Morning Agenda: Used-Car Dealers Under Fire

Government authorities across the country are cracking down on so-called liar loans in the subprime auto market, which enable borrowers to inflate their income and obtain loans they cannot afford, DealBook’s Jessica Silver-Greenberg and Michael Corkery report. The loan fraud inquiry is said to focus on used-car dealerships across the country. Already, federal and state authorities have found hundreds of fraudulent loans that together total millions of dollars.

At the center, the investigations are examining whether dealerships are inflating borrowers’ income or falsifying employment information on loan applications to ensure that anyone, no matter what their credit quality, can buy a car. Under pressure to generate more and more loans, salesman at some used-car dealers are suspected of getting inventive. Fraudulent loans “corrode confidence in the booming market for securities that are created from bundled subprime auto loans,” Ms. Silver-Greenberg and Mr. Corkery write. “If loan applications are falsified, leading borrowers to ultimately fall behind on their bills, that could spell trouble for investors, which include insurance companies and public pension funds.”

Such inflated applications can mean that some of the most vulnerable borrowers are saddled with auto loans they can never afford to repay. The loans, which often come with interest rates that soar to 29 percent, can haunt borrowers long after their cars are repossessed, further damaging their credit scores and plunging them into bankruptcy. The widespread investigations are playing out as the market for loans to borrowers with poor credit is booming. In the second quarter, total auto loan originations were at the highest level since before the financial crisis, according to the Federal Reserve Bank of New York. Lenders originated $20.6 billion in subprime auto loans in the second quarter, nearly twice as many as they did in the second quarter of 2010.

BOND KING’S MANTRA LIVES ON | William H. Gross may have departed Pimco, but executives at the bond giant have embraced his view that a stagnating global economy will force central banks to keep interest rates low, Landon Thomas Jr. writes in DealBook. Yet even as Pimco seeks to reassure jittery mutual fund holders and giant pension funds, investors appear to be fleeing in droves. In September, investors pulled $23.5 billion from the firm’s flagship fund, the Pimco Total Return Fund, with the largest redemptions coming on Friday, the day Mr. Gross stunned Wall Street by resigning from the firm he co-founded more than 40 years ago.

Before he left the firm, Mr. Gross called his insight the “new neutral,” and Pimco is showing no signs of abandoning its departed leader’s mantra. In so doing, the firm’s executives are making the case that the Pimco bond funds that have made investments based on this economic approach will not soon change their strategy. Daniel Ivascyn, who was appointed to succeed Mr. Gross as group chief investment officer, took pains to point out that this new investment tack had many fathers, and emerged from a Pimco-wide brainstorming session this spring. But it is also true that the notion never really took off until Mr. Gross pitched it at an investor conference while wearing sunglasses, Mr. Thomas writes.

Mr. Gross’s economic predictions have failed in the past, but Pimco looks to be on firmer ground this time around. Like Mr. Gross, a number of economists believe that a mix of high debt, low growth and disinflation will force central banks around the world to keep rates from rising. Before he left Pimco, Mr. Gross had begun to invest in riskier, higher-yielding securities like government bonds in Italy and Spain and corporate bonds in Brazil, a strategy that the firm is still following. The important question now is whether Pimco will be able to persuade investors to remain in Total Return and the other large Pimco funds until the strategy bears fruit.

BANK OF AMERICA CHIEF ADDS CHAIRMAN ROLE | Bank of America said on Wednesday that Brian T. Moynihan, its chief executive, would assume the additional role of chairman, DealBook’s William Alden reports. The decision by the bank’s board will unite the roles of chief executive and chairman for the first time since 2009. Other Wall Street firms, including Goldman Sachs, Morgan Stanley and JPMorgan Chase, have also combined the roles, though the practice has drawn criticism from some shareholders and corporate governance experts. To offset Mr. Moynihan’s power, the board elected Jack O. Bovender Jr., a former chairman and chief executive of the Hospital Corporation of America, as the so-called lead independent director.

Mr. Moynihan, who became chief executive in 2010, has led the bank during a difficult period of recovery from the financial crisis. Most recently, the bank struck a $16.65 billion settlement with federal and state authorities over its role in selling shoddy mortgages before the crisis. Mr. Moynihan succeeds Charles Holliday Jr. as chairman. The move is effective immediately.

ON THE AGENDA | The Challenger job cut report is out at 7:30 a.m. The Gallup payroll to population report is released at 8:30 a.m. Weekly jobless claims are out at 8:30 a.m. Data on factory orders is released at 10 a.m. Warren E. Buffett is on CNBC at 8 a.m. William C. Dudley, the president of the New York Fed, gives a speech at New York University’s Stern School of Business at 12 p.m.

JUDGE CHALLENGES SANCTITY OF PUBLIC PENSIONS | A federal bankruptcy judge on Wednesday upended the belief that public workers’ pensions have a special status in California that makes them impossible to cut, further chipping away the idea that pensions are sacrosanct in a municipal bankruptcy, Mary Williams Walsh writes in DealBook. The ruling, which came during a hearing on a plan by the City of Stockton to exit bankruptcy, did not order the city to cut its pension plan or take any specific action. But the decision dealt a blow to Calpers, California’s giant state-led pension system, which has been leading efforts to preserve defined-benefit pensions nationwide.

Calpers had argued that if Stockton stopped making payments and dropped out of the state pension system, its lien would allow it to foreclose on $1.6 billion of the city’s assets. But the judge said that those statutory powers were suspended once a California city received federal bankruptcy protection. He did not dispute that Stockton would be billed $1.6 billion to leave Calpers. But in bankruptcy, he said, Stockton could legally refuse to pay the bill because it arose from the city’s contract with Calpers, and contracts are broken routinely in bankruptcy. The judge also said that Stockton had many options other than Calpers for retirement benefits, including a private provider or a multiemployer pension plan affiliated with a union.

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