Bubble Updates

We have been reporting on the collapsing bubbles in the auto industry and public employee pensions. You may not be aware of these unfolding crises because the main stream media is reporting 24/7 on the Russia-Trump connection, a total non-story if ever I heard one. Let’s look at some real news.

Santander Consumer is the largest subprime auto lender in the country with more than $15 billion in outstanding loans to under-qualified buyers. The company dominates the business of bundling these subprime auto loans into Asset Backed Securities for sale to investors. Santander’s first ABS deal of 2015 (SDART 2015-1) carries loans with an average FICO of 595, an average APR of 16.20% and an average term of 70 months. These are people you probably would not want as neighbors. Doesn’t this securitization remind you of the residential subprime ABS that helped to trigger the 2008 financial crisis?

And that’s not all. Moody’s Investors Service reports that Santander apparently only verified income data on roughly 8% of the loans they subsequently dumped into ABS facilities and sold off to pension and insurance companies. These are the second coming of ‘liar loans’, dear reader. General Motors Financial Co.’s AmeriCredit unit only verified 64 percent of the loans sold into a recent securitization. Obviously, the car market has been a finance-driven bubble with the same level of fraud as the housing market 10 years ago.

You can argue that the dollars are not that big…the auto loan market is only a little over a trillion dollars…but this is evidence of systemic fraud that can be found in every credit market from RVs and second homes to tanker ships and wind turbines. It’s the curse of too much cheap money.

Now, if you want fraud with bigger numbers, try the pension business.

Many of our states and cities today are running Ponzi schemes that would make Bernie Madoff proud. But these Ponzi schemes, known as “massively underfunded pension funds”, are completely legal and no one seems to notice or care.

Take, for example, the Chicago Teachers’ Pension Fund (“CTPF”) which has roughly $10 billion in assets to cover an estimated $21 billion in future payment obligations.  The fund has to pay out roughly $1.4 billion to retirees each year to cover benefits. That’s one problem. Here’s another: in 2016 CTPF actually showed a net loss of $28 million on its $10 billion in assets.

How did they make up the difference?  They did a Madoff. The CTPF used the $700 million that was contributed to the fund in 2016 from taxpayers and the $192 million contributed by teachers from their pay checks. This is the money that was supposed to be invested on behalf of current teachers to pay for their future retirements. Instead, the CTPF gave it to current retirees. Just like Madoff, the CTPF takes money from new investors (current teachers) and uses it to fund redemptions (benefit payments to current retirees).

There are thousands of these underfunded pension plans all over America. There are an estimated $5 trillion in underfunded pension obligations in the public sector alone. Like most financial time bombs with a huge tail risk, the devastating consequences of America’s failed public pensions will not be addressed until it’s already too late. The catastrophe will be too large for even America’s taxpayers to bail out.

I hope, dear reader, you aren’t relying on one of these plans to pay for your old age.