But for all that this is really profitable business. The dealers are averaging 38% profit on the sale of each car. That is a huge profit margin, but that is what you get when you are sticking it to people who really have no other choice when it comes to getting a car they need to keep their jobs.

This is where our friends in the 1% come into the picture. Capital investment firms have noticed these kinds of profit margins and are buying up BHPH chains. But the fun does not stop there!

They are also buying and securitizing these deep subprime loans. From the L.A. Times story:

Although they're backed mainly by installment contracts signed by people who can't even qualify for a credit card, most of these bonds have been rated investment grade. Many have received the highest rating: AAA. That's because rating firms believe that with tens of thousands of loans lumped together, the securities are safe even if some of the loans prove worthless.

It is hard to believe that there is anyone this freaking stupid! 25% of these loans fail and wind up in repossession, yet some yahoo at Moody’s or S&P or Fitch put a triple A rating (more than S&P thinks the United States credit worthiness is valued at) on it!

Now the market for these securitized auto-loans is smallish right now. Only $15 billion in the last two years, but it is growing, just like every other bubble does.

While auto loans from BHPH lots will never reach the size of the home mortgage market, all the pieces of a boom and bust are in place. Investment banks see profits, there is little regulation of these lots, there are people who will bend the rules to make more money (not all car sales organizations are rotten, but enough are that they have earned their reputation) and there are people who need this service who are not very sophisticated and can be taken advantage of.

The good news, such as it is, is that there not everyone sees this as a new golden goose to be cut open to get at the eggs.

"We think that investing in such companies is a ticking time bomb," said Joe Keefe, chief executive of Pax World Management, which steers its investments into businesses it deems socially and environmentally responsible. "It has ethical as well as systemic risk implications."

Mr. Keefe is exactly right. Leaving aside the abusive nature of this business, it exists because the normal auto financing system does not serve those with bad credit but we have a society that is mainly predicated on having a car. If this bubble is allowed to bloom and bust it could destroy this meager and usurious safety net for the working poor.

Then there is the issue of having another round of collapsed securities and the Credit Default Swaps that will be attached to the folks holding the bag on these insanely bad securities.

It is exactly this kind of thing that we need a functioning consumer protection agency and strong financial regulations to protect against. I am not opposed to companies making a little extra money on riskier loans, the people often need the product and we have agreed as a society (for now) that if you are more likely to fail to pay your loans it costs more to take one out.

But to allow these same loans to be bundled and then somehow magically blessed into AAA status by virtue of their numbers is insane and should not be allowed. If the credit rating agencies can not do their jobs correctly, and the evidence is piling up higher than the Hindu Kush, then we must step in and do something about it.

The fact of the matter is that the people who will pay for their errors are the ones now paying for their errors in mortgage meltdown, people with mutual funds. According to the Times article, Oppenheim funds is already putting these supposedly safe bond in six of their mutual fund portfolios under the title DriveTime Securities.

Of course you’re probably not going to hear a lot more about all of this until it is too late. There will be a sudden flurry of loans, the cost of a used car will rise (it’s gotta go up if they are going to make more and more money on it) and then one day the bottom will fall out when investors realize that their AAA bonds were given that rating on an investment that goes bad 25% of the time (way, way, way above what homes do).

Then it will be a bunch of the “smartest guys in the room” looking for a hand out while saying “Who could have ever known?”

The floor is yours.

