Big banks bet, but not with own $$

Depending on whose money they’re using, Wells Fargo and JPMorgan either love subprime car loans or fear them.

Both banks have grown more reluctant to make new subprime loans using their own money from the balance sheets. Wells Fargo tightened its underwriting standards and slashed the volume of all car loans in the first quarter by 29 percent after greater numbers of borrowers fell behind on payments.

JPMorgan’s consumer and community banking head, Gordon Smith, earlier this year said the bank had cut its new lending for subprime auto loans “dramatically.”

At the same time, the firms are indirectly funding billions of dollars of the loans by helping companies like Santander Consumer USA Holdings borrow in the assetbacked securities market, essentially shunting money from bond investors to finance companies.

Wall Street banks packaged more loans from finance companies into bonds in the first quarter than the same period last year, and Wells Fargo and JPMorgan remained two of the top underwriters of the securities.

Banks can have legitimate reasons for shying away from making some kinds of loans directly, even as they help investors finance the loans.

Money managers like hedge funds have more appetite for risky assets than a lender with government-insured deposits, for example. And the securities can be built in a way that cushions bond investors against losses in the underlying loans.

But giving money managers the chance to invest in debt that banks are increasingly reluctant to touch themselves can at least create the perception that they are foisting trash onto customers, said David Hendler, founder of Viola Risk Advisors.

“Banks always say the securities are well structured. But you can’t rely on underwriters’ assumptions,” Hendler said. “They’re there to move a deal.”

Spokeswomen for Wells Fargo and JPMorgan declined to comment. Wells Fargo’s stock has declined 1 percent in 2017, while JPMorgan has advanced 2.5 percent.

Investment banks took heat after the 2008 financial crisis for bundling debt into bonds that later soured.