An Epic Disaster In The Making For This Bank

We normally don’t circle back on themes and stories this soon.

But when one of our editors shared the story yesterday, it was as if time stopped.

Our office was in disbelief.

Wells Fargo plans to ramp up its subprime auto lending.

This at a time when subprime defaults are at 20-year highs.

We swear we couldn’t make this up if we tried.

Well’s already has its fair share of financial problems. What could adding a few defaulted loans do?

Nothing good if you ask us.

Today we examine what Well’s subprime desires mean for the company, and its shareholders.

Your Rundown for Tuesday, May 22, 2018…

How Wells Fargo Will Usher In An Auto Loan Disaster

The story of subprime auto loans got a lot more complicated this week.

Last Friday we reported there were more subprime auto borrowers defaulting on their loans right now than during the financial crisis.

A Consumer Affairs report notes subprime defaults have “hit a 20-year high this March.”

It’s a bad situation. And it looks like it may get a lot worse before better.

Despite the warning signs, some financial institutions are in the process of increasing their subprime auto loan exposure.

In April, reported Blackstone Group LP (NYSE: BX) had announced it would increase its exposure to subprime lending by $300 billion.

That’s a lot of potentially defaulted loans.

But the move makes sense for BX who, through its subsidiary Exeter, backs its subprime loans with asset-backed securities. A means for profit and liquidity.

For other financial institutions, exposure to subprime lending doesn’t make sense.

Monday, Wells Fargo (NYSE: WFC) announced they plan to increase the amount of auto loans offered in a renewed focus to that side of their operations, as reported by Bloomberg.

It’s a move that has many of us scratching our heads.

Last year WFC pulled back on its auto lending. Price drops in used car sales made repossessing cars more, difficult, according to Bloomberg.

Now however, WFC is all in on subprime.

But we can’t find any logic in this.

WFC is already in a heap of financial hot water.

The company has earnings caps in place and a billion in fines to pay back for previously bad lending practices.

They don’t back their loans with asset-backed securities like BX.

And again, defaults on subprime loans are at a 20-year high.

Banks don’t make money off repossessions.

They make money off interest, from people who pay. Not from people who default.

If WFC follows through on this plan, you heard it here first. It will be a disaster.

Now, turning to the markets this morning…

Market Rundown for Tues., May 22

Yield on the 10-Year Treasury sits at 3.076% this morning, up 0.009.

S&P 500 futures are up 4.75 at 2,737.

Oil’s up $0.19 to $72.43.

Gold’s up $3.10 to $1,294.

Bitcoin goes for $8,206 this morning, according to CoinDesk.

We’ll talk again on tomorrow.

For the Rundown,

Aaron Gentzler

Aaron Gentzler

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Aaron Gentzler

Aaron Gentzler is the publisher of Seven Figure Publishing. He is also the editor of The Rundown and has been with Agora Financial / Seven Figure Publishing since 2005. He's been covering technology and markets for over a decade.

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