Cliff Sosin

The two-year went up and Fed funds were low and deposit rates were low. And the credit unions, and when I say the two-year, it's worth pointing out that the average duration of a pool of auto loans, including prepayments and defaults, is about two years. So the two years are a reasonable proxy for the appropriate kind of risk-free benchmark.

The two-year went up and Fed funds were low and deposit rates were low. And the credit unions, and when I say the two-year, it's worth pointing out that the average duration of a pool of auto loans, including prepayments and defaults, is about two years. So the two years are a reasonable proxy for the appropriate kind of risk-free benchmark.

So in late 21, as the two-year goes racing up, as people expect Fed funds to rise, all these competitors just didn't raise rates because they didn't. There's no academic reason why they shouldn't have. They just sort of didn't. And then even as Fed funds began to rise, they were super slow.

So in late 21, as the two-year goes racing up, as people expect Fed funds to rise, all these competitors just didn't raise rates because they didn't. There's no academic reason why they shouldn't have. They just sort of didn't. And then even as Fed funds began to rise, they were super slow.

You know, I remember there was a long period of time where like Navy Federal was offering car loans at a discount to the treasury of the comparable duration. And this is a big problem for us. This is funny, except for the fact that we have to compete with this every day.

You know, I remember there was a long period of time where like Navy Federal was offering car loans at a discount to the treasury of the comparable duration. And this is a big problem for us. This is funny, except for the fact that we have to compete with this every day.

Industry-wide, auto loan spreads by late 2022 were at the lowest levels in the whole time series I have, going back to before the crisis, before the financial crisis in 2008. And it was a wild time for that to be the case because every other consumer credit spread was wide for a whole bunch of really good reasons. And the underlying auto collateral was the most kind of overpriced it would ever be.

Industry-wide, auto loan spreads by late 2022 were at the lowest levels in the whole time series I have, going back to before the crisis, before the financial crisis in 2008. And it was a wild time for that to be the case because every other consumer credit spread was wide for a whole bunch of really good reasons. And the underlying auto collateral was the most kind of overpriced it would ever be.

So auto loans should have been really expensive on a spread basis. But instead, they were at their all-time tights. And the reason was that there was just all these dumb competitors. And then you'd call these – we did research into what was going on. And you'd be like, well – Our asset liability management committee meets like once a quarter.

So auto loans should have been really expensive on a spread basis. But instead, they were at their all-time tights. And the reason was that there was just all these dumb competitors. And then you'd call these – we did research into what was going on. And you'd be like, well – Our asset liability management committee meets like once a quarter.

And then we try not to raise rates more than like 25 bps at a time. And then it takes us 60 days to implement the rate changes because our systems, blah, blah, blah. And you're just like, but guys, like...

And then we try not to raise rates more than like 25 bps at a time. And then it takes us 60 days to implement the rate changes because our systems, blah, blah, blah. And you're just like, but guys, like...

Right. This is definitely not in the textbook. But so the problem, so CarMax, they just ate it. They just originated at low spreads. And then the next year, and even to somewhat, it's getting better now. But if you look at their financials, you can see they paid for it a year or two later, but they ate it at the time. They sacrificed a bit of the future for the present.

Right. This is definitely not in the textbook. But so the problem, so CarMax, they just ate it. They just originated at low spreads. And then the next year, and even to somewhat, it's getting better now. But if you look at their financials, you can see they paid for it a year or two later, but they ate it at the time. They sacrificed a bit of the future for the present.

Carvana was not in that position, right? Like we, you know, the company needed the money. So Carvana had to price to reality. And That meant that Carvana was in the market with loans that were like meaningfully more expensive than competitors, which did not help. And to just put this in context, Capital One also pressed to reality because they're smart.

Carvana was not in that position, right? Like we, you know, the company needed the money. So Carvana had to price to reality. And That meant that Carvana was in the market with loans that were like meaningfully more expensive than competitors, which did not help. And to just put this in context, Capital One also pressed to reality because they're smart.

They saw their auto originations fall 50, five zero percent. So Carvana is dealing with both of those things. The other thing, which I think is more subtle, but I also think is true, has to do with early adopters. And to explain this, I need to go back and explain a little about how Carvana grows.

They saw their auto originations fall 50, five zero percent. So Carvana is dealing with both of those things. The other thing, which I think is more subtle, but I also think is true, has to do with early adopters. And to explain this, I need to go back and explain a little about how Carvana grows.

And this is the part that I was least aware of at the time, but I've done more work on and I've come to understand a lot better.

And this is the part that I was least aware of at the time, but I've done more work on and I've come to understand a lot better.