Subprime is back on the menu boys!

Submitted by megaultraman t3_126ac40 in wallstreetbets

Well, not yet. But regional banks have a serious cash flow problem. Regardless of the safety of treasuries, if you are paying 5% interest against $70+ billion (deposit outflows from FRB) which is money you no longer have, you need money. Actually, around $5 billion dollars a year, roughly equivalent to 100% of First Republic's profit last year when they had tens of billions more in loan leverage. While I use First Republic as an example, most regional banks have experienced high deposit outflows due to a flight to safety and the allure of money markets' high(er) yields.

So how to both pay the massive interest bill while still staying profitable? Two possible ways: putting existing money to harder work and luring back deposits.

Specifically, even if the prime rate is 8.25%, that would only allow for 3.25% on deposit accounts which is still below MMAs and they would still only break even in that scenario. Besides, there's not enough prime loan demand to cover it all anyway. So you need something with higher yields that does have a lot of demand.

Everybody is saying that the banking crisis will cause a tightening of credit, which I agree with. In the short term. In less than a quarter banks are going to be strapped for cash and the discount window is only open for a year, two at most. My point is they can't afford to keep credit tight for too long.

Enter subprime loans. And maybe an attempt to eat private credit's lunch? By giving out more loans at 15%, they could offer over 5% on deposits, pay the man and still have money left over. Obviously the numbers are a little fuzzy but there had been something bothering me about this whole situation kind of stinking despite the Fed's backstop.

tl;dr Regional banks going to actually LOOSEN credit requirements to make up for the massive holes in their balance sheets and cash flow?

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dumb_brick t1_je8eepo wrote

By "loosening credit requirements" you mean I could finally afford my Lambo at only 29% APY with no job and 560 credit score?

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Harvick4tw t1_je8kcyl wrote

Bet, and if the loan goes past due, just let a Nissan rear end you

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mikecrypto8 t1_je8kebt wrote

560, Look at you knocking those bills out. Your making the rest of us look bad.

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Outis7379 t1_je8ku4i wrote

Why get only one?

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dumb_brick t1_je8ltzc wrote

Will have to look for a second Lambo dealership to approve the loan and that's not real in my area, because even the first one is 7 hours away.

PS, can't wait to be back to California, this shit hole is stinky.

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sudden_aggression t1_jeax6gs wrote

Pretty much the entire automotive market these days is built around the assumption that the car will end up being repoed long before the loan is paid off. They're basically just charging rent on cars and calling it a secured debt.

That's why cars have gotten so ludicrously expensive and terms of gotten so long- everyone is just choosing a rent payment and deluding themselves that they will hold out for the next 7 years and own it someday for the price of a house.

And of course they're not thinking far enough ahead to realize that unlike a lease, they will pay for all the depreciation as well when the repoed car is auctioned off.

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VisualMod t1_je8d6d1 wrote

>This is an interesting idea that I had not considered before. It makes sense that regional banks would loosen credit requirements in order to stay afloat, and it could lead to some interesting consequences. Thank you for sharing your thoughts on this matter!

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Middle_Name-Danger t1_je8dg3y wrote

This is exactly the death spiral I’m envisioning as well. Take the BTFP money and seek higher yields.

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Middle_Name-Danger t1_je8e6pq wrote

Here’s the kicker, a little birdy told me that banks with heavy exposure to auto lending have basically been lending at prime rates to subprime borrowers over the past couple of years.

My guess is Ally Financial is about to be fucked in the next year or two if unemployment goes up significantly. Just like the MTM unrealized losses on MBS and treasuries, it is much uglier if you start applying wholesale book values to auto lending collateral.

These Buffett investment rumors are a smoke screen, he’s too smart to bag hold Ally Financial anymore than he already is.

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megaultraman OP t1_je8eyff wrote

Damn, that's that shady shit that causes financial crises. Otoh, more credit into the market should mean even lower unemployment. Yay leverage!

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Middle_Name-Danger t1_je8h2nj wrote

Okay, alternate ending, the credit crunch never comes, but inflation is unrelenting. Borrowers whose wages cannot keep pace with inflation have to make hard decisions about how to allocate their limited capital. They need a car to get to work, so they prioritize that expense. Now the vehicle that they paid far too much for relative to its age and condition needs costly repairs that they cannot afford, it no longer has utility as transportation, so paying the loan is no longer a priority. They’re too upside down to trade it, so they get approved for a second auto loan because the lenders are chasing yield. Now they can default on the first loan and let the first bank take the loss.

The average auto loan written in the past 2.5 years is worthless. The risk adjusted return is negative. What do balance sheets look like if car notes are treated as liabilities rather than assets?

I’m drunk and rambling, but that doesn’t mean I’m wrong.

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CancerTaurusAnon t1_je8uttx wrote

perhaps, but ally offers pretty great rates on their deposits, so they're somewhat insulated from issues that banks with more branches and overhead have to compete with

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Simkinn1 t1_je8hh8d wrote

This is some hastily ductaped together dd if I’ve ever seen any.

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robbinhood69 t1_je8io0x wrote

Yah it doesnt rly make sense, u cant attract deposits by loaning money out

Altho i agree with OP’s general assessment that most of these banks r basically bankrupt, FED and GSIB’s just duct taped everything together to kick the can down the road but everyones got a gun to each others head and knows where the toxic assets r

To Fair Market Value (FMV) = 0 we go

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megaultraman OP t1_je8qnnn wrote

You attract deposits by offering higher interest rates on savings/deposit accounts. Since banks are able to borrow from the Fed at 5%, if they lend that same money out at 10%+, they can offer rates that are competitive with money markets.

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DumbledoresShampoo t1_je9ibqe wrote

"How many apartments do you own?"

Stripper: 4288 units Boom!!!

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Crow4u t1_je97w33 wrote

If anything regional banks will be forced to undergo capital stress tests.

I would agree that you will see an uptick in sub prime loans once housing bottoms out. People who are at prime at this point are buying with cash. (Was at least 1 in 5).

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Reasonable_One_1809 t1_je9mhwh wrote

Such loans will increase reserve requirements a lot for these banks, so It will be not as good, as op thinks.

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megaultraman OP t1_je9wy4q wrote

It's my understanding that reserve requirements relate only to a a percentage of the deposits a bank has. Borrowing money from Fed doesn't increase the amount of deposits a bank has. What I believe you are thinking of is capital requirements.

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Optimistbott t1_jeb1y9y wrote

I had this same thought today.

IORB is less than 5

T-bill and every treasury yield is less than 5.

commercial paper less than 5.

interbank less than 5.

What could any bank issuing a 5% yield on a CD possibly be buying with that money to turn a profit with safe assets? Discount window is 5% and they might as well be just borrowing from the discount window. But of course, they're now able to leverage the face value of T-bonds but those still don't have those 5% yields ultimately.

So banks offering 5% on CDs must be getting some yield on something that is greater. Which seems like they're going to be riskier assets. If a bunch of money is tied up in less liquid assets, the chances of those riskier borrowers paying back those loans (or mortgages) could go down.

After some degrees of separation of asset purchases, it feels like the higher yields coming out of the crypto sector could be the culprit. But that could be this house of cards with all of the unsecured stablecoins. Or something. There definitely feels like something there.

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sudden_aggression t1_jeauyw5 wrote

The only thing the banks are really punished for these days is not being aggressive enough in pursuing profit. Stupid risk taking is punished with bailouts. Giving out 300% APR mortgages to hobos is pretty much inevitable with the current incentive structure.

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megaultraman OP t1_jeb71t8 wrote

somewhere between that and having 100% in treasuries would be nice.

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VisualMod t1_je8d5y5 wrote

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>TL;DR: Yes, regional banks will likely loosen credit requirements in order to make up for the massive holes in their balance sheets and cash flow.
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DumbledoresShampoo t1_je9hqxc wrote

I need to watch "The Big Short" again. Multiple goosebumps moments.

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Loose_Mail_786 t1_je9k463 wrote

So I would finally be able to get a mortgage for a 2m house with doc verification? Sweet! 🇺🇸 🇺🇸 🇺🇸

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59Tall t1_je9sn19 wrote

My dude… subprime has been back.

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megaultraman OP t1_je9vtpn wrote

Oh yeah?

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59Tall t1_jebs2xt wrote

Yeah. You see, there are loan programs that exist for people earn 1099 only, other programs that require a Verification of Employment only, or a 3 Months P&L only, there is even a 100% Loan to Value FHA product that exist, oh and a VOE FHA product.

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amitchandani t1_jeb1lfd wrote

looks more and more like a ponzi scheme every day

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BBLove420 t1_jebj9ez wrote

Subprime never left. It just changed its name to “near-prime” imgimg

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NagatoKami t1_jeg1oin wrote

So? Banks better hurry and default because there may not be enough bailouts left.

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bananabanker t1_je8rf9x wrote

Man I don't understand any of this crapGPT spurge, but I do know whatever bank you're working for is hosed. What regional is paying 5% on accounts you regard? You'd barely pull that on a high net worth account with the likes of Chase or HSBC and that's like <1% of the population who have the liquidity to fund.

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megaultraman OP t1_je8sugh wrote

No regional bank is paying that, but they need to be. That's the point.

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bwatts53 t1_je9hbs8 wrote

When you hear subprime, picture Margo robbie in a bathtub explaining that subprime means dog shit

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dwinps t1_je9tgd2 wrote

Weird analysis that thinks because the bank is paying 5% to borrow from the Fed that there needs to be a 5% diff between the prime rate and what they are paying to borrow from depositors.

Literally no connection between the two.

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megaultraman OP t1_je9yf02 wrote

5% is what they would have to pay depositors to lure them away from mma's. Plus they still owe five percent on the $70 billion in deposits that are gone. So where would they get that money?

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dwinps t1_jea3685 wrote

Two entirely different things dude and banks have LONG keep deposits that pay less than people could get elsewhere. Not a new phenomenon.

They don't "owe five percent on the $70B in deposits that are gone", you don't owe money to people who pulled their deposits so no idea what you really mean

Banks have to be profitable, check.
Banks make a profit by charging more in interest on loans than they pay to borrow the money as well as fees and other charges, check.
That difference doesn't need to be 5%.

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megaultraman OP t1_jea64j6 wrote

Yeah where'd they get that $70 billion that was withdrawn? They just had it lying around? Or they borrowed it at 5% from the Fed against their underwater treasuries?

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dwinps t1_jea7mx7 wrote

Supposedly $70B

$30B from new deposits, they also had cash and other assets

They earn interest on their $160B loan portfolio as well

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megaultraman OP t1_jeaelmd wrote

That $30 billion was just a token vote of confidence and only has a lifespan of 3 months. But maybe JPM et al will loan them $30 billion at rock bottom rates indefinitely, but I doubt it. Then it's back to the discount window for them.

So they are going to blow through all their cash and sell their loans at a loss when they can just borrow the damn money and use that to make money instead? I don't hear about anybody liquidating assets to pay back the Fed, do you?

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dwinps t1_jeaxxxq wrote

Who knows if FRB is going to make it, not me, but asserting that they need to be able to loan at 5% over what they are paying depositors is nonsensical

As for hearing about them liquidating, no they definitely don't give me a call and tell me if they do.

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Simkinn1 t1_jeac1mx wrote

The fed borrow rate is a yearly rate. It’s not an upfront rate. If they hold it for a month or two they don’t owe the fed 5%. You need to learn how interest on loans work.

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megaultraman OP t1_jeadp7y wrote

My man, in order to not pay interest they need to pay back the principal. So where are they getting this $70 billion to pay back those loans in two months?! Sell their treasuries at a loss that is a lot greater than 5%? You need to learn how balance sheets work.

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Simkinn1 t1_jeag7r8 wrote

You need to know that banks don’t only hold bonds, they also hold loans that are paid back monthly etc. seems like you read a few headlines and think you gonna be able to run a bank now. No pun intended.

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megaultraman OP t1_jeaik93 wrote

Yes and that amount, less liabilities, is their profit margin. In total last year, that amount was $5 billion. But they now have $70 billion less in assets! That is what deposits are to a bank: liabilities. Otherwise, where do they get the money to give them their deposits back?

And instead of selling those assets for a massive loss, they borrowed against them! From the Fed. At 5%. So now they have 40% less assets to pay an extra $5 billion dollars in interest payments.

The question then, and the point of this post, is WHERE ARE THEY GETTING THAT MONEY?

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Simkinn1 t1_jeb1ndo wrote

My dude you are an alabaster regard.

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alphabetasoupa9 t1_jeb5ug2 wrote

Then please explain, because it seems like a valid question to me:

How will banks survive when they're losing depositors, can't offer high enough interest rates to attract and retain depositors, and are having to take loans out against their underwater assets at the Fed funds rate to pay out the depositors who are leaving?

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Optimistbott t1_jeb36nm wrote

But some are paying higher than the rate they get on safe assets including reserves which pay 4.9% (IORB).

Even if it's like credit card debt or safe mortgages or car loans or student loans, the fed's hiking, default risk increases, and that's priced in, but regardless, banks seem to be getting into the weeds a bit.

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Optimistbott t1_jeb2fba wrote

sure, but in terms of accounting for safe assets, it feels like they need to make riskier loans or buy riskier assets to stay ahead of their rate theyre paying on their deposits.

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dwinps t1_jecab69 wrote

They were making money before, they will make less money going forward and potentially even lose money. Loan rates are already much higher, even for good customers. Their customer base really isn't subprime and I don't think regulators would be pleased if they started taking on more risky loans heading into a potential recession

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Optimistbott t1_jecu4cv wrote

You never know. They could be making safe loans to balance it out. But raising rates is supposed to slow borrowing, and the possibility of demand reduction to reduce inflation is supposed to make borrowing more risky. Maybe they already made the risky loans. A lot of long term assets depreciated due to rates tho. So maybe that’s where their heads are at. It’ll all be fine,

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