A refinement of collateralized mortgage obligations is proposed: the ‘collateralized recently owned auto promise’, or CRAP
The continuing tsunami of Chinese cash flooding into the global financial system has helped create an insatiable demand for new financial instruments that offer long-term security and steady returns.
The banking sector rose to the challenge with characteristic ingenuity by inventing collateralized mortgage obligations (CMOs), the financial equivalent of quantum indeterminacy. Money managers, bankers and other investors rapidly seized upon CMOs before the idea suddenly became unfathomably unfashionable this year.
The CMO was a triumph of globalization. For example, German bankers who would have happily shooed away any down-atheel inner Frankfurt resident were all-too eager to assume decades long responsibility for loans to New Orleans residents whose homes were a fathom or two below the Mississippi water table. The bonds were sold globally as long-term instruments even while brokers were fostering continual churning of mortgages among borrowers eager for lower interest rates.
With their customary lemminglike solidarity, investors are now pulling out of CMOs as fast as they bought into them. Notwithstanding the fads and fashions of capricious investment bankers, there is still a need for stable long-term financial instruments. Therefore, standing on the shoulders of others, like most geniuses, I would like to offer a refinement of CMOs: I propose the ‘collateralized recently owned auto promise’, or CRAP.
Credit from car dealers to buy used cars represents collateral that’s just as sound as modular homes in dubious sub-prime hotspots. There are risks in selling instruments backed by collateral of uncertain worth, and debtors of uncertain risk, but no one seemed to notice that when CMOs were introduced. So we think the CRAP will go down well in view of the insatiable historical appetite for such products (consider what people swallowed with the CMO).
The CRAP is also virtuous from a macro-economic point of view. Along with home building, the auto industry is the gyroscope of the economy. Just as the demand for new homes is predicated on people being able to sell their existing properties, the auto industry depends upon the buying and selling of previously owned cars.
After property, cars are the single most expensive consumer product anyone buys, so it is essential for everyone’s economic well-being that there should be ample liquidity in the American used car business, while meeting the demand for high-paying paper to palm off on investors.
There is an obvious synergy here. The skills that enabled bankers to sell CMOs are precisely those traditionally associated with used car salespeople: a robust emphasis on the upside of the transaction with a scorn for pessimistic downside details.
There is a great deal of scope for creative selling of CRAP. I have little doubt that before long everyone will have forgotten just how they turned up their noses at the CMO, and we will all be up to our eyes in the CRAP.
