Subprime Ghost of 2008 returns to haunt the financial world

Anyone remember the meme “Cash for Clunkers” or more formally known as Car Allowance Rebate System (C.A.R.S.)? Back in 2009 Obama had the bright idea to get people to buy new cars by giving them cash back on their old clunkers to buy new more “energy efficient” models. It was supposed to bolster the auto industry during those dark days. So he wrote an executive order to push this through. Of course, no studies nor realistic commonsense went into the planning or implementation of the executive order.

It was reported that only a total of 690,000 new vehicles were sold under the Cash for Clunkers program in 2009. The car owners received on average between $4,000-$4,500 per vehicle while a total of $3 billion was allotted for the rebates.

Americans for Tax Reform went through and calculated that Obama, Pelosi, and Reid spent all of that $3 billion to save $375 million in 5 billion barrels of oil at $75.00 per barrel. But according to Ford and other auto makers, it was a much needed kick start for the declining auto sales industry.

Well, at the same time as the subprime real estate market was taking down the “Titanic” finance industry, auto financing was flowering for old cars needing financing when there was bad credit or other reasons that people could not qualify for newer cars.

In other words, the subprime market moved from real estate over to auto financing. One would have thought caution would have been the watch word for people who had money to lend but were seeing the subprime causing such havoc in the housing market. Apparently not though, many groups jumped feet first into the idea of offering loans to resale dealers so that subprime purchasers could get a vehicle.

By 2014 the “Cash for Clunkers” was getting bad reviews and several MSM sites like Newsweek were ripping it to shreds.

“Did the program work?

According to the careful empirical analysis carried out by the three Texas A&M economists, it did not. Car sales went up during the program, but they went down by enough during the subsequent seven to nine months that the total number of vehicles sold within a year of the start of the program was not affected. And it gets worse than that: because of the environmental agenda embodied in some of the rules of the program, “folks” used their credits to buy smaller, cheaper cars.

As a result, total spending on new cars actually went down in 2009-2010, at the height of the recession. The federal government spent $3 billion on Cash for Clunkers, and by doing so it reduced spending on new cars by, you guessed it, $3 billion. The program, which was somehow found to be consistent with the Obama doctrine of “don’t do stupid stuff,” cost both taxpayers and carmakers $3 billion. Staggering.”

 

About the same time as the negative press came out about the “Cash for Clunkers,” subprime loan companies were beginning to feel the “negative burn” from hasty decisions to jump into the auto loan business.

According to a December 21, 2017 article by Newsweek, not only did the subprime loan groups begin to feel the liberal burn for their efforts but several have been caught in a financial spiral reminiscent of the one that the auto industry itself went through.

“Private-equity firms that plunged headlong into subprime auto lending are discovering just how hard it might be to get out.

A Perella Weinberg Partners fund has been sitting on an IPO of Flagship Credit Acceptance for two years as bad loan write-offs push it into the red. Blackstone Group LP has struggled to make Exeter Finance profitable, despite sinking almost a half-billion dollars into the lender since 2011 and shaking up the C-suite multiple times.

And Wall Street bankers in private say others would love to cash out too, but there’s currently no market for such exits.

In the years after the financial crisis, buyout firms poured billions into auto finance, angling for the big profits that come with offering high-interest loans to buyers with the weakest credit. At rates of 11 percent or more, there was plenty to be made as sales boomed. But now, with new car demand waning, they’ve found the intense competition — and the lax underwriting standards it fostered — are taking a toll on profits.

Delinquencies on subprime loans made by non-bank lenders are soaring toward crisis levels. Fresh investment has dried up and some of the big banks, long seen as potential suitors, have pulled back from the auto lending business. To top it off, state regulators are circling the industry, asking whether it preyed on borrowers and put them in cars they couldn’t afford.

In some ways, buyout firms can only blame themselves. Because of the limited time to show a return on their investments, usually four to six years, there was immense pressure to grow. That led many finance companies to loosen their standards — like lengthening repayment periods and lending to borrowers with lower credit scores — to gain an edge as car sales roared back from the depths of the recession and competitors jumped in. Many pushed into “deep subprime,” the riskiest part of the business that’s grown in recent years.

Bigger subprime auto lenders can still turn to the capital markets. Sales of subprime auto ABS have reached $25 billion, topping last year’s total and almost triple the amount in 2010. They’ve also shored up finances by lending to borrowers with stronger credit, said Amy Martin, an analyst at S&P. That in turn has buoyed shares of some of the biggest ones in recent months.

Martin expects a lot of mergers as car sales slow. In the meantime, PE firms have largely lowered their expectations for a big exit and are trying to make their companies leaner to extract a dividend or sell the loan portfolios.

“Nobody wants to pay much more than book value” for these companies, said Colonnade’s Gillock. “It’s not a disaster, but it’s a failure.”

Buyout firms can only blame themselves.

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Oops! Greedy people grabbing the fast buck–and now there is a new financial issue, only these guys aren’t in the “too big to fail” category nor do they have Obama to dig them out from under what was and could possibly become an issue again.

There are many reasons that someone can’t afford to pay a loan, some are realistic like they were laid off or there were unforeseen medical issues. Others simply chose to pay one thing over the other thinking that Obama would bail them out as well during his time in office.

Well that bailout didn’t happen.

In fact, history may be on the brink of repeating itself. Apparently subprime real estate loans are starting to show back up. According to whatever article one reads, the 2008-2009 crash was (or was not) the fault of the speculators “flipping” properties rather than subprime lending.

With all the tension, genuine fear of a global financial meltdown, and the thousands of regulations generated by the Obama administration in response, one would believe that common sense would prevail; the stock market would have learned its lesson on bundle selling of subprime; and those wanting to purchase as well as those lending to help them would have learned their lesson.

Obviously like many other things, the liberals currently acting like idiots and the financial world have selective short-term memory and have not learned from their experiences. It seems we may again be heading for a financial meltdown. These supposedly intelligent people seem to be falling once again to lows of stupidity. Being intelligent means you learn from mistakes and don’t repeat them.

It never seems to fail that some groups like Democrats have little to no understanding of economics; furnishing on a shoestring; or, work to support oneself rather than becoming a social malcontent and repeat-offender social program burden. Some seem to covet wealth like a devout church-goer. But when is enough, enough? Where will it end?

More than likely, it will end when country’s can no longer fix their financial crises or they fall for lack of foundational common sense, reality, or conservative approaches to wealth.

–Uriel–

About Uriel

Retired educator and constitutionalist
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10 Responses to Subprime Ghost of 2008 returns to haunt the financial world

  1. SafeSpace says:

    Well, Uriel, at least Batears was fair: Taxpayers and automakers were screwed equally by Cash For Clunkers…. If you want a real appreciation of the global auto industry’s problems, consider that there are millions of brand-new vehicles stockpiled in outdoor lots, unsold. The incentives for keeping production rates artificially high exceed the market’s ability to absorb all those vehicles. So we waste resources and create expensive scrapyards.

    • Uriel says:

      No joke on that one. Why produce so many that there are graveyards of new ones? Simple, release only a few and keep the price artificially high. If all of those were lowered to realistic prices where automakers only received barely above cost of production, a lot more people would have vehicles–but then there goes the roadways even more clogged than before. If they only manufactured the number sold per year, then a lot of pollution, gas consumption, and material costs would be lowered. How about going back to human workers not mechanical ones. Eliminate the speed of production and size of inventory and make vehicles that were actually less likely to be recalled.

  2. Whitetop says:

    So Obama was able to dedicate $3 billion of our tax dollars just on his signature alone via the EO. Where the hell was congress? I thought all money spent had to be authorized by Congress. Maybe I read that in a comic book or something.

    • Uriel says:

      Yes — more than likely you did. But Obama was perfect you know. He followed all the laws and the separation of powers rules (sarcasm). Yet Trump who actually follows the law and does the right actions as the president is raked over the coals.

  3. Hardnox says:

    Isn’t it interesting that EVERY Batears program has turned to total shit. I hope these parasites take huge losses. I will set out my tear bucket.

    • Uriel says:

      yeah I haven’t found too many actual things that Obama did that weren;t illegal, wasteful, far left garble, or treasonous. To me he did these things knowing that the results would financially and mentally destroy this country in order to achieve goals totally counter to our nation.

  4. Wise Owl says:

    I will say it again: Liberals are mentally defective, being little more than intelligent animals that can speak, but lack rational, logical, and analytical capabilities that humans should have.

    Well, what about liberal doctors, lawyers, and other professionals? Surely they can think rationally. Yes, but only until an emotional issue (guns, impoverished people, social issues) hits them, and the revert to the emotional domain, issuing executive orders or pushing agendas that only FEEL good, but lack rationality.

    I’ll use guns as an example: Gun crimes are caused by people who do not heed laws. So, what do liberals propose? More laws. Further, they ignore data from failed cities and states that ALREADY HAVE those same laws. Can it be any more irrational than that?? Arghhhh!

    Put liberals in zoos to teach children what humans evolved from.

  5. vonmesser says:

    Cash for clunkers performed a valuable service. It removed 690,000 Obama bumper stickers from the highway.

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