Auto Loan And Credit Card CDOs In Hiding

The press has focused on mortgage-based CDOs and the huge write-offs that investment banks and commercial lending companies have had to take because of the subprime market falling apart. Morgan Stanley (MS) said, when it announced its $10 billion write-off with last quarter’s earnings, that its exposure to mortgage instruments was now under $2 billion.

What the market has failed to acknowledge, at least so far, is that there are huge pools of CDOs based on auto loans and credit cards.

If the economy continues to get worse, credit car and car loan defaults are going to rise. As The Economist writes: “A consumer-credit slump, which looks increasingly likely, would clobber securities backed by credit-card and car loans, which are also pooled in CDOs.”

One of the problems with car loans and credit cards is that they are not backed by an asset as solid as a home. While home prices may be falling, they are still down only about 10% from their peak in most markets and 20% in some of the hardest hit.

The value of a car drops immediately, as it is “driven off the lot” as they say. Most cars lose over 50% of their value in the first two years. Used cars sales are being squeezed by incentives and discounts offered on new cars.

The credit card situation is worse. With most credit cards, there is no collateral. If the consumer defaults, the claw-back is likely to be zero.

Total US credit card debt is well over one trillion dollars, so, it is not a small problem.

As the mortgage mess demonstrates, CDOs carry so much leverage that the percent of mortgages that needed to default  to cause a problem was fairly small. Subprime defaults are still only about 1% of all loans in the category.

The auto and credit card CDO troubles are still out there, waiting from them to “show up” on some bank’s balance sheet.

Douglas A. McIntyre

Sponsored: Tips for Investing

A financial advisor can help you understand the advantages and disadvantages of investment properties. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Investing in real estate can diversify your portfolio. But expanding your horizons may add additional costs. If you’re an investor looking to minimize expenses, consider checking out online brokerages. They often offer low investment fees, helping you maximize your profit.