A month or so ago Professor Pearlstein of George Mason University published an article in WaPo concerning the ripples in the national financial pond, and now he has another unsettling article out chronicling current corporate greed in WaPo:
Now it is happening again [the rush after poor investments, as seen just prior to the Great Recession], 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. …
Although some sophisticated investors have begun to pull back from the CLO market, they have been replaced by retail investors seeking higher yields who have flocked to mutual funds and exchange-traded funds that specialize in CLO debt.
Which sounds like wretched amateurs chasing the big return with little thought as to the underlying risk. The sheep will be sheared. But where are the regulators who protect investors against deceptive investments?
Although financial regulators have taken passing notice of the increased volume and declining quality of corporate credit, they haven’t done much to discourage it — just the opposite, in fact.
Earlier this year, after complaints from banks and dealmakers reached sympathetic ears in the Trump administration, the newly installed chairman of the Federal Reserve and the Comptroller of the Currency Office declared that previous “guidance” against lending to companies whose debt exceeded six times their annual cash flow should not be taken as a hard and fast rule.
Whether intended or not, however, the market read the regulators’ announcement not only as a green light to the banks to step up their leveraged lending but also as an indication that regulators would be more responsive to industry pressure than during the Obama years.
And that’s the problem. Regulators don’t exist to increase the profits of an industry – or a company. They exist to keep the economy, or more often some sector of the economy, stable and safe, and thereby create an environment in which reasonable profits are possible. When they collude with the industry they are regulating, there’s a vastly increased chance of a disaster born of the greed of the amateur, the inexperienced.
Or even the cautious, wise citizen.
Because our economy has become so large and convoluted, even the most wise financial actor can get their fins caught in the net of blind bad chance, and dragged onto the beach for a good beating and then a meal. The ceaseless plaints again Glass-Steagall, crowned by its repeal and soon followed by the Great Recession, have been replicated by the grousing about the terrible burdens of Dodd-Frank, which have since been lifted somewhat, ironically with the help of one of its authors, retired Representative Barney Frank (D-MA). Will financial disaster once again befall the nation because of ignorance about the role of regulators?
I shouldn’t be surprised.
But I don’t know enough to even guess, either. But when the experts are shaking their heads …
