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Subprime Auto Canary: Deutsche Bank Probes Employees For "Exaggerating ABS Demand"

Tyler Durden's picture




 

Perhaps more than anyone else, we’ve been keen on documenting the rise of subprime auto loans.

Over the course of the last 12 months, data from Experian clearly shows that underwriting standards are falling in the industry as competition for a shrinking pool of eligible borrowers heats up.

  • Average loan term for new cars is now 67 months — a record.
  • Average loan term for used cars is now 62 months — a record.
  • Loans with terms from 74 to 84 months made up 30%  of all new vehicle financing — a record.
  • Loans with terms from 74 to 84 months made up 16% of all used vehicle financing — a record.
  • The average amount financed for a new vehicle was $28,711 — a record.
  • The average payment for new vehicles was $488 — a record.
  • The percentage of all new vehicles financed accounted for by leases was 31.46% — a record.

Note that this is the same dynamic that unfolded in the US housing market in the lead up to the crisis. In order to keep the music going, the universe of borrowers must be perpetually expanded, and that means extending more generous terms to entice customers.

This is critical for two reasons. First, the much ballyhooed US auto “renaissance” must be sustained at all costs or else Phil LeBeau won’t have anything to talk about. As we demonstrated last week, the cracks are already starting to show.

Second, Wall Street’s securitization machine needs feeding. Just as securitizations fueled the housing market prior to the meltdown in 2008, so too does consumer ABS issuance “drive” (no pun intended) the auto market in America today. The model is called “originate to sell,” which simply means that lenders make loans and promptly sell them off for securitization by investment banks who then sell the resulting paper to investors. Obviously, this exacerbates the trend towards lower underwriting standards. That is, if the loan isn’t going to stay on my books, why do I care if the borrower is creditworthy?

Over the last year we’ve seen some truly awful deals go off including a number of horrendous securitizations from Skopos Financial, where “the best part [about getting a loan] is speed.” In late October, Skopos went “full-retard”, selling $154 million of paper backed by a pool of credits in which 14% of the loans were made to borrowers with no credit score.

Needless to say, news that those kind of deals are getting done might well spook investors who have managed to keep a level head amid what is now a trillion dollar bubble.

When investors get spooked, they want more yield for their trouble and that’s likely especially true now given the worrying statistics on loan terms and the three charts shown above.

Given all of this, we weren’t terribly surprised to learn that Deutsche Bank is now conducting an internal probe to determine whether employees “exaggerated demand” in the course of selling subprime ABS in an effort to artificially suppress yields.

“Deutsche Bank AG officials are reviewing whether some employees exaggerated demand as they marketed new securities backed by risky auto loans, potentially suppressing yields for investors,” Bloomberg reports, citing people familiar with the matter. “The bank has looked at communications between the employees and investors to determine whether such marketing practices were normal salesmanship or if they crossed a line, said the person, who asked not to be named because the matter is private.”

Apparently, new CEO John Cryan is also looking at whether special treatment was afforded to VIP clients.

So, it would appear that demand for auto loan ABS may be beginning to dry up as investment banks are forced to engineer an artificial buzz around new deals in order to keep skeptical investors from demanding sharply higher yields. 

As a reminder, if the market for auto loan ABS stalls (so to speak), it will trigger a chain reaction all the way down to the dealers who will suddenly care about the creditworthiness of borrowers again.

Once that happens, the US auto "miracle" will suddenly disappear in a cloud of noxious tail pipe exhaust as the one reliable "driver" of consumption in America is exposed for what it is: a castle built on subprime quicksand.

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Thu, 01/14/2016 - 11:12 | 7045595 Winnipegger
Winnipegger's picture

And so it begins...

Thu, 01/14/2016 - 11:28 | 7045656 Uchtdorf
Uchtdorf's picture

The automakers are also complicit. FCA is fudging their sales data.

http://www.autonews.com/article/20160113/RETAIL01/160119818/0?cciid=internal-anhome-mostright

Thu, 01/14/2016 - 12:57 | 7046071 Manthong
Manthong's picture

It’s not your father’s Ninjamobile.

Thu, 01/14/2016 - 12:59 | 7046092 Manthong
Manthong's picture

ABS.. Automotive Bullshit Security

Thu, 01/14/2016 - 11:14 | 7045604 Bill of Rights
Bill of Rights's picture

Man you guys see the 2017 Lincoln Continental, sweet ride.

Thu, 01/14/2016 - 11:37 | 7045688 css1971
css1971's picture

Audi clone.

http://www.audi.de/

Thu, 01/14/2016 - 11:15 | 7045609 Dr. Engali
Dr. Engali's picture

It's funny how banks suddenly start probing employees when things start to go south. Let's just pretend that the behavior wasn't encouraged when things were in the uptrend.

Thu, 01/14/2016 - 11:17 | 7045617 Arnold
Arnold's picture

I suspect that we are just now finding the curbs to enthusiasm.

Thu, 01/14/2016 - 12:02 | 7045620 freewolf7
freewolf7's picture

Investigate to appease whomever cares, and...find nothing.

Thu, 01/14/2016 - 11:25 | 7045650 Ghordius
Ghordius's picture

it's not banks. it's megabanks. the difference is profound

in a bank, the kind of company with a state licence to generate credit, management has some clue of what is happening and why, and who is taking which risk

in a megabank... well, you have to understand how they got there: by slapping one bank to the other until they were humungous. where the real managers of them are somewhere two or three levels down in the chain of the CEO. and that's the reason why they even need "internal probes". or why the Bank of England was trying to lift off a probe into "bank culture"

de-regulation gone mad has created a cross between Godzilla and Zombies, the immortal megabank. and nobody has the guts of doing the right thing, i.e. break them in pieces, anti-trust style

Thu, 01/14/2016 - 11:30 | 7045663 Dr. Engali
Dr. Engali's picture

You won't find any disagreements from me there.

Thu, 01/14/2016 - 12:50 | 7046032 847328_3527
847328_3527's picture

When banks were moar local and also held onto most of the loan, things were alot different.

 

Also, in those days white collar criminals were indicted and actaully saw jail time.

Thu, 01/14/2016 - 21:33 | 7048646 LibertarianMenace
LibertarianMenace's picture

Securitization internationalized local cash flow, mind you, for monetary purposes. When the reserve currency closes its gold window, fiat notes must be converted to interest bearing assets to support the inevitable rise in the money supply. As a result, local money no longer recirculates where it was first spent, killing the local economic base. Take housing, one of the largest local investments and what happens to the income stream from the loan? Instead of remaining a local interest bearing asset to be recycled locally, it's bundled with every other loan across the country and converted into a jumbo, so some sovereign like Saudi Arabia has somewhere live to park their excess cash. Meanwhile, the One Bank gets to skim the sovereign's commission. It's dia-bO-lical.

Thu, 01/14/2016 - 13:04 | 7046119 Apply Force
Apply Force's picture

Anecdotal story - Someone please tell me if I am off base here...

Went into a Chase branch maybe 6 or so years ago to close all of my accounts.  Financed a car through Chase in mid-2000's that was paid off about a year or so prior to me attempting to close all accounts, with auto loan still showing as an "active" account, and they would not close the account. So I am assuming that this "loan" account still sits on their books as an asset, when in reality it is a 2004 car that was paid off in 2008.  And now that "asset" sits on their books as collateral for ($$ ??), when in reality it is not their asset, and not a high "worth" asset at this point anyway.

 

 

Thu, 01/14/2016 - 11:16 | 7045613 Colonel Klink
Colonel Klink's picture

Douche Bank, weren't they involved in the LIBOR rigging scandal too?  Bad global actor needs to have its US license pulled.

Thu, 01/14/2016 - 11:22 | 7045621 Dr. Engali
Dr. Engali's picture

If we pulled the license of every bad global actor we wouldn't have any banks......., Hey wait, you may be on to something.

Thu, 01/14/2016 - 11:44 | 7045731 Ghordius
Ghordius's picture

then you risk that the US Treasury has no Primary Dealers anymore. a lot of the "leeway" that PDs get on the global scene is because they are the supporting pillars of the UST

this is not particular to the US, mind. every country that has sovereign bonds circulating has some kind of "network" of dealers, and most of the times it's the national banking system

Greece comes to mind. the pause in the media? the four big Greek banks needed restructuring. the cause? all those Greek sovereign bonds, who nearly broke Cypriot banks

whereas the US has a supporting network of global megabanks. after the principle that anything worth doing is worth doing it in the biggest style possible

you can have megabanks, but you cannot have nice megabanks. the inherent slight anti-social behaviour of business generates extreme anti-social behaviour in Big Biz

the difference between a small, cute lizard versus a Tyrannosaurus Rex. but hey, kids love the Tyrex, don't they?

Thu, 01/14/2016 - 12:27 | 7045937 Dr. Engali
Dr. Engali's picture

"then you risk that the US Treasury has no Primary Dealers anymore."

 

That's pretty much the idea.

Thu, 01/14/2016 - 14:13 | 7046523 Iam_Silverman
Iam_Silverman's picture

"That's pretty much the idea."

True, it's just so labor consuming for the Federal Reserve to float out that debt to be purchased by the PD's who in turn reverse-repo it to the FedRes.  They could certainly save some time and effort by cutting out the middlemen!

Thu, 01/14/2016 - 11:28 | 7045616 williambanzai7
williambanzai7's picture

Line? What fucking line?

There used to be three words that scared the shit out of banksters: Sherman Act, Glass Steagal and Lender Liability, all toothless now.

Thu, 01/14/2016 - 11:17 | 7045618 Panic Mode
Panic Mode's picture

I am a farmer, practices witch hunt and keeps a lot of scapegoats. Time like this, I am more than a Marvel hero.

Thu, 01/14/2016 - 11:18 | 7045624 mtndds
mtndds's picture

I will believe it when I see HOUSING PRICES drop and unemployment starts to take off.  Until then its party on!!

Thu, 01/14/2016 - 11:19 | 7045626 NEOSERF
NEOSERF's picture

We turned a blind eye to some folks

Thu, 01/14/2016 - 11:20 | 7045632 2ndamendment
2ndamendment's picture

So I bet the auto industry HATES me cause I still drive my 2004 Volvo beater with 200K +++ miles on it!?!?!?! 

Thu, 01/14/2016 - 11:22 | 7045634 MATA HAIRY
MATA HAIRY's picture

this is why they are cramming the rapeugees into the West--they need an ever expanding pool of consumers

Thu, 01/14/2016 - 11:23 | 7045643 Dr. Engali
Dr. Engali's picture

No, to create chaos and destroy borders. The NWO globalists at work.

Thu, 01/14/2016 - 11:50 | 7045770 Ghordius
Ghordius's picture

would you be willing to contemplate the idea that the US of A is the one "most globalist" entity in the world? as in "the one that destroys most borders"?

and that Americans are those who support - with their Way of Life, culture and business - most globalist endeavours?

just asking, we here are often painted as globalist... while we talk about borders between us, not towards the rest. those, it's the US gov that tries to tear them down

Thu, 01/14/2016 - 11:53 | 7045788 Dr. Engali
Dr. Engali's picture

Would I deny that fact? Hell know! I'm sick and tired of the U.S global antics. I'm just wondering when the rest of the world is going to feel the same and tell us them to fuck off.

Thu, 01/14/2016 - 11:22 | 7045637 youngman
youngman's picture

a Broker lying to a customer..say it isnt so....lol

Thu, 01/14/2016 - 11:29 | 7045658 surf0766
surf0766's picture

no news causes a 200 pt turn around?

 

Thu, 01/14/2016 - 11:30 | 7045661 buzzsaw99
buzzsaw99's picture

isu u (missing z)

Thu, 01/14/2016 - 11:31 | 7045667 Chris P
Chris P's picture

It seems like the banks only know one tune. Weahter it be housing , student loan or autos the game is the same. Lever it beyond it's max and then walk away with all the money

Thu, 01/14/2016 - 11:31 | 7045670 Baron Munchausen
Baron Munchausen's picture

All of this seems eerily familiar.

Thank the gods Obama firewalled the real economy from the banks, or else we'd be in real trouble of the sort even massive printing and secret bailouts globally could not fix.

Thu, 01/14/2016 - 11:32 | 7045673 Spungo
Spungo's picture

Why would anyone buy a car loan or basket of car loans? Have they ever bought a car before? The car finance guy would blatantly lie on my application. If I say my income is 50k, they might write down 60k just to make sure it gets approved. It would be silly to assume the guy only does that on my loan application.

Thu, 01/14/2016 - 11:37 | 7045685 hedgiex
hedgiex's picture

That DB still exist is amazing. The derivatives books and the inferior trading desks that are jokes. Now only they wake up to spooks on investors by their talents (many have already walked). Go get your 2 way quotes from this inconsequential market maker. 

Thu, 01/14/2016 - 11:46 | 7045743 venturen
venturen's picture

The employee probably already has a job offer at Goldman.

Thu, 01/14/2016 - 11:50 | 7045764 SmedleyButlersGhost
SmedleyButlersGhost's picture

If it drives, flies, floats or fuks - it's cheaper to lease it.

Thu, 01/14/2016 - 12:10 | 7045874 shovelhead
shovelhead's picture

No kidding.

Nissan, when they run out of places to stuff cars, will do a huge lease dump. Dirt cheap.

Thu, 01/14/2016 - 12:00 | 7045836 wstrub
wstrub's picture

There's more under that rug......

Thu, 01/14/2016 - 12:01 | 7045840 shovelhead
shovelhead's picture

C'mon guys, get real.

Somebody's gotta buy this shit. How would finace even work at all if it wasn't for the greedy and the dumb folks out there?

RaShawn gets his Escalade and you get to pocket some of his cash if he ever goes back to work.

Thu, 01/14/2016 - 13:14 | 7046192 donebydoug
donebydoug's picture

The real canary?  Cash for clunkers.

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