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Does Bank Of America Want Some Goddamn Brownie Points Or Something?

Refusing to bundle subprime auto loans doesn't make you saint.
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We all know Brian Moynihan is enjoying a nice respite from the ordinary drudgery of being Brian Moynihan. Bank of America greeted 2017 with an uncommon spring in its step, and things in Charlotte are finally looking up. But BriMo isn't content to simply run the nation's second-largest bank. Evidently, he also wants a damn citizenship award.


In a Bloomberg story exploring the curious fact that banks like Wells Fargo and JPMorgan have continued to securitize subprime auto loan even as they stopped issuing such debt themselves, we learn that one major player is conspicuously absent:

At least one Wall Street bank has steered clear of underwriting bonds backed by subprime auto loans. Bank of America Corp., which bought the biggest maker of risky mortgages as the housing bubble was bursting, has consciously avoided the subprime auto bond market out of fear that its reputation could suffer in a downturn, according to a person with direct knowledge of the matter. In consumer auto lending, Bank of America focuses on prime customers.

Well la-ti-dah. It's not like there's a huge pecuniary risk for the banks themselves in bundling garbage auto loans and handing them off to yield-hungry hedge funds and Scandinavian pension investors. As the BofA source evidently wanted Bloomberg to know, this is a matter of saving face, not money.

As for Wells Fargo and JPMorgan, the risks are far from existential. As they continue pumping out subprime securities in the face of a collapsing market, the banks have kept substantial risk from building up on their books by dialing back their own subprime auto issuance. On a broader level, bad car loans probably won't drive a 2008-style systemic meltdown. If these underwriters do happen to get caught up in a burst bubble, they're not going to be left holding gargantuan sums. The $7.1 billion in total subprime auto securities issued in Q1 reflects is a healthy sum, sure, but not big enough to kill.

Still, JPMorgan and Wells Fargo aren't exactly in the clear. The worst-case scenario for these banks is if – god forbid – regulators later find that broad swaths of entire subprime issuance market has been shot through with fraud – which, well, hm. Just as the knowing securitization of fraudulently sold junk mortgages is eventually what cost so many billions in post-crisis settlements, the real risk for current subprime securitizers is taking auto loan issuers at their word.

Now, we're not saying Wells Fargo, JPMorgan et al, in a rerun of subprime mortgages circa 2006, are holding their noses and passing what they know to be grade-A bullshit onto customers who've been assured that everything is buttoned up. But we can understand why Brian Moynihan might look at subprime auto and begin to feel a foreboding queasiness as the word Countrywide flashes before his eyes.

So no, BofA isn't getting any dang brownie points.

Wells Fargo, JPMorgan Wary of Auto Loans, Pack Them in Bonds [Bloomberg]



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