A booming business in lending to poor people with bad credit who need cars to get to work is as much about Wall Street’s demand for high returns as it is about used vehicles. . . . In a kind of alchemy that Wall Street has previously performed with mortgages, thousands of subprime auto loans are bundled together and sold as securities to investors, including mutual funds, insurance companies and hedge funds. By slicing and dicing the securities, any losses if borrowers default can be contained, in theory.I marvel once again at the problems created in our economy by too much money. With so much money chasing after any decent investment opportunity, the only way investors can get what they consider good returns is by taking bad risks. To "manage" those risks they deploy a whole array of techniques -- securitization, credit default swaps, etc. -- which do reduce risk for the original lender, but on the other hand have the effect of distributing the risk through the whole system, making everything vulnerable to a big enough crash. Right now this is still a pretty small business by Wall Street standards, so it poses nothing like the risk of the mortgage fiasco. But it is exactly the same process in action, and it brings home again why we desperately need banking regulation and why Republicans are crazy to keep fighting it.
Tuesday, January 27, 2015
This Time with Auto Loans
What could possibly go wrong with this?