American banks' secret subprime exposure stretches into the billions

On paper, America's bailed-out banks learned their lessons from the crash of 2008 and got rid of their exposure to subprime debt, especially "deep subprime" loans to people who are so broke that it's basically impossible that they'll ever pay their loans back.

In reality, the banks have extended billions in loans and lines of credit to "nonbank lenders" — bankerese for subprime lenders, payday lenders, and other issuers of credit to risky borrowers.

Did I say billions? I meant tens of billions. Er, make that hundreds of billions.

Last week, the Wall Street Journal rounded up the financial picture a decade after the 2008 crash and specifically identified credit bubbles (including the now-bursted subprime auto bubble and student debt bubbles) as a systemic risk.

How much banks are exposed in this manner to subprime loans – not just auto loans, but also subprime mortgages, and subprime consumer loans – is somewhat of a mystery. But some clues are percolating to the surface. According to an analysis by the Wall Street Journal of regulatory filings, bank loans to nonbanks lenders have surged sixfold since the Financial Crisis to nearly $345 billion at the end of 2017. Here are the top contenders:

1. Wells Fargo: $81 billion, up from $14 billion in 2010

2. Citigroup: $30 billion

3. Bank of America: $30 billion

4. JP Morgan: $28 billion

5. Goldman Sachs: $22 billion

6. Morgan Stanley: $16 billion.

Banks extend these loans at relatively low interest rates because the loans are collateralized and don't expose the banks directly to the risks of lending to subprime consumers. Nonbank lenders make money off the spread between the relatively low cost of money and the often double-digit rates they charge consumers. The spread is so sweet and enticing that it caused a boom in the sector and attracted private equity firms.

How Much Are Banks Exposed to Subprime? More than we Think [Wolf Richter/Wolf Street]

(via Naked Capitalism)

(Image: Andrew McGill, Cjohnson7, CC-BY; Steve Morgan CC-BY-SA)