I lived in Las Vegas when the last recession hit, so I had a front-row seat. I saw (and benefitted from) the real-estate scramble that pushed rents down. One house I rented a room in even received a foreclosure notice, which was my cue to get the heck out, and I consider myself fortunate that I wasn’t laid off until 2011 and was “only” out of work for 10 months. And while I know that humans tend to make the same mistakes over and over again, I figured we’d go longer than a decade before the greedy pursuit of quick profits on bad debt would wreck us all over again.
Last time, the culprit was mortgage-backed securities, which were considered invulnerable because the house attached to it was supposed to hold its value even if the loan tanked. (This Tom the Dancing Bug cartoon explained it well.) It’s a little different this time around:
Indeed, there are times when there’s so much demand for loans from investors and the profit from selling them is so lucrative that bankers are only too happy to go out and make bigger and riskier loans than they would if they were keeping them on their own books.
Now it is happening again, as investors and money managers scramble to buy floating-rate debt — debt offering interest payments that will increase as global interest rates rise, as they are expected to over the next few years. A big new source of floating-rate credit is the market for “leveraged loans” — loans to highly indebted businesses — that are packaged into securities known as “collateralized loan obligations,” or CLOs. Because the market seems to have an insatiable appetite for CLOs, leveraged lending and CLO issuance through the first half of the year are already up 38 percent over last year’s near-record levels.
Thing is, credit-rating companies are sounding an alarm over what the writer dryly describes as “a noticeable decline in the quality of the loans.” The ones borrowing the money, apparently, have credit ratings below investment grade — good ol’ junk bonds. Gotta love ‘em.
There’s a lot in this article, and its kind of lengthy, but worth it if you have the time. One nugget I don’t want to miss: More of the borrowed money is being used for stock buybacks and dividends and such, which pays off investors but doesn’t grow the business.
The CLO market got an even bigger boost this year when an appeals court in Washington struck down a regulation issued under the Dodd-Frank financial regulation law that required all securitizers — the firms that bundle loans of any kind and sell pieces of the packages to investors — to retain 5 percent of a deal. The regulation’s rationale was that if the securitizers had “skin in the game,” they wouldn’t have an incentive to make or buy questionable loans and peddle them to unsuspecting investors.
The three-judge panel that made the decision consisted of “activist, conservative judges who were clearly looking for a way to ignore the explicit intent of Congress.” And it included none other than Brett M. Kavanaugh, our Very Stable Genius’ pick for the Supreme Court. The article then quotes a financial reform expert who said that with this opinion, “we have now re-created the condition that led to the last crisis by making it easier to aggregate loans that are not good for investors.”
Are we headed for another crash? I don’t know. I’m nowhere near the steering wheel on this economy; mostly, I count myself lucky that I’m usually not being crapped on directly. But I know that we’re mushrooming our deficit needlessly, not making the kinds of public investments that would make our country more resilient, and pissing off our allies. Oh, and starting trade wars.
Looks like I picked the wrong administration to quit sniffin’ glue.