Back in the day (i.e. last fall), larger banks in the US went through a rite of passage. It was called the “we don’t do subprime lending” declaration. The banks made the declaration to avoid being tarred-and-feathered as lending heathens.
Banks are doing another mea culpa these days. Only this time it is called the “we don’t do auto finance” declaration. Oh, how far we have fallen.
I heard this mea culpa several times this week from executives at some of our nation’s most august banks. (Wait, are any US banks still “august”?) They made their assertions to Wall Street investors at a conference I attended, and it was jarring. In my opinion, the auto finance industry’s priority today is not protecting itself from more regulation (that’s No. 2 on my list), it is resuscitating its image with the investment community.
There was an exception to this lambasting. US Bancorp’s CEO Richard Davis adamantly reiterated his bank’s plan to stick with auto finance, saying it has been in the auto finance business since the 1950s and it will stay in the business through this downturn. Davis was the lone cry in a swirling storm, a storm that is beginning to drown out business logic as well.
When loans are held in portfolios (rather than sold) they were underwritten more carefully. Will banks put some of their own skin (capital) in the game by guaranteeing their own portfolio performance? Nothing like a “personal” guarantee to insure some attention to detail. I commend CEO Richard Davis on USBancorp’s commitment to the auto finance industry.
To the extent that these banks have sold their auto loans via securitization then these banks do have skin in the game through over collateralization, cash reserves, etc. Plus they expect to get something at the end. Banks do have a vested interest in the performance of their portfolios that have been securitized. Does anyone know if any of these securitizations have gone bust (bond holders are taking hits)?