What bank execs are saying about auto sector bankruptcies

If hearing the words “subprime loan” immediately triggers anxious memories of 2008’s global financial crisis, you’re not alone. As present-day Wall Street starts to rumble with worry about subprime auto loans, no one could blame you for having a 2008 flashback.

Bankruptcies last month at subprime auto lender Tricolor and auto parts supplier First Brands, both of which relied on complicated loan systems, have triggered concerns on Wall Street about potentially overlooked cracks in the credit market.

The deeper issue with these bankruptcies is they suggest that for lower-income consumers, wages are languishing amid a seemingly stagnant job market, making it increasingly difficult to make auto loan payments, as car prices also rise.

“Distress in auto lending broadly is often seen as a bellwether to changing circumstances in the US economy, because Americans particularly in the lower-income brackets tend to put their highest priority in auto payments,” Brett House, an economics professor at Columbia Business School, told the Guardian.

It’s too soon to say exactly how 2008-ish this might be. Small cracks can become big problems.

In recent earnings calls, executives at big banks and financial service firms largely took a measured, diplomatic response to the auto-adjacent bankruptcies, downplaying fears about more systemic stress in the credit market.

Of course, it’s easy to stress less when you’re not exposed. Wells Fargo CFO Michael Santomassimo said in the company’s latest earnings call on October 14 that “we very much focus…on the big established players [for non-bank financial institution lending], which obviously reduces potential issues.”

Meanwhile, Goldman Sachs CFO Denis Coleman noted the same day that the investment bank doesn’t “have any direct exposure to either of the big names that have been in the press lately.”

The exception to the rule, however, was JPMorgan Chase CEO Jamie Dimon, whose bank wrote off $170 million in the third quarter due to Tricolor exposure. (The company had no exposure to First Brands.)

“My antenna goes up when things like that happen,” Dimon said during the company’s earnings call on October 14, in reference to Tricolor’s bankruptcy. “And I probably shouldn’t say this, but when you see one cockroach, there are probably more.”

Personally, our antenna goes up when a Big Four CEO says “I probably shouldn’t say this.”

But for all the talk of hidden cockroaches in the economy, Dimon was careful to stress the general consensus on the recent auto bankruptcies: There’s a good chance they have more to do with internal issues at both companies. The Department of Justice has launched a criminal investigation into the borrowing scheme at the heart of First Brands’s woes. Meanwhile, an initial fraud probe at Tricolor “indicate[d] potentially systemic levels of fraud.”

“There clearly was, in my opinion, fraud involved in a bunch of these things,” Dimon said. “But that doesn’t mean we can’t improve our procedures.”

BlackRock CFO Martin Small echoed that message. “The reported cases look more like idiosyncratic pockets of stress and things like deep subprime or again, where there’s been potential fraud reported, they don’t look like broad stresses on asset-based finance or consumer credit,” he said during the company’s earnings call on October 14.