This is true as evident in the prospectus. The majority of the loan recipients have high FICO.

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The failure with mortgages was in assuming ever-increasing real-estate prices would bail out the investors, so severities on foreclosures would be effectively zero, so default rate didn’t matter.

Not necessarily. One main problem that is practically never reported (because it’s maths, lol) is that by re-tranching, the sensitivity to initial assumptions is very high. It’s a complex situation that can’t/shouldn’t really be summarized to a 1-axis final bonding. Basically, CDO-like things either have to be very conservative, or they’ll exploit a fundamental primitive weakness in bond ratings.

Obviously, both the base rate and the discount rate are key to the amount of subvention paid, are the subject of intense negotiation between the manufacturer and captive, and are closely held secrets. In deference to the captive from which I retired, I’m not going to disclose their formula (it may have changed in the two years or so since I was involved in this stuff).

In any event, Chrysler Financial has cashed the subvention checks for these contracts and is amortizing the subvention into income over the lives of the contracts. Now that the contracts have been securitized, the rest of the subvention sill be brought into income as an offset to the loss on sale of selling a zero percent contract.

The only thing Ron missed is that resale values also affect the profitability of retail contracts because of the effect on the credit loss when you repo a vehicle. So not only are credit losses affected by the default rate, but also by the loss per default. It’s the difference between losing a couple of thousand on an SUV a few years ago and losing ten thousand or more last summer when you couldn’t give the damn things away.

And these are securitizations we’re talking about here (at least with regard to this prospectus). In my experience, the rating agencies kept a close rein on the captives regarding the contracts eligible to be included, tranching, rating of the tranches, etc., so that to the best of my knowledge no external investor has ever lost a penny on a securitization of auto retail contracts from captive finance companies (I won’t comment regarding sub-prime companies). The failure with mortgages was in assuming ever-increasing real-estate prices would bail out the investors, so severities on foreclosures would be effectively zero, so default rate didn’t matter.

What they need to do is securitize/re-tranche that debt, and pay off a rating agency to get all A’s for most of it, sell that part off to suckers for profits/bonuses, and stick the rest onto taxpayers.

This marketing money is taken into account when the manufacturer prices the car, just as Proctor and Gamble takes into account its coupons when pricing Tide.

http://primetime.unrealitytv.co.uk/freefall-launches-on-bbc-one/

Watch it if you can use bbc iplayer, it is a really great (but worrying) film.

http://www.bbc.co.uk/iplayer/episode/b00lrt0p/Freefall/

They want to sell $1.64 billion in debt for $851.4 million. That works out to be about 52 cents on the dollar. An investor would have to forecast an anticipated repayment schedule that accounts for defaults, repo’s, skips and early prepayment (the last category is a risk on those accounts with high interest rates, because some of them may refi out), and then decide whether 52 cents is a good price.

Now you can see why the domestics can’t make money through volume. When their finance companies lend out money for less than their own cost of capital, then they have to eat losses on the financing. Don’t believe the dealers when they tell you that they’re doing the company a huge favor by selling vehicles with huge incentives on them that produce losses at every turn.

Theoretically, the company might be able to make up for the hit on the spread made on the cars themselves. But since you know that they aren’t offering cut rate financing on popular vehicles, you know that this isn’t going to happen. So this is just a matter of locking in losses.

In this particular case, this may be an easy way to bring in cash at no loss to the current owner, in that I would imagine that these loans were made pre-Fiat; these losses may belong to Cerberus, not so much to Fiat. But that would be a temporary condition, and Fiat is going to find themselves in the same boat soon enough. Once they’ve sold the inventory they’ve inherited and have to pay to build their own product, that’s when it’s going to really start to matter.