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Comment by larrydag | Hacker News Reader

Here's the flip side of that from auto lenders. They are seeing a huge recovery benefit from repossession of vehicle after chargeoff. Lenders portfolios are seeing a net benefit in chargeoffs which has hardly ever happened in recent history. Even more bizarre.

https://www.yahoo.com/now/ally-financial-ally-beats-q3-12451...

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Another flip side effect. My dad is a CFO at a car dealership and tells me that the banks are having problems due to the lack of cars as well. A dealership will normally float all their inventory on a big bank note but they basically have no cars on the lot to sell which means the banks underwriting those notes are making no money on interest. Multiply it by thousands of dealerships nationwide and this has big impacts on revenue to those banks.

Could you clarify what this means for a layman? AIUI you are saying that a car dealership will borrow money from the bank to purchase their inventory, but nowadays with no inventory, banks are not getting payments from the dealers for the money they've borrowed. 1. With no inventory, why does the dealer need the money from the bank? 2. If the dealer is still borrowing money from the bank despite having no inventory, don't they still need to pay interest? I think there is something fundamental that I am misunderstanding here.

Dealers have a line of credit, like a credit card, that they use to purchase inventory. They pay it back as they sell cars, and run it up as they buy new inventory to replace it. So the overall loan balance roughly represents their current unsold inventory. No inventory means no loan balance, which means no interest payments to the bank.

It sounds like dealers choose how much to borrow. If they borrow less, banks get less interest, meaning less income, unless they replace it by finding other people to make loans to.

This seems like a really good thing for the dealership. They are able to operate with ~0 inventory and ~0 inventory holding costs.

Amazon famously has (or had?) something like negative inventory on the books. To be more technical, it's negative working capital, or negative cash conversion cycle.

That's because in whole-sale you typically have something like 90 days to pay your bills. But Amazon sells its inventory on to retail customers (who up front) before those 90 days are up.

Now, if I describe it as 'negative working capital' it sounds like some desirable thing. But the flip side is that you can also describe it more mundanely as: Amazon gets loans from its suppliers.

walmart pioneered negative working capital for retail well before amazon existed (70s-80s iirc). it's how walmart jettisoned itself into a retail juggernaut. carrefour cribbed that part of the playbook from them to expand across france and europe, and bezos very likely did so as well. it only works when you have enough monopsony power to persuade/coerce the supply chain into cooperating.

> it only works when you have enough monopsony power to persuade/coerce the supply chain into cooperating.

What makes you think so? If you offer attractive enough terms, you can get financing from your suppliers just fine.

And what makes you think Amazon, Carrefour or Walmart etc have monopsony power?

The Tesla model. I wonder if any of them will realise they can just sell cars without a flashy dealership showroom with sales staff and demonstrators?

That's insane.

If only all the small US banks and credit unions held off on their (~2005) indirect lending strategy and saved it for now, it might have actually been profitable!

Are you saying that doing indirect lending around 2005 makes them unable to do the same in 2021?

I believe so, yes, indirectly.

Wow, those are some terrible incentives. I've never had a loan, so maybe I misunderstand the experience. But I'd hate to owe money to somebody that is hoping I fail badly enough that they take my stuff and while keeping my money.

Usually the bank has no mechanism to alter whether you make payments or not. Keep making payments and they can't repossess the car.

It'll be interesting to see what this does to the credit quality of future borrowers, which is the only leverage the bank has. Secured loans on appreciating assets mean that at some point, the bank has an incentive to write loans that they know are not going to be repaid, because they buy only part of the asset, receive a stream of cash payments for it, and then get the full asset anyway when the borrower defaults. It's like a call option that you get paid for instead of paying for.

Come to think of it, I wonder if this is why we got NINJA loans with the 05-07 housing bubble. Once housing prices started going up consistently enough, it becomes profitable to write loans to borrowers that you know are going to default, because you can take the house and enjoy the asset appreciation while getting a nice stream of cash flows in the process.

"...it becomes profitable to write loans to borrowers that you know are going to default, because you can take the house and enjoy the asset appreciation while getting a nice stream of cash flows in the process."

Not the way it works, for two main reasons. First, people who owe less than the house is worth are generally not foreclosed on - in the worst case they just sell and keep whatever equity they get away with. Second, legally the bank can't keep any surplus. If they foreclose on your house, they have to sell it at auction and keep only up to the amount you owed. They would have to give you any excess. At least for houses, banks aren't allowed to profit from foreclosures.

the surplus comes from late payment fees, penalties, foreclosure fees, etc. On paper there is no surplus, in reality all equity is wiped out

> At least for houses, banks aren't allowed to profit from foreclosures.

I assume the details depend on whatever the fine print on your mortgage says?

> It'll be interesting to see what this does to the credit quality of future borrowers, which is the only leverage the bank has. Secured loans on appreciating assets mean that at some point, the bank has an incentive to write loans that they know are not going to be repaid, because they buy only part of the asset, receive a stream of cash payments for it, and then get the full asset anyway when the borrower defaults. It's like a call option that you get paid for instead of paying for.

Seems a bit roundabout. If they want to bet on appreciating assets, they can just buy those assets directly?

> Come to think of it, I wonder if this is why we got NINJA loans with the 05-07 housing bubble.

There was no housing bubble. Only a big housing 'burst'.

See eg https://www.idiosyncraticwhisk.com/p/a-slide-deck-on-bubble-... (and if you are really interested, I can give you some better material.)

It's in the best interest of a bank not to repossess because there are operational expenses and the bank will get more return if the loan goes to completion.

Aren't you on the hook for those operational expenses?

The bank only loses if you default early in your loan, and the price of the collateral collapses.

The way this is set up if the first happens the second was likely the cause.

unless the collateral appreciates past some threshold of expectation

Just usury at work. Is anyone surprised?

They're really only keeping the interest and principle up to that point.

Long story short, pay your bill.

How can you honestly "charge off" a debt as unlikely to be repaid, when you are quite likely to be repaid? It seems that in the case of a car loan you can usually reposses the collateral, which recently will have held value oreven appreciated in the interim.

Historically, car values underwent significant depreciation over time and loans that went delinquent were for vehicles that were "underwater"- their value was less than the loan. Its pretty much unprecedented for the value of a vehicle to actually increase at any point in time over its life, and how long this anomaly will go on for is very uncertain- another way to put it is that you don't change all of your process and accounting norms because of a temporary (at least as we think for now) supply issue.

> you don't change all of your process and accounting norms because of a temporary (at least as we think for now) supply issue

Is this why some people stick insist on making payments by sending cheques through the post?

> [...] you don't change all of your process and accounting norms because of a temporary (at least as we think for now) supply issue.

Yes. And for the appreciation to persist, the supply chain issue wouldn't just have to persist, but get worse.

Current prices reflect expected supply chain issues. That's both prices for new and used cars.

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