subprime

Conn’s Game: Subprime Loans, Subhuman Lenders

From the keyboard of Thomas Lewis
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One of the stores built by a Conn’s game, based on junk bonds and subprime loans, in Houston Texas.

One of the stores built by a Conn’s game, based on junk bonds and subprime loans, in Houston Texas.

First published at The Daily Impact  December 12, 2014

After some rant or another about the combined greed and stupidity of the industrial Masters of the Universe, I frequently get this response: “Look, they couldn’t be that stupid or they wouldn’t be in charge. They know what they’re doing, and we just don’t understand it.” Seriously. I get that. If a quick refresher on the Enron Bubble and the Dot-com Bubble and the Housing Bubble are not enough to put this turkey of an argument into the deep fryer for once and for all, then consider the true story of Conn’s, a Texas-based 90-store retailer who came up with the Business Plan to End All Business Plans. And it did.

Aesop could not have fashioned a better cautionary tale of greed and stupidity, and now he doesn’t have to. (I’m grateful to Wolf Richter for laying all this out on his blog Wolf Street)

Conn’s game was at first a pretty standard one. It sold furniture, appliances and electronics to people who didn’t have a lot of money. And, to increase the take on each sale, they lent the customer the money to make the purchase. So far, so good. You get an increase in sales from the convenience of in-store financing, and you get additional profit in the form of interest collected on the loan. Lots of companies do it, often successfully. GMAC comes to mind.

But when you’re running a Conn’s game, you are not content to do as well as everybody else. You want to be number one, and Conn’s gamers came up with the answer. Subprime lending. They would finance anybody, without regard for credit score or credit record or assets or ability to repay the loan. That way, they would sell lots of stuff, and become number one in retail. That apparently is where their thinking stopped. If we had asked any of the obvious questions, they would have said, “We know what we’re doing. You just don’t understand.”

And their plan worked. Lord, did it work. People who couldn’t afford to buy a candy bar flocked to Conn’s and walked out with couches, TVs, and double-door refrigerators. Sales went through the roof. In the third quarter of this year Conn’s retail revenue hit $370 million, up 20% from last year’s third quarter. Six new stores were up and running, and gross retail margin was over 40% (Conn’s is no discounter; people who can’t buy anything anywhere else will pay just about any price Conn asks, when there’s no down payment). Retail profits were up 12%.

Another American success story, another bunch of self-made millionaires made billionaires by their own hard work and initiative. They really did know what they were doing, just like the Enron guys and the Countrywide mortgage guys and the shale-oil fracking guys — as long as you did not look at the rest of the picture. As long as you looked only at the retail P&L, Conn’s game is doing fine. How’re they doing over in the finance office?

Lots of paper — $1.25 billion in loans outstanding at the end of September, with an increasing number of them standing out pretty far, as in 10 per cent of them delinquent for 60 days or more. The unit lost $33 million in just three  months, which meant that overall, Conn’s game lost more than $3 million for the quarter. The company explained to its shareholders:

“Delinquency increased year-over-year across credit quality levels, customer groups, product categories, geographic regions, and years of origination… losses are occurring at a faster pace than previously anticipated, due to the continued deterioration in the customer’s ability to resolve delinquency.”

Damn those customers, and their inability to resolve delinquency! They’ve gone and ruined a perfectly good business plan! Conn’s stock has lost 73% of its value in a year. If you are unlucky enough to be the owner of one of the $250 million worth of junk bonds Conn’s sold in June to finance its operations, you might sell it for 60 cents on the dollar if you can find a rich idiot — better move fast — and you can expect 10 cents on the dollar when they default.

Set aside the fact that usury, which used to be a sin, is now a standard business practice (but only when you’re dealing with poor people); never mind that what Conn’s did is not illegal, and not widely regarded as immoral (although it is clearly unethical); and ignore the fact that the business plan is being replicated at full speed in the auto industry, and in the real estate industry (again!); ignore all that and explain to me in what universe, under what laws of mathematics, a sentient human being can be convinced that lending money to people who do not have the ability to pay it back is a profitable enterprise.

If you do I will agree that in that universe, these people are not that stupid, and may know what they are doing. But they still have no business on this planet.

 

***

 

Thomas Lewis is a nationally recognized and reviewed author of six books, a broadcaster, public speaker and advocate of sustainable living. He also is Editor of The Daily Impact website, and former artist-in-residence at Frostburg State University. He has written several books about collapse issues, including Brace for Impact and Tribulation. Learn more about them here.

 

 

The Next Bubble: Cars Under Water

From the keyboard of Thomas Lewis
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Most new cars sold in America today are submarines — they live under water.

Most new cars sold in America today are submarines — they live under water.

First published at The Daily Impact  August 6, 2014

The Masters of the Universe — those energetic guys and gals who brought the world’s economies gasping to their knees six years ago — are at it again. Having successfully avoided punishment (for the most part) and staved off any meaningful interference by regulators, they have gone back to their favorite modus operandi: predatory subprime lending to finance big-ticket purchases followed by bundling and securitization of the shaky loans. Not houses, this time. Cars.

The auto industry, saved by the skin of its teeth by government intervention after the crash of ‘08, has been one of the few bright spots of the anemic recovery that has ensued. Annual auto sales have marched steadily upward, for the past few years as if on steroids, and this year are poised to blow through the 16-million mark, the highest in (you guessed it) eight years.   Now we know how they did it:

Longer terms. Remember when auto loans were for two years, period? Forget it. The average term for an auto loan has reached 66 months, and terms of seven years are not uncommon.

Bigger loans. Remember when you had to make a substantial down payment to buy a car? Forget it. Lenders (which are often wholly owned subsidiaries of the car manufacturers or dealers) are happy to lend you now only the entire price of the car, but more. Just sign here. Total loans outstanding have been increasing by ten per cent a year for four years, and are now over $900 billion dollars.

Lower credit scores. Remember when you had to have good credit to get a loan? Forget it. Subprime lending, defined as lending to people with credit scores below 620, now accounts for 25 per cent of all auto loans.

For the sub-subprime, a lease. If you can’t afford a 120% loan at 0% interest for seven years, then a lease is the thing for you. By increasing the balloon payment at the end, we can get that payment down to the price of a dry martini. One quarter of all new-auto sales are now leases, which means that half of all cars sold are going to either leases or subprime lenders.

As we learned in the housing-bubble implosion, those who have no responsibility for collecting loans are happy to make them to just about anybody, and the happy days of no-doc, liar, and ninja (no income, no job, no assets) loans are here again. The minute the loan is made, it is sold to a bundler (on the well-tested theory that a whole bunch of bad loans are a better investment than just one), the bundle is securitized and the securities sold, and everybody goes forth to kill again.

Setting aside for a moment those who will not be able to make their payments (this rage is new, so defaults are still relatively low) just about every car “owner” in this scenario is under water from the start, and especially at the end. Most people trying to buy a different car at the end of three or four or seven years will find that in addition to the cost of the new vehicle they will finance a hefty balance on their old one. That’s gonna hurt.

Especially when you consider that the days of zero interest rates, brought to you by your friendly national reserve bank, cannot last forever, and a return to normal market interest rates will have a cascading effect on underwater motorists: it will be harder to get the next car because loan interest rates, thus payments, will be higher and also because investors will have lots of options to earn good returns and reduced motivation to go with subprime stuff.

In the words of one of the country’s leading analysts of the auto business, Adam Jonas of Morgan Stanley, there is “little doubt we’re in bubble territory.” He thinks the downside will take a few years to kick in, but then we’ll be looking at “peak auto.”

Just another indication that the Masters of the Universe will not be diverted from their endless efforts to sate their insatiable greed, not by experience, example, history or ethics. Sending some of them to jail would work, but their wholly-owned and -operated governments have learned not to interfere with greed. (Except for the US Department of Justice, the one part of government that seems not to have received the memo that laws are for little guys. It has opened an investigation into subprime auto lending.)

Apparently, this barn can’t be cleaned out until it falls down.

 

***

 

Thomas Lewis is a nationally recognized and reviewed author of six books, a broadcaster, public speaker and advocate of sustainable living. He also is Editor of The Daily Impact website, and former artist-in-residence at Frostburg State University. He has written several books about collapse issues, including Brace for Impact and Tribulation. Learn more about them here.

 

 

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