Corporate Debt Is the New Subprime

Dec 10, 2018

The market of very risky loans for the most highly indebted companies has been booming. Last year, these very risky loans, called leveraged loans, broke the one trillion dollar mark. This year, they are the fastest growing kind of corporate loan in the U.S.

In many ways, corporate leveraged loans resemble the old subprime mortgage business, which collapsed 10 years ago. Just like how banks dealt with subprime mortgages 10 years ago, the banks today don’t bother to check if the companies can pay back the leveraged loans before lending the money to these companies. That is because—just like 10 years ago—they don’t hold onto these corporate loans. Instead, the banks combine the loans together and then chop them up into financial securities in order to sell to pension funds, insurance companies, hedge funds, mutual funds and endowments all over the world, which seek these financial securities because they pay very high interest rates.

Not surprisingly, there is a very good chance that most of the very indebted companies that have taken out even more loans will default when an economic downturn hits, rendering the financial instruments worthless. And this could set in motion another financial collapse on a global scale, just like the subprime mortgage crisis did 10 years ago.

So what if the companies go bankrupt sometime in the future? The bankers and the big stockholders and owners already got their money.

So what if a rash of corporate bankruptcies brought on by this lending ignites a financial avalanche? Well then, these capitalists figure that the government will just make the working population pay for a new bailout ... just like it did after they brought on the financial collapse 10 years ago.