Another Reason to Retire Sam Brownback: The Senate Subprime Car Loan Sleaze

By William K. Black

When Sam Brownback was a Senator he carried water for the sleaziest of auto lenders – the subprime lenders that specialize in making “liar’s” loans.  His successful mission was to carve out an exemption from the Dodd-Frank bill’s protection for borrowers.  We had just seen the CEOs controlling similar home lending specialists lead the three mortgage fraud epidemics that blew up the global financial system.  The bill’s drafters and President Obama strongly opposed the Brownback carve out, but Brownback’s brigade of auto lobbyists made road kill of their opponents.

The New York Times article, of course, never uses the “f” word to describe the subprime auto sleaze that exploited Brownback’s carve out to run a classic accounting control fraud, but all the necessary facts are in the article.  It’s the same old fraud recipe for a lender – and for the secondary market purchasers of the toxic loans.

1. Extreme growth through making
2. Terrible quality loans at a premium (nominal) yield while employing
3. Extreme leverage and
4. Pathetic loss reserves

As with the nonprime home mortgage fraud epidemics the “sure thing” of surging defaults and borrowers who lose their asset (their car) and are left deeply in debt with ruined credit ratings has become a daily reality.  Tens, perhaps hundreds of thousands, of borrowers will be pushed into bankruptcy.  This fraud scheme will cause severe losses to the lenders and the secondary market purchasers, but it has delivered the other  two “sure things” that the fraud recipe delivers – record (albeit fictional) reported profits in the near term that make the controlling officers wealthy through modern executive compensation.  The officers will walk away wealthy while the companies crater, as George Akerlof and Paul Romer explained in their classic article “Looting: The Economic Underworld of Bankruptcy for Profit” in 1993.

Brownback should be held accountable for pimping for the auto loan sleaze.  He knew better.  He had just seen the same kind of accounting control fraud schemes cause catastrophic damage to our Nation.  His actions allowed the same kind of fraud schemes to harm hundreds of thousands of Americans including many of his poorer constituents in Kansas.