A group of hedge funds, convinced they have found the next Big Short, are looking to bet against bonds backed by subprime auto loans. Good luck finding a bank willing to do the trade.
Subprime Loans
Money managers have looked at betting that subprime auto securities will tank for many of the same reasons that investors wagered against risky mortgage bonds in the run-up to the financial crisis: Loan volume has mushroomed in the last few years, lending terms have become looser and delinquencies are ticking higher. Mary Kane, an asset-backed securities analyst at Citigroup Inc., wrote in a note late last month that the bank has received ‘an explosion of calls’ in recent weeks, after the movie ‘The Big Short’ portrayed a group of traders that profited from the collapse of subprime home loans.
The demand now is coming from hedge funds that trade everything from stocks to bonds, analysts said. But many banks, including Bank of America Corp. and Morgan Stanley, are not interested in making the bet happen for clients, according to representatives of the firms. Some said they fear that helping clients wager against car loans would be bad for their reputation, and that new capital rules and other post-crisis regulations would make the transactions difficult or even impossible to put together.
‘Most trading desks just don’t take that kind of risk now,’ said Mike Edman, a former Morgan Stanley executive who helped invent credit derivatives that helped Wall Street banks bet against subprime mortgage bonds.
This post was published at David Stockmans Contra Corner on February 12, 2016.
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