Main Street or Wall Street?

Introduction

In arguing against tougher regulation of car dealers, Kansas Republican Sen. Sam Brownback insisted they didn’t belong in the broad financial reform legislation. “Auto dealers are a part of Main Street, not Wall Street, and they are not responsible for the financial meltdown.”

The influential National Automobile Dealers Association also sought to distance its 17,000-plus members from Wall Street. “Dealers obtain financing for their customers through captive finance companies, credit unions, and banks. … Auto dealers do not obtain financing from Wall Street investment firms.”

Consumer groups counter that the auto sales and financing industries are dominated not by mom-and-pop shops, but by large corporate players that couldn’t thrive without the financial liquidity provided by Wall Street banks and investors.

Many auto dealers are intimately linked with Wall Street through the auto loan-backed securities market. Wall Street funds more than 70 percent of auto dealer loans, according to a report by the Cambridge Winter Center for Financial Institutions Policy.

“Not only are they completely tied in to Wall Street, but they are the people who create the products that are in all of these securitizations,” says Tom Domonoske, a former Duke University Law School instructor who now spends his time investigating and suing auto dealers and lenders. “Saying they’re not part of Wall Street is like saying the foundation is not part of a building.”

Domonoske and other consumer advocates say auto dealers operate in much the same way that mortgage lenders did before the home-loan meltdown: The dealers make first contact with the borrowers, negotiate an interest rate and other terms of the credit contract, and then make the loan in their own names. Then, in much the same way that on-the-ground mortgage lenders sold loans up the food chain to bigger lenders, car dealers sell their loans to larger financing entities, which work with Wall Street investment banks to package the loans into pools of auto loan-backed securities.

The dealers association says that “dealer-assisted financing is optional for car buyers and provides more convenience, more competition and more choices for consumers.” Often, it notes, the captive finance companies run by big automakers, such as Ford Motor Credit Co., enable dealers to offer zero percent financing to customers, “which banks and credit unions do not offer.”