Wednesday, August 1, 2018

Poison in Debt is Rising...Again

Everyone should know by now that one of the biggest reasons for the financial crisis of 2008 was CLOs or collateralized loan obligations. Banks would assemble a package of loans based on borrowers ability to repay. Some were triple - A and some were Ninja's(no income no job or assets). They divided the package by yield called tranches. The riskier part received a greater yield.

The problem surfaced when too many risky loans defaulted. This crushed the value of the package. The chain of the dominoes falling sent many lending institutions and banks to financial oblivion.

As a result we got Dodd-Frank and other limitations to reckless lending, but the greed factor never goes away. Little-by-little demand for yield gave banks and non-regulated lenders the enticement to begin CLOs, anew.

There are many types of investors - pension funds, hedge funds, mutual funds, sovereign wealth funds, and insurance companies. These are the takers to bite the apple. Where are the regulators, you ask? In the pocket of the weak side of our democracy.

With tighter standards all boats floated safely. Now, it appears that banks are sneaking riskier loans into packages that utilize higher yield to attract buyers. The same suspects from above have come for another bite of the apple. This poison is circulating. We have reached a point in the debt cycle where riskier businesses are seeking and getting loans. I do not want to disparage a brand name, but think of some of the current companies in a rough patch like Sears, Radio Shack, et. al. There is another problem. Since the Fed is raising interest rates, the chances for the more riskier participants in these loan packages to default rises substantially. With too much debt on the books, companies cannot service the load. I think this danger will first appear in car loans and commercial real estate, notably with malls.

Sad but true...

One of the central usages for loans today is to buy back shares or for mergers. This practice makes the bottom line look good and CEOs line their retirement option package at the companies expense. These corrupt so-called leaders will be gone when rosy predictions of acquisitions fail to materialize. These type of loans are up 38% from last year's near record total.

Credit rating service companies like Standard & Poor's, Moody's and others have warned, but the siren's call is too great. All the blame cannot be directed to banks. Non-regulated lenders are competing for loans. They deal in toxic CLOs. They work the system. They buy lobbyists and donate to political parties. They can exploit the weak link in democracy. These are the people that I referenced above who are in the pockets.

The next part shows the effect...

You can see the results in a set back on Dodd-Frank by a recent court ruling. The Republican appointed judges ruled against the "skin in the game" provision in Dodd-Frank. The idea that the issuer retain 5% of a loan package to show good faith in the deal. It is dead! Killed by these idiots who think too much government regulation in business is the problem in our economy. They over look man's greedy, corrupt nature. They fail to see the same pattern that happens in history time-after-time.

The poison is in the system. The effects will soon be displayed. The doctors will arrive late and after the fact. Sadly, the dominoes will fall again as the disease circulates.