The housing crisis laid bare an epidemic of fraud and sloppy paperwork on loans made to home buyers with spotty credit. Investors who purchased bonds backed by those loans suffered drastic losses.
Six years later, investors are snapping up a new crop of subprime bonds, this one backed by auto loans. Ratings companies are awarding the bonds top grades, and buyers have almost no way to determine the accuracy of the information they get about them. “Investors are basically taking the issuer’s word that they follow certain procedures,” says Eugene Grinberg, a former analyst who structured subprime auto asset-backed securities and now runs his own software company. “There is opportunity for fraud.”