Tags: Stockman | subprime | auto | loan

David Stockman: Subprime Auto Lending Is the Latest Big Bank Scam

By    |   Monday, 12 January 2015 02:31 PM

A subprime auto lending scam concocted on Wall Street and abetted by the Federal Reserve could end up causing mayhem in the U.S. economy, according to David Stockman, former White House budget chief.

With a headline that sounds like something his former boss Ronald Reagan might say — "Here They Go Again — Subprime Delinquencies Rising In Autoland" — Stockman on his Contra Corner blog compares the escalating number of delinquent auto loans to the home foreclosure meltdown that came before.

"The apparent macro-economic recovery and prosperity of 2004-2008 rested on the illusion of an unsustainable debt-fueled housing boom; this time it's the auto sector," he wrote.

In Stockman's view, apart from the V-shaped recovery in auto sales fueled by subprime loans, the American economy is only inching forward.

"The fact is, outside of autos and student loans, households have reached peak debt. That is after a 30-year spree of getting deeper and deeper into hock, middle-class households stopped adding to leverage on their wage and salary incomes at the time of the financial crisis; and since then they have actually deleveraged slightly — albeit at levels that are still way off the historical charts."

He noted that much of the recent growth in auto sales is attributable to subprime loans to credit-poor borrowers and add now up to 31 percent of all loans with near-impossible interest rates of 20 percent or more.

The loans are available "primarily due to junk debt financing of non-bank lenders. That is, fly-by-night start-ups organized by Wall Street and private equity funds."

"Car loans are collateralized and recoverable by the repo man when borrowers fail to pay. But unlike the case of housing, there has not yet been a crash in the value of new and used vehicles. So lenders — and especially the big banks like Chase and Wells Fargo — have had a field day making auto loans."

Sooner or later, the soaring default rates from peddling high-interest auto loans to people who cannot make payments will end in a resounding pop like the subprime mortgage bubble, Stockman said.

He predicted the recovery in auto sales is "undoubtedly the last hurrah for the Fed's maniacal embrace of ruinous printing press economics."

Meanwhile, The Wall Street Journal reported that more than 8.4 percent of borrowers with poor credit who took out loans in the first quarter of 2014 had missed payments by November, according to credit industry data. It was the highest level of such delinquency since 2008.

Analysts and some industry experts believe that practices that helped boost 2014 light-vehicle sales to a near-decade high could ricochet badly.

"It's clear that credit quality is eroding now, and pretty quickly," said Mark Zandi, chief economist at Moody's Analytics.

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A subprime auto lending scam concocted on Wall Street and abetted by the Federal Reserve could end up causing mayhem in the U.S. economy, according to David Stockman, former White House budget chief.
Stockman, subprime, auto, loan
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2015-31-12
Monday, 12 January 2015 02:31 PM
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