Well, this is finance:
A huge increase in the amounts borrowed by already indebted households in Britain and the US to buy new vehicles is fuelling fears that “sub-prime cars” could ignite the next financial crash.
British households borrowed a record £31.6bn in 2016 to buy cars, up 12% on the year before, said the Finance and Leasing Association on Friday. Nine out of 10 private car buyers are now using personal contract plans (known as PCPs), which have boomed since interest rates fell to historic lows.
Some of the car-leasing loans in the US and the UK have been packaged into asset-backed securities, to be sold on to investors such as pension funds. This was an asset class that played a ruinous role in the credit crunch, except this time the collateral for these assets is cars, not houses. The ratings giants, Standard & Poor’s and Moody’s, have given most of these batches of loans a triple-A safety rating.
The 2008 problem was that those bonds were *not* sold on to end investors like pension funds. Instead they sat around on bank balance sheets, often leveraged up 25 to 30 times the capital base supporting them. That was the problem – value impairment mean the banks had to dump them before their entire capital base was exhausted setting off a spiral of downward valuations.
If these bonds are with unleveraged final investors then this will not and cannot happen. Thus there’s no problem. If values fall then pensions fall a tiny bit in value. Shrug.