?v=zqHZWdFVyyQ
Wait for the end...sound...familiar?
They don't make movies like they used to any more. Now it's all psycho-analytic, get in touch with your inner child or feminist, ball-busting angst training for the Womyn in our country.
Absolutely Fabulous? Well...
My Cats applied for credit cards. I also cleaned their litterbox today, hate that, cat freak wife. Then I took a dump too. GROSS Domestic Product! GDP!
https://www.youtube.com/watch?v=IytNBm8WA1c
Well, at least with Cal you didn't just get a piece of paper - you got an actual car. Not so much with these illusionists.Reminds me of the movie Now You See Me, where the protagonists create the visual illusion of seeing pallets with wrapped banknotes inside a vault. The reality was that the cash was long gone before the illusion showed it being taken.
Sure sounds like these vermin.
Welcome to Dancing With The Stars, with special guest Chuck Prince.
Shit, like taking out life insurance on 86 year olds living in a assisted living facility, but having the agent list the age as 26. The underwriter is going to box it up and sell it as AAA to pension funds. Me and the agent make out like bandits and the underwriter just ships it down the line for few points. Everybody gets rich, pass the Grey Poupon.
Worse, the 86 year old has unprotected anal sex with Haitian boys in his Nigerian Villa.
All I can say is the radio ads inundate with 0% down, no payments for 4 years, buy a $5 ,000 mattress set for delivery today.
So, don't pay a thing, sleep on a "luxury" bed for 4 years, and really, who is going to come collect?
Probably similar for big appliances etc. Make a little money on delivery services, and show "sales" on the books and in the consumption #s, but is anyone paying cash? It's "financed". It's rigged. All playing like this finance is somehow legit.
Student loans, cars, beds - what next, magazine subscriptions? Giving it away to pretend an economy exists.
Big APpliances - sell the service contracts!
IF you are in a non-recourse state, then NO ONE comes to collect, other than houses, cars & boats
Charge away bitches!!!
I see nothing wrong with that, they pretend to pay us and we pretend to pay them.
BULLISH on Interest Payments.
Bullish on bullshit.
My thought exactly - "the art of the possible" - can anyone conjure me phrasing more bullshit than that?!
'As to suckers:
'There's another one born every minute.'
(P.T. Barnum)
Looking from the Banker's side of the desk, of course the Interest is all he's looking at: The MONEY is FREE to him...
Our Governments are using our taxes to promote this? BUY THIS CAR! -Frank "Obie" Rizzo
Gee isn't this a debt based society after all?
Debt is the new gold! Get it? It's backed by the government!
Wow, a whole percent above treasury paper to finance a new Chrysler 300 with spinner rims in South Central LA, and hope it doesn't spin on down across the Southern border never to be seen again?
Such a deal.
Oh, HELL!
The Chrysler 300 is just trying to go home where it was born!
Used cooking utensils, and confectionary equipment for sale... Will trade for "i Everything"
~ SARC ~
They are bankers. That's what bankers do.
You have to eliminate them from the planet. Not much of a task. It has already happened. You don't have to do anything. Just wait.
The Somalian pirates are on Jamie Dimon's island.
It might soon become apparent the economic efficiency of credit is beginning to collapse and the additional money poured into the system coupled with lower rates can no longer drive the economy forward. When this happens we are at the end game.
At some point the return on loaning money is simply not worth the risk! Why do you want to loan money if most likely you will never be repaid or repaid with something that is totally worthless? When this happens the only safe place to store wealth will be in "tangible assets" and the only lenders will be those who print the money that nobody wants.
The collapse of credit can pose major problems such as what we saw when many sellers were forced to demand payment up front before shipping goods in 2008. More on this subject below.
http://brucewilds.blogspot.com/2014/06/the-economic-efficiency-of-credit...
Yes, and we saw the state govs such as CA issue 'IOU's' (more paper!). It's not going to be pretty.
"You don’t have to be particularly smart to see where this is going. The floodgates are open, once more, and nothing at all, other than semantics and lip service, has been done to make them more secure. Because that would risk the flow of credit, which is the same as debt, and today gets habitually mistaken for money."
The digression from steak to hamburger, and from hamburger to 'meat-glued beef product', and from 'meat-glued beef product' to 'meat-flavored soy with fillers' is only proof of the Second Law of Thermodynamics. 'OMFG' is the NEW 'AAA'.
The auto repo numbers are highly under-reported (I'm sure they only reflect 'new car' purchases, which ARE NOT, I repeat, ARE NOT the majority of automobile sales).
"Sales of bonds backed by loans used to finance car purchases undertaken by the least creditworthy borrowers have reached pre-crisis levels in the US, prompting a Department of Justice investigation. While losses on subprime auto asset-backed securities (ABS) remained low during the crisis, there are concerns that new specialised lending companies are making riskier loans which are then being bundled into the bonds."
'NEW SPECIALIZED LENDING COMPANIES'. Payday loan companies that loan against post-dated checks in accounts that are OVERDRAWN so that the poorest of the poor can scrape together a 'down-payment' for 'Ziggy's Used Cars' so that they can get to work at McDonald's and pay their CRACK DEALER FIRST, I suppose, is the definition of 'NEW SPECIALIZED LENDING COMPANIES'. A used car salesman that moonlights as a repo agent is the NEW definition of 'ENTREPENEURIAL SPIRIT'. The Payday loan companies roll over the loan again, and again, and again, and again...
I'm SURE! (SARC) that CONGRESS will write a whole NEW set of rules about this practice of selling tranches (OOPS, I ,mean 'MEZZANINES') of used-car loans as 'triple-A'.
It kind of gives the OBAMANITE term "CASH FOR CLUNKERS" a whole new dimension of thought reality. A 1993 Ford Explorer with a crush weight value of $300.00 can turn and churn as much as $15,000.00 (if done right). CONGRESS only needs to see that KFC and Burger King and Taco Bell and McDonald's need the ability to CONTINUOUSLY EXPAND their operations, and everything will be 'GREEN SHOOTS' in the 'ECONOMY'... as long as the debtors in the debtor nations need vehicles to get to work to pay the debts...
More likely that Chrysler 300 will go to Russia.
The Russians have enough problems.
SERIOUSLY.
A re-styled 1998 Dodge Intrepid is so much like a 1956 Lada that it isn't even FUNNY.
HELL, they don't want Big Macs either...
Kashkari. Cash carry. The phantom. In, out.
Max out out you home, credit cards,etc, and buy precious metals. Then default and leave the subprimers high and dry.
Interesting picture. The poor of that day didn't have a car; the poor pf today don't have a new TESLA, but they can finance a suburban at 100% LTV of 100 yeears and throw the flat tires and rims into the loan. The poor are relatyively just as poor, or perhaps worse with debt, but they manage to keep up appearances.
Poor of tht day didn't NEED a car. The cities were not destroyed and were still livable, so you walked to work nearby if you lived in the city or you lived on the farm where you worked.
People didn't really need car until they were forced to live in the suburban areas, where they could have some semblance of a normal life and at least get kids kind-of educated in the better schools out there.
Greenspan said he didn't believe in fraud. Can you believe that? Summers, Rubin, Gensler, etc. What happened? Illegal derivatives previously OTC. The private sector criminals rotate into the .gov. Gensler heads the CFTC( ha!, cheese eating little rat). Make the derivatives legal and regulate. Draghi is a flippin prostitute. I mean what a whore. Let Draghi take his little ABS scam to the Russians and see what happens. The european union will be german.
Well about this little tibit here:
The ratings agencies are too powerful
LOLZ!!! Umm, didn't the US cross international borders and raided the S&P offices after they downgraded the US??
Ratings agencies, since that moment, have been completely controlled by the gov
A world headed down the tubes...
... and sure to get there.
I was thinking about runing up loans and not paying them back, but I have a country property worth about 100k, and afraid they will take it...I was thinking about signing it over to someone I trust, then taking out a bunch of loans and not paying them back...I am a firm bliever in Christ, and maybe that would be called stealing. But check this out: They took money for social security and at 56 years old, you and I both know they will never pay me back. So I will take it back other ways. For instance, if you put 25k in the bank, then you go to withdraw and they dont give it to you, isnt that stealing too? Then they tell me, theft begats theft..But I am not stealing, I am simply taking my money back...I dunno know what I am sayin, just ranting.
And may I add...honestann, you are pretty and if you are at ZH you are smart too...Will you marry me? I am fit and good looking :-)
at least my mom told me that, she may be a bit bias :-)
Paper masturbation. Anything to avoid real work.
People rightfully rant about the free money ZIRP bailouts the banksters and large financial service companies continue to receive. But, I think the greater gift from the Fed and government is free risk, (or risk free) dealing. Their engagement and profiteering in almost any highly risky venture is backstopped in a rat’s nest of subtle false regulation and government guarantees so they don’t actually incur the risk themselves. None of them would do it otherwise. Ultimately, the risk gets laid off on everyone else but them.
If you build it, they will come - back. Probably no one will ever let Angelo Mozilo officially run a sub-prime loan operation again. That only makes me wonder what shill he’s doing it through now.
Ever wonder what would have happened if all those trillions of dollars had actually gone into the economy, infrastructure, tax rebates for a smaller government and to stimulate spending and investment? What if GM and the unions had been allowed to fail and natural selection of a competitive economy had taken place. We wouldn't have plastic GM shit offered at 0% for 72 months but what would we have. We have been so robbed as a country.
i've lived 63 yrs., known. and met 1,00's of people, some of them just once for my personal reasons, none of them had less morals than those who plan the destuction of millions of peoples lives for personal monetary gain, and a personal idelogical sceme.
I, for one, would not characterize to-hell-in-a-hand-basket as being 'nowhere', Z/H. Clearly, the goal posts have been moved if 'nowhere'
is the operational definition for where we are heading toward as this Hegelian Spiral brings us ever closer to societal contagion, and ultimately, chaos in North America, and the Western world. 'Nowhere'
is not like a good drinking establisment down the street that has good tunes, and nice looking waitresses, don't ya know.