The Washington Post published an alarming story yesterday on risky loans big banks are making to cash-poor companies and the devastating effects this mountain of corporate leverage could have if the economy starts to wobble (as it appears to be doing more and more lately).
If that sounds eerily like what happened during the subprime mortgage crisis of 2008 (i.e., lenders originating far too many bad loans with far too little concern about the consequences), hey, you get a gold star. Move to the head of the class.
You need to read the whole story, because it’s 1) hard to summarize in a few paragraphs and 2) focking impossible to believe.
But here are a few choice excerpts:
Goldman Sachs, Wells Fargo, JP Morgan Chase, Bank of America and other financial companies have originated these loans to hundreds of cash-strapped companies, many of which could be unable to repay if the economy slows or interest rates rise.
“This means that the next downturn that we have could be more serious and longer-lasting and more difficult to deal with than it would have been if we had constrained these practices,” former Federal Reserve chair Janet L. Yellen said in an interview.
Yup, that sure sounds familiar.
And who’s behind this deregulatory fever?
Do you even need to ask?
The lending boom was precipitated, in part, by the rush to water down regulations at the start of the Trump administration. That’s when newly minted regulators — many with close ties to the financial industry — sought to strip away post-crisis financial rules and find ways to juice the economy by encouraging more lending.
One of their top targets was leveraged loans. These are giant loans that banks make to heavily indebted — in financial speak, highly leveraged — companies. Bankers often have little assurance that the loans can be repaid, which can make them particularly risky. Bankers earn large fees off these products, and many banking executives say their institutions are sheltered from losses because they sell the loans to other investors such as hedge funds, mutual funds and insurance companies.
Yeah, what could go wrong?
So in order to artificially goose the GDP in the short term, Republicans once again gambled with our economy and with the lives and livelihoods of our citizens. And the next Democratic president will likely have to deal with the fallout. And Republicans will obstruct that president, and whine about the skyrocketing deficit they created, and complain endlessly about how Democrats aren’t fixing the Republican-created mess fast enough. And, somehow, they’ll trace it back to something a Democrat did once upon a time. Maybe Lyndon Johnson, but more likely Barack Obama or Bill Clinton. Or FDR? Sure, why not. Americans will believe just about anything. While they’re at it, congressional Republicans should just go ahead and censure Barack Obama for his Katrina response, because truth and consensus reality are for fucking nerds.
Some former regulators have noted an eerie parallel between the subprime mortgage crisis and the leveraged-loan buildup. In the 2000s, banks and other finance companies took risky loans — certain mortgages — and packaged them into products that were sold off to investors. Financial companies also made other exotic instruments, known as collateralized debt obligations, tied to those securities. The products entangled financial companies with one another, allowing weak institutions to pull down stronger institutions when the value of these products cratered.
Today, regulators say they don’t have a firm grip on what the impact will be when the economy weakens or enters a recession.
They don’t? Whatever. The banks will be fine in the long run, and that’s the most important thing, right?
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