What Could Go Wrong?

The subprime loan market is making a come back, but with a twist.

This time we will package subprime auto loans at risk of default into triple A-rated securities, rather than home loans.

The Los Angeles Times today noted that investors are pouring money into car dealerships that provide high-cost loans to those with poor credit. The dealers are assembling these loans — about one in four of which defaults — into securities, selling them off much like subprime mortgage securities were sold around the world. In fact, “in the last two years, investors have bought more than $15 billion in subprime auto securities.” The Times noted that “although they’re backed mainly by installment contracts signed by people who can’t even qualify for a credit card, most of these bonds have been rated investment grade.

The subprime auto securities are receiving AAA ratings and being sold in the same manner as the mortgage-backed securities that lead to the 2008 financial crisis.

Meanwhile, Standards & Poor's does not even consider the United States to be worthy of a AAA rating. Chew on that.