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$1.2T in risky corporate debt showing similar warning signs to subprime crisis

465 points by prostoalex 8y ago

interlocutor 8y ago
This is the key phrase in the story: "packaged into securities and sold to investors". This is exactly like the mortgage crisis. Back then banks knew many of the borrowers are not being truthful in their loan applications but lent to them any way (look up "liar loans"). Banks didn't care because they packaged these mortgages into securities and sold them to investors as "mortgage-backed securities", so defaults are someone else's problem. Banks are back at it again.
- abakker 8y ago
  A public company is just packaged up its equity into securities and sold them to investors. The mortgages of 2008 were to the real problems, the sudden lack of liquidity in the markets for trading them was. Sure, some mortgages were hurt, and the housing market went down, but the problems with those securities were illiquidity brought on by the difficulty in valuing the derivatives. Corporate debt is somewhat easier to price, because disclosure is better/easier. Still. I am not rushing out to invest in these securities now...
  - abrichr 8y ago
    > the problems with those securities were illiquidity brought on by the difficulty in valuing the derivatives Can you please elaborate and/or provide a source? I’d like to learn more.
    - abakker 8y ago
      Timothy Geithner's book "Stress Test" does a great job of explaining this, IMO. The trouble with derivatives is that they are contractually bound to reflect some price that is locked to the price of a primary asset. If the derivatives are linked to the price of a security, which is in itself linked to a certain risk-bundle of assets (e.g. the AAA rated CDO with the most senior debt) then it was not exactly clear what happened to the derivative, because it wasn't clear whether people were going to make their payments on their mortgages, or whether the derivative counterparties could pay. The market responses was to try to sell all the derivatives, rather than wait to see what they'd be worth. Effectively, the liquidity which those derivatives and CDOs had prior to the crisis disappeared entirely, which meant that their true value fell much faster than it really should of since people were selling at a discount just to get them off their balance sheets.
everybodyknows 8y ago
"Leveraged loan", defined: https://www.nasdaq.com/investing/glossary/l/leveraged-loan https://www.nasdaq.com/investing/glossary/l/leveraged-loan FT offers a more technical view of the phenomenon. Yesterday: https://www.ft.com/content/64c9665e-1814-11e9-9e64-d150b3105d21 https://www.ft.com/content/64c9665e-1814-11e9-9e64-d150b3105...
ngngngng 8y ago
Who profits off of people worrying about another economic crisis? I'm pretty knowledgeable on my local real estate market, and people are constantly telling me we're in a bubble (we're not) and it's all going to come crashing down this year (it won't). It seems very common these days for people with next to no economic expertise to be certain of a coming crash. I don't think it can be credited to everyone watching the Big Short. Edit: Explanation because i'm getting downvoted. I live in Utah. Our prices have increased quite a bit in the past couple years. The first bit of increase was justified by the increase in high paying tech jobs, but then sellers got greedy. We're currently in a stalemate where nothing is selling because sellers want unrealistic prices. That's not a bubble, that's a market correction.
- jayalpha 8y ago
  > I'm pretty knowledgeable on my local real estate market, and people are constantly telling me we're in a bubble (we're not) I don't know your real estate market, but real estate seems to be in a bubble basically world wide. A bubble can easily predicted when looking backwards. Regarding the future: The Case–Shiller index does not make current US real estate prices look like a bargain.
  - sambroner 8y ago
    Can you talk to the Case-Shiller index? I'm finding it somewhat difficult to understand. I believe it should be going up (more people?), so how would you use it to argue US Real Estate prices are high?
- UncleEntity 8y ago
  When prices reach a point where you can't pay your mortgage by renting out the property then you can pretty much guarantee that prices are on the (too) high side. > ...but then sellers got greedy. We're currently in a stalemate where nothing is selling because sellers want unrealistic prices. Technically...buyers make the market. Without a willing buyer it's all just wistful thinking. The real question is if the prices are truly unrealistic or are they necessary to ensure the seller isn't losing money on the deal?
sdinsn 8y ago
Misleading. They show the amount that debt has increased, but they don't show how corporate assets have increased. If they did, you'd see that the wealth/debt ratio is NOT alarming.
raiyu 8y ago
This article is a bit misleading. The subprime crisis occurred because of the leverage on packaged debt that was held by big banks. Where by an original loan amount of say $1MM had an outstanding obligation perhaps 100x that. The issue was that the banks held this debt, which means when there was an issue, they would become insolvent, which would lead to a financial crisis like the great depression, which is why government intervention was needed. $1.2T of outstanding debt is high, however, not very relevant without knowing who the debt holders are. And as the article states, the primary big banks aren't overly exposed to this debt. Additionally if the debt isn't leveraged on top of the outstanding loan amounts, again the damage from a potential crisis in this area will be very contained. As the article states a lot of this exposure sits with private equity funds and hedge funds, which would result in very little impact to the average citizen if there were an issue. In regards to the Michael Burry comments about fraud, that was specifically related to a bubble. That one of the surest signs of a bubble is out right and rampant fraud. This is critical because when a bubble occurs it means that mass hysteria sets over the general population as neighbors see people "dumber" than them making money. This leads to rampant speculation across the board, which then leads to bad actors committing fraud. They commit fraud because the incentives are high to make a quick buck. A loosening of debt requirements, while a bad idea, doesn't qualify as fraud. There also isn't general speculation that is associated with a bubble, which was one of the main ingredients for the housing mortgage crash as well. So while there maybe an issue here if defaults occur those issues will be very contained. There maybe some hit to the general financial markets, but nothing even remotely close to what occurred with the housing crisis. This is basically the equivalent of saying that any debt that shows loosening guidelines and floating APR is the same thing as the housing crisis, which isn't accurate.
- RestlessMind 8y ago
  > That one of the surest signs of a bubble is out right and rampant fraud. This is critical because when a bubble occurs it means that mass hysteria sets over the general population as neighbors see people "dumber" than them making money. This leads to rampant speculation across the board, which then leads to bad actors committing fraud. They commit fraud because the incentives are high to make a quick buck. That reads like a description of SV. Mass hysteria - check (eg. BTC, shitty startups)! "dumber" people making money - check! rampant speculation - check (eg. Uber IPO valuation of 120B, bay area shacks going for millions)! Actors committing fraud - check (eg. Theranos, Zenefits)! So can we say that SV is in a bubble, maybe confined to the tech sector?
presidents 8y ago
I think what’s really happening is social media is “going dark” in the wake of Facebook and Trump, and predictions that were previously possible, will now expire. All of this ties into candidacy announcements for 2020 presidential elections, and people are doomsday prepping for that one, since the ground is going to shake no matter the outcome, this time around.
- marcrosoft 8y ago
  Nope, the economy goes in fairly predictable cycles and it doesn't care who's president. Stocks are currently over valued: see Nobel prize winning economist's CAPE ratio.
fromthestart 8y ago
I imagine economic bubbles are not independent. I wonder if this in sum with the student loan 'bubble' could make things worse than in part.
nspattak 8y ago
How much is 1.2 terabyte of debt? :P
- avehn 8y ago
  1,228.8 gigabytes (in binary)
api 8y ago
Seems to be a similar theme: there is a ridiculous amount of money at the top that has nowhere to go and nothing to do but inflate debt and asset bubbles.
- anoncoward111 8y ago
  Most of the money the top dogs make is from selling overpriced assets to lower tier chumps :(
- dba7dba 8y ago
  The irony and tragedy of modern capitalism. Everyone wants to get paid, but no one wants to pay. Since ones in power have more control, the top end up keep getting paid more, while the lower ends keep getting paid less. One example would be equity firms. They buy a firm with borrowed money, and in order to pay back the loan, interest on the loan, AND make a profit, they apply the expensive knowledge learned from fancy MBA schools (that charge bucks) and lower cost and increase profit. And lowering cost always means paying less to employees. And increasing profit means charging more. Little do the super rich realize, that soon enough there will be no middle class to buy their stuff/services. And eventually the rich/superrich can only sell stuff to each other, while us peasants watch on smartphones from our slums using youtube service and enduring all the ads since we can't afford the $20/month to hide the ads...
  - perfmode 8y ago
    That’s ice cold
    - dba7dba 8y ago
      If you like what I said, please click on subscribe, I mean, upvote my comment. /sarcasm
      - borkeded 8y ago
        Joke’s on you. HN’s voting is broken.
swampthinker 8y ago
How would one go about shorting this debt?
- cdiddy2 8y ago
  Short the companies with the most debt to earnings or some strategy along those lines.
- HillRat 8y ago
  You could short publicly-traded PE firms with unfavorable profiles, go after companies with bad current ratios and operational cashflow, or just short the market. Dangerous game, though — remember that the market can stay irrational longer than you can stay solvent.
  - fjp 8y ago
    "Being right early is the same as being wrong"
- aaronblohowiak 8y ago
  This debt can also be seen as a bet that there will be inflation.
- ikeboy 8y ago
  Start a company and issue debt
  - incorporate 8y ago
    Actually, this is my favorite answer, because it’s absolutely THE way to profit from terrible economic practices. Borrow money, and never give it back. That IS the correct way to come out a winner when it comes to operating stock ownership. Be the borrower.
    - quickthrower2 8y ago
      Other people’s money, as they say. But can you spend that money as is on for example a Ferrari? Best bet would be to “invest” in something high risk where you either lose it or make so much you can pay off the loan and still be loaded.
rayvy 8y ago
Have also been reading about this [3-6]. With some believing the economy is slowing[1] (i.e., lower corp profits), and with the Fed believed to be pausing rate hikes[2] (i.e., no interest payment increases), I'm curious to see if this turns into a sizeable problem (i.e., quasi '08 bad) [1] https://www.cnbc.com/2018/12/10/goldman-sachs-warns-of-a-sharp-us-economic-slowdown-next-year.html https://www.cnbc.com/2018/12/10/goldman-sachs-warns-of-a-sha... [2] https://www.reuters.com/article/uk-global-forex/dollar-falters-on-bets-fed-will-pause-u-s-rate-hikes-idUSKCN1P112U https://www.reuters.com/article/uk-global-forex/dollar-falte... [3] https://www.zerohedge.com/news/2018-10-30/corporate-debt-bubble https://www.zerohedge.com/news/2018-10-30/corporate-debt-bub... [4] https://www.bloomberg.com/news/articles/2018-11-19/corporate-america-s-debt-boom-looks-like-a-bust-for-the-economy https://www.bloomberg.com/news/articles/2018-11-19/corporate... [5] https://www.forbes.com/sites/jessecolombo/2018/08/29/the-u-s-is-experiencing-a-dangerous-corporate-debt-bubble/ https://www.forbes.com/sites/jessecolombo/2018/08/29/the-u-s... [6] https://seekingalpha.com/article/4225847-corporate-bond-market-getting-junkier https://seekingalpha.com/article/4225847-corporate-bond-mark...
arawde 8y ago
At last year's World Economic Forum, there was a panel titled "The Next Financial Crisis", and while many different potential causes were considered, the most prominent one is definitely corporate debt, especially emerging market debt that is dollar-denominated. [0] Much of the concern in markets right now seems to stem from the idea that as the Federal Reserve tightens credit, both through raising interest rates and through unwinding its previous QE programs, there will be a significant impact on companies that have borrowed at lower interest rates. Debt that is going to come due in the next few years is going to have to be refinanced, or is going to default. If you're a country which borrowed in dollars, the tightening of US monetary policy will often lead to a change in exchange rates that makes it more expensive to pay back debt. Coupled with a global economic slowdown resulting from a trade war, and things start to look nasty wherever you look. [0]: https://www.youtube.com/watch?v=1WOs6S0VrlA https://www.youtube.com/watch?v=1WOs6S0VrlA
- pmorici 8y ago
  Thinking about this reminded me of the line from the movie "The Big Short" where Michael Burry says one of the indicators of the coming crisis was an increase in the rate of fraud. Juxtapose that with what feels like an uptick in white collar fraud these past couple years. ie: Theranos, Fyre, 1MDB, numerous crypto token related scams.
  - darawk 8y ago
    That's interesting though i'm not sure that's the right kind of fraud. The fraud Bury was referring to was related to mortgage lending, both on the part of the borrowers (fraudulent documents supporting income, etc.) and on the part of the immediate lenders (the banks / lead generators for mortgages). The comparable type of fraud here would be businesses inflating their assets or income streams to acquire bank loans that they couldn't otherwise qualify for. It may be that that kind of fraud is on the rise, but I don't think the examples you cited (with the notable exception of 1MDB) are instances of it.
    - zippy5 8y ago
guntars 8y ago
The article doesn’t mention who’s buying the debt. As long as it’s private investors using their own money, I don’t see a problem with this.
- TravisLS 8y ago
  You'll recall the financial crisis in 2008, where many of us taxpayers paid massively to bail out these private investors using their own money.
  - guntars 8y ago
    The taxpayers made $96B on those loans [1]. The issue then was that everyone was buying those CDOs because they were AAA rated, things like the pension funds and the banks themselves. I'm saying that if only individual investors are buying the corporate debt, it's not a systematic risk. [1] https://projects.propublica.org/bailout/ https://projects.propublica.org/bailout/
    - TravisLS 8y ago
      That's a fair point given the way I phrased my reply, but TARP is far from the extent of the cost of the financial crisis. The resulting market crash, credit crunch, unemployment all play a role in making this much more than a private issue. The fed estimated the cost to each American at $20-80K. [1] Also TARP could have very easily not made money, and bailouts are certainly not guaranteed to make money the next time around. [1] https://www.nytimes.com/2014/01/22/business/economy/the-cost-of-the-financial-crisis-is-still-being-tallied.html https://www.nytimes.com/2014/01/22/business/economy/the-cost...
      - guntars 8y ago
        That's fair too, though it's easy to blame all of the recession on the subprime bubble bursting while I think it would have happened anyway, eventually. And I'm advocating for letting banks, funds and investors fail if they lose at the game of musical chairs. For this to work though they need to be kept separate from rest of the finance system and use their own money.
alexnewman 8y ago
I called this when we moved from basel 2->3 . It changed the reserve requirements to 0 for these type of loans.
shiftpgdn 8y ago
I run a small SAS company and consult for another medium sized O&G company. The amount of debt I am offered to take on every day is staggering. The O&G company recently took a $200k loan with little to no proof of income, collateral, or anything else. I know of some other small companies with MILLIONS in debt and absolutely 0 collateral to back it up. In the event of insolvency the lender will just soak the loss.
- hn_throwaway_99 8y ago
  Obstetrics and Gynecology?
  - deleted 8y ago
    [deleted]
  - sokoloff 8y ago
    Oil and Gas
- 01100011 8y ago
  The O&G company has no assets(land, equipment, mineral rights, signed contracts, etc)?
- digitaltrees 8y ago
  Is the debt on favorable terms or is it really high interest?
- elliotec 8y ago
  I work for a fintech company that is in the business of small/medium business credit and financing, and this is a very surprising thing to hear. My understanding is the majority of our customers are struggling to establish business credit and get decent financing, especially if they haven't been in business long and/or don't have high revenue streams. Do the companies you mention have decent revenue, even if they also have debt?? Your situation is one many of our customers would love to be in.
  - 8y ago
magila 8y ago
The FED certainly still remembers the mortgage mess, considering they still hold some $1.6 trillion in mortgage backed securities on their books. One wonders what they will do when the next debt crisis hits. Will they take on another trillion in corporate debt? Clearly this can't go on forever, but there seems to be little political will to let credit markets normalize. For me the whole situation is really scary.
- hn_throwaway_99 8y ago
  That's the scary thing that makes it so difficult to argue invest in my opinion, in that really ever since the late 90s Asian financial crisis we've been on these huge boom/bust/boom/bust cycles, all fueled by the Fed encouraging people to take more risk to lessen the blow of the bust.
  - twblalock 8y ago
    We've been on large boom and bust cycles since the 19th century at least. This isn't new.
  - pishpash 8y ago
    And look where it got us in exchange: a new economy, the potential for AI and new medicine. Booms and busts don't matter in the grand scheme of things, so long as people remain productive and energy remains plentiful.
tcbawo 8y ago
Beware financial analysis and economic forecasts. Confirmation bias is rampant.
heifetz 8y ago
no it's not. The subprime crisis was precipitated by a lot of people taking out mortgages with either blatantly or coerced false income information in their mortgage applications on homes that had inflated values. Once home prices stopped going up as much and interest rates started increasing, these people were no longer able to make their mortgage payments. Leveraged loans at 7x ebitda are still less leverage than someone taking out 90% LTV mortgage (90% LTV can be thought of as 9x leverage against your equity). Companies usually also have more flexibility to increase their income, or decrease their expenses compared to an average person. And mortgages have required amortization where as most levered loans to my knowledge are interest only. All in all, unless a significant % of companies taking out levered loans are submitting fraudulent financial filings, this is nothing like the subprime crisis.
- jayalpha 8y ago
  > no it's not. It is easy to make fundamental predictions in finance. It is impossible to predict timings. > Once home prices stopped going up as much and interest rates started increasing, these people were no longer able to make their mortgage payments. When was the last time you looked at the Case–Shiller index?
- FireBeyond 8y ago
  > The subprime crisis was precipitated by a lot of people taking out mortgages with either blatantly or coerced false income information in their mortgage applications on homes that had inflated values. Whereas what, companies would never utilize non-standard accounting methods or falsified or exaggerated earnings reports or forecasts?
  - heifetz 8y ago
    Sure companies will and can do that, there has been pretty good history of really large companies committing financial fraud. However, I don't think there ever has been systematic fraud in the US, unlike with subprime mortgages
    - luckydata 8y ago
zjaffee 8y ago
People have been saying this since 2015. While the conditions for debt refinancing have certainly changed, it's not clear by any means that this is the sort of problem that would cause any sort of cascading recession all at once.
- jcranmer 8y ago
  There's a great saying... economists have predicted the last 7 of 5 recessions. A more interesting question to ask is why we shifted from the student loan crisis to corporate debt as the very-definite-hiding-in-plain-sight cause of the impending crash.
  - anongraddebt 8y ago
    My two cents: (Full disclosure. Not an economist) The great depression seemed to have ~5-8 primary causes to it. These causes came from many different directions and converged on a single year (or handful of years) in time. Since then, the recessions we've had have seemed to have occured due to a single or unitary primary cause. That is, they did not seem like the convergence of a multitude of quite distinct causes. A problem here is how fine a line you draw between separate causes. On one interpretation, there was a convergence of a multitude of causes leading up to 2008. The only thing I will say here is that the multitude of causes for 2008 seem much fewer in number and distinctness than 1929, and our present situation feels more similar - in that way - to 1929 than 2008.
    - onlyrealcuzzo 8y ago
      Ray Dalio is saying our current situation most closely resembles 1937, and 2008 most closely resembled 1929.
      - aaronblohowiak 8y ago
        Source? I’d love to learn more
paxys 8y ago
The economy is always in one of two states - recession, or people predicting that the next recession is just around the corner.
- marcrosoft 8y ago
  Here are two more things lurking behind the corner that can drastically effect the economy: Inflation Deflation
caublestone 8y ago
When markets crash they tend to crash fast after seeming to be in a slow motion. I wonder what the kickoff will be? If it’s this week it will go something like this: 1. People realize that they aren’t getting their tax returns because of the shutdown and it has an outsized effect because consumer savings rates are low. Market wobbles. 2. Treasury issues short term debt at high yields and long term debt at low yield yields Thursday, market crumbles Friday. 3. Fed meets next week to discuss the debt window and if they need to slow down QT or go back to QE. They don’t know. Market goes volatile. 4. Government shutdown ends at first sending stocks up. Then key economic data releases showing consumer spending is going to be weak because real wages were down. Anyways, it’s more likely we’d have to see a couple of blue chips go bankrupt first like a big state utility company or a classic old American tech company.
- marcrosoft 8y ago
  For awhile now I've been preaching my prediction which is: When (not if) the market crashes again, it will happen MUCH faster than previous crashes due to increasing automated trading and general speed of news. Expect a flash crash within minutes instead of days. And, if there is a halt in trading it will crash even faster.
- umeshunni 8y ago
  Your first statement (People realize that they aren’t getting their tax returns because of the shutdown) is incorrect: https://www.bloomberg.com/news/articles/2019-01-07/irs-will-pay-refunds-during-government-shutdown-official-says https://www.bloomberg.com/news/articles/2019-01-07/irs-will-...
travisoneill1 8y ago
The difference is that everybody knows that leveraged loans are risky. The mortgage crisis wasn't triggered by the fact that complex mortgage backed securities were risky, but by the fact that people thought they were pretty much risk free and were blindsided.
- interlocutor 8y ago
  Whoever is determining credit worthiness needs to have skin in the game. This is what Dodd-Frank did. It required security bankers retain 5% of the overall risk of the security. Known as the Volcker Rule, it is now being rolled back: https://www.washingtonpost.com/business/economy/trump-signs-law-rolling-back-post-financial-crisis-banking-rules/2018/05/24/077e3aa8-5f6c-11e8-a4a4-c070ef53f315_story.html https://www.washingtonpost.com/business/economy/trump-signs-...
WheelsAtLarge 8y ago
You have to take all these gloom and doom articles with a grain of salt. And take them as a reminder that all economic booms reverse. Yes, some are right. Yet, most are not. Question is which and when? We can't know and won't know until after the next financial disaster happens. Even as we go through one we won't know until months after it starts. The last recession started at the end of 2007 yet we didn't really start feeling it until well into 2008. Financial collapses are more like earthquakes. You never know when they will happen. But by the time they happen, it's too late to get ready so you better be ready to avoid a major disaster beforehand.
m3kw9 8y ago
Are these debt misclassified as AAA, I don’t think so because of what happened before at Moody’s, I think they changed some rules
- abakker 8y ago
  No, they’re junk bonds, I.e. not investment grade.
platz 8y ago
does that mean VCSH (Short term investment grade debt) is a good or bad play? https://investor.vanguard.com/etf/profile/VCSH https://investor.vanguard.com/etf/profile/VCSH
acd 8y ago
The current financial system does not price taking care of the environment. Tragedy of the commons, air co2, oceans pollution. Further it is unstable there is always credit booms and busts in cyclical fashion. Further besides thrashing the planet it sends wealth from the middle class up to the top of the pyramid. I am curious why the middle class tolerates it? Could it be that most people do not understand the financial system?
- collyw 8y ago
  I am sure that it is made deliberately complicated so that only those in the know can make money from it. I don't doubt that I could make money from it myself, but I don't have the time to learn all the intricacies of the system. Well that's my excuse.
steve_gh 8y ago
A lot of the problem isn't in the debt as such, it is in the collateralization. When you bundle the debt and sell it on in slices with different risk profiles (i.e. separating out who gets paid first (least risky) to last (most risky) then it becomes really hard to understand how risky the debt slices are (which dictates how much they are worth). People assume that the least risky debt (sometimes called super-senior) is worth its face value. The problem is that when things go wrong, investors lose confidence in the valuation of the debt. And suddenly a bank with say $1T of super-senior debt finds it is only worth $100B on the open market. And that means that the bank doesn't have the assets to back the loans it has made - so has to raise money by selling things. Selling things when you are in trouble is never a good idea, as you are forced to accept a discount. So you now have the market flooding with cheap assets (say securities), which then drops the value of the securities that other banks hold - which gives them problems in backing the loans they have made. Then they have to start selling. And that's how a financial earthquake begins...
honestoHeminway 8y ago
Seems like having all smart people working as fractal fleas in the banking sector, instead of developing products produces crisass. We need more self-regulation.

465 points by prostoalex 8y ago

This is the key phrase in the story: "packaged into securities and sold to investors". This is exactly like the mortgage crisis. Back then banks knew many of the borrowers are not being truthful in their loan applications but lent to them any way (look up "liar loans"). Banks didn't care because they packaged these mortgages into securities and sold them to investors as "mortgage-backed securities", so defaults are someone else's problem. Banks are back at it again.

abakker 8y ago
A public company is just packaged up its equity into securities and sold them to investors. The mortgages of 2008 were to the real problems, the sudden lack of liquidity in the markets for trading them was. Sure, some mortgages were hurt, and the housing market went down, but the problems with those securities were illiquidity brought on by the difficulty in valuing the derivatives. Corporate debt is somewhat easier to price, because disclosure is better/easier. Still. I am not rushing out to invest in these securities now...
- abrichr 8y ago
  > the problems with those securities were illiquidity brought on by the difficulty in valuing the derivatives Can you please elaborate and/or provide a source? I’d like to learn more.
  - abakker 8y ago
    Timothy Geithner's book "Stress Test" does a great job of explaining this, IMO. The trouble with derivatives is that they are contractually bound to reflect some price that is locked to the price of a primary asset. If the derivatives are linked to the price of a security, which is in itself linked to a certain risk-bundle of assets (e.g. the AAA rated CDO with the most senior debt) then it was not exactly clear what happened to the derivative, because it wasn't clear whether people were going to make their payments on their mortgages, or whether the derivative counterparties could pay. The market responses was to try to sell all the derivatives, rather than wait to see what they'd be worth. Effectively, the liquidity which those derivatives and CDOs had prior to the crisis disappeared entirely, which meant that their true value fell much faster than it really should of since people were selling at a discount just to get them off their balance sheets.

everybodyknows 8y ago

"Leveraged loan", defined: https://www.nasdaq.com/investing/glossary/l/leveraged-loan https://www.nasdaq.com/investing/glossary/l/leveraged-loan FT offers a more technical view of the phenomenon. Yesterday: https://www.ft.com/content/64c9665e-1814-11e9-9e64-d150b3105d21 https://www.ft.com/content/64c9665e-1814-11e9-9e64-d150b3105...

ngngngng 8y ago

Who profits off of people worrying about another economic crisis? I'm pretty knowledgeable on my local real estate market, and people are constantly telling me we're in a bubble (we're not) and it's all going to come crashing down this year (it won't). It seems very common these days for people with next to no economic expertise to be certain of a coming crash. I don't think it can be credited to everyone watching the Big Short. Edit: Explanation because i'm getting downvoted. I live in Utah. Our prices have increased quite a bit in the past couple years. The first bit of increase was justified by the increase in high paying tech jobs, but then sellers got greedy. We're currently in a stalemate where nothing is selling because sellers want unrealistic prices. That's not a bubble, that's a market correction.

jayalpha 8y ago
> I'm pretty knowledgeable on my local real estate market, and people are constantly telling me we're in a bubble (we're not) I don't know your real estate market, but real estate seems to be in a bubble basically world wide. A bubble can easily predicted when looking backwards. Regarding the future: The Case–Shiller index does not make current US real estate prices look like a bargain.
- sambroner 8y ago
  Can you talk to the Case-Shiller index? I'm finding it somewhat difficult to understand. I believe it should be going up (more people?), so how would you use it to argue US Real Estate prices are high?
UncleEntity 8y ago
When prices reach a point where you can't pay your mortgage by renting out the property then you can pretty much guarantee that prices are on the (too) high side. > ...but then sellers got greedy. We're currently in a stalemate where nothing is selling because sellers want unrealistic prices. Technically...buyers make the market. Without a willing buyer it's all just wistful thinking. The real question is if the prices are truly unrealistic or are they necessary to ensure the seller isn't losing money on the deal?

sdinsn 8y ago

Misleading. They show the amount that debt has increased, but they don't show how corporate assets have increased. If they did, you'd see that the wealth/debt ratio is NOT alarming.

raiyu 8y ago

This article is a bit misleading. The subprime crisis occurred because of the leverage on packaged debt that was held by big banks. Where by an original loan amount of say $1MM had an outstanding obligation perhaps 100x that. The issue was that the banks held this debt, which means when there was an issue, they would become insolvent, which would lead to a financial crisis like the great depression, which is why government intervention was needed. $1.2T of outstanding debt is high, however, not very relevant without knowing who the debt holders are. And as the article states, the primary big banks aren't overly exposed to this debt. Additionally if the debt isn't leveraged on top of the outstanding loan amounts, again the damage from a potential crisis in this area will be very contained. As the article states a lot of this exposure sits with private equity funds and hedge funds, which would result in very little impact to the average citizen if there were an issue. In regards to the Michael Burry comments about fraud, that was specifically related to a bubble. That one of the surest signs of a bubble is out right and rampant fraud. This is critical because when a bubble occurs it means that mass hysteria sets over the general population as neighbors see people "dumber" than them making money. This leads to rampant speculation across the board, which then leads to bad actors committing fraud. They commit fraud because the incentives are high to make a quick buck. A loosening of debt requirements, while a bad idea, doesn't qualify as fraud. There also isn't general speculation that is associated with a bubble, which was one of the main ingredients for the housing mortgage crash as well. So while there maybe an issue here if defaults occur those issues will be very contained. There maybe some hit to the general financial markets, but nothing even remotely close to what occurred with the housing crisis. This is basically the equivalent of saying that any debt that shows loosening guidelines and floating APR is the same thing as the housing crisis, which isn't accurate.

RestlessMind 8y ago
> That one of the surest signs of a bubble is out right and rampant fraud. This is critical because when a bubble occurs it means that mass hysteria sets over the general population as neighbors see people "dumber" than them making money. This leads to rampant speculation across the board, which then leads to bad actors committing fraud. They commit fraud because the incentives are high to make a quick buck. That reads like a description of SV. Mass hysteria - check (eg. BTC, shitty startups)! "dumber" people making money - check! rampant speculation - check (eg. Uber IPO valuation of 120B, bay area shacks going for millions)! Actors committing fraud - check (eg. Theranos, Zenefits)! So can we say that SV is in a bubble, maybe confined to the tech sector?

presidents 8y ago

I think what’s really happening is social media is “going dark” in the wake of Facebook and Trump, and predictions that were previously possible, will now expire. All of this ties into candidacy announcements for 2020 presidential elections, and people are doomsday prepping for that one, since the ground is going to shake no matter the outcome, this time around.

marcrosoft 8y ago
Nope, the economy goes in fairly predictable cycles and it doesn't care who's president. Stocks are currently over valued: see Nobel prize winning economist's CAPE ratio.

fromthestart 8y ago

I imagine economic bubbles are not independent. I wonder if this in sum with the student loan 'bubble' could make things worse than in part.

nspattak 8y ago

How much is 1.2 terabyte of debt? :P

avehn 8y ago
1,228.8 gigabytes (in binary)

api 8y ago

Seems to be a similar theme: there is a ridiculous amount of money at the top that has nowhere to go and nothing to do but inflate debt and asset bubbles.

anoncoward111 8y ago
Most of the money the top dogs make is from selling overpriced assets to lower tier chumps :(
dba7dba 8y ago
The irony and tragedy of modern capitalism. Everyone wants to get paid, but no one wants to pay. Since ones in power have more control, the top end up keep getting paid more, while the lower ends keep getting paid less. One example would be equity firms. They buy a firm with borrowed money, and in order to pay back the loan, interest on the loan, AND make a profit, they apply the expensive knowledge learned from fancy MBA schools (that charge bucks) and lower cost and increase profit. And lowering cost always means paying less to employees. And increasing profit means charging more. Little do the super rich realize, that soon enough there will be no middle class to buy their stuff/services. And eventually the rich/superrich can only sell stuff to each other, while us peasants watch on smartphones from our slums using youtube service and enduring all the ads since we can't afford the $20/month to hide the ads...
- perfmode 8y ago
  That’s ice cold
  - dba7dba 8y ago
    If you like what I said, please click on subscribe, I mean, upvote my comment. /sarcasm
    - borkeded 8y ago
      Joke’s on you. HN’s voting is broken.

swampthinker 8y ago

How would one go about shorting this debt?

cdiddy2 8y ago
Short the companies with the most debt to earnings or some strategy along those lines.
HillRat 8y ago
You could short publicly-traded PE firms with unfavorable profiles, go after companies with bad current ratios and operational cashflow, or just short the market. Dangerous game, though — remember that the market can stay irrational longer than you can stay solvent.
- fjp 8y ago
  "Being right early is the same as being wrong"
aaronblohowiak 8y ago
This debt can also be seen as a bet that there will be inflation.
ikeboy 8y ago
Start a company and issue debt
- incorporate 8y ago
  Actually, this is my favorite answer, because it’s absolutely THE way to profit from terrible economic practices. Borrow money, and never give it back. That IS the correct way to come out a winner when it comes to operating stock ownership. Be the borrower.
  - quickthrower2 8y ago
    Other people’s money, as they say. But can you spend that money as is on for example a Ferrari? Best bet would be to “invest” in something high risk where you either lose it or make so much you can pay off the loan and still be loaded.

rayvy 8y ago

Have also been reading about this [3-6]. With some believing the economy is slowing[1] (i.e., lower corp profits), and with the Fed believed to be pausing rate hikes[2] (i.e., no interest payment increases), I'm curious to see if this turns into a sizeable problem (i.e., quasi '08 bad) [1] https://www.cnbc.com/2018/12/10/goldman-sachs-warns-of-a-sharp-us-economic-slowdown-next-year.html https://www.cnbc.com/2018/12/10/goldman-sachs-warns-of-a-sha... [2] https://www.reuters.com/article/uk-global-forex/dollar-falters-on-bets-fed-will-pause-u-s-rate-hikes-idUSKCN1P112U https://www.reuters.com/article/uk-global-forex/dollar-falte... [3] https://www.zerohedge.com/news/2018-10-30/corporate-debt-bubble https://www.zerohedge.com/news/2018-10-30/corporate-debt-bub... [4] https://www.bloomberg.com/news/articles/2018-11-19/corporate-america-s-debt-boom-looks-like-a-bust-for-the-economy https://www.bloomberg.com/news/articles/2018-11-19/corporate... [5] https://www.forbes.com/sites/jessecolombo/2018/08/29/the-u-s-is-experiencing-a-dangerous-corporate-debt-bubble/ https://www.forbes.com/sites/jessecolombo/2018/08/29/the-u-s... [6] https://seekingalpha.com/article/4225847-corporate-bond-market-getting-junkier https://seekingalpha.com/article/4225847-corporate-bond-mark...

arawde 8y ago

At last year's World Economic Forum, there was a panel titled "The Next Financial Crisis", and while many different potential causes were considered, the most prominent one is definitely corporate debt, especially emerging market debt that is dollar-denominated. [0] Much of the concern in markets right now seems to stem from the idea that as the Federal Reserve tightens credit, both through raising interest rates and through unwinding its previous QE programs, there will be a significant impact on companies that have borrowed at lower interest rates. Debt that is going to come due in the next few years is going to have to be refinanced, or is going to default. If you're a country which borrowed in dollars, the tightening of US monetary policy will often lead to a change in exchange rates that makes it more expensive to pay back debt. Coupled with a global economic slowdown resulting from a trade war, and things start to look nasty wherever you look. [0]: https://www.youtube.com/watch?v=1WOs6S0VrlA https://www.youtube.com/watch?v=1WOs6S0VrlA

pmorici 8y ago
Thinking about this reminded me of the line from the movie "The Big Short" where Michael Burry says one of the indicators of the coming crisis was an increase in the rate of fraud. Juxtapose that with what feels like an uptick in white collar fraud these past couple years. ie: Theranos, Fyre, 1MDB, numerous crypto token related scams.
- darawk 8y ago
  That's interesting though i'm not sure that's the right kind of fraud. The fraud Bury was referring to was related to mortgage lending, both on the part of the borrowers (fraudulent documents supporting income, etc.) and on the part of the immediate lenders (the banks / lead generators for mortgages). The comparable type of fraud here would be businesses inflating their assets or income streams to acquire bank loans that they couldn't otherwise qualify for. It may be that that kind of fraud is on the rise, but I don't think the examples you cited (with the notable exception of 1MDB) are instances of it.
  - zippy5 8y ago

guntars 8y ago

The article doesn’t mention who’s buying the debt. As long as it’s private investors using their own money, I don’t see a problem with this.

TravisLS 8y ago
You'll recall the financial crisis in 2008, where many of us taxpayers paid massively to bail out these private investors using their own money.
- guntars 8y ago
  The taxpayers made $96B on those loans [1]. The issue then was that everyone was buying those CDOs because they were AAA rated, things like the pension funds and the banks themselves. I'm saying that if only individual investors are buying the corporate debt, it's not a systematic risk. [1] https://projects.propublica.org/bailout/ https://projects.propublica.org/bailout/
  - TravisLS 8y ago
    That's a fair point given the way I phrased my reply, but TARP is far from the extent of the cost of the financial crisis. The resulting market crash, credit crunch, unemployment all play a role in making this much more than a private issue. The fed estimated the cost to each American at $20-80K. [1] Also TARP could have very easily not made money, and bailouts are certainly not guaranteed to make money the next time around. [1] https://www.nytimes.com/2014/01/22/business/economy/the-cost-of-the-financial-crisis-is-still-being-tallied.html https://www.nytimes.com/2014/01/22/business/economy/the-cost...
    - guntars 8y ago
      That's fair too, though it's easy to blame all of the recession on the subprime bubble bursting while I think it would have happened anyway, eventually. And I'm advocating for letting banks, funds and investors fail if they lose at the game of musical chairs. For this to work though they need to be kept separate from rest of the finance system and use their own money.

alexnewman 8y ago

I called this when we moved from basel 2->3 . It changed the reserve requirements to 0 for these type of loans.

shiftpgdn 8y ago

I run a small SAS company and consult for another medium sized O&G company. The amount of debt I am offered to take on every day is staggering. The O&G company recently took a $200k loan with little to no proof of income, collateral, or anything else. I know of some other small companies with MILLIONS in debt and absolutely 0 collateral to back it up. In the event of insolvency the lender will just soak the loss.

hn_throwaway_99 8y ago
Obstetrics and Gynecology?
- deleted 8y ago
  [deleted]
- sokoloff 8y ago
  Oil and Gas
01100011 8y ago
The O&G company has no assets(land, equipment, mineral rights, signed contracts, etc)?
digitaltrees 8y ago
Is the debt on favorable terms or is it really high interest?
elliotec 8y ago
I work for a fintech company that is in the business of small/medium business credit and financing, and this is a very surprising thing to hear. My understanding is the majority of our customers are struggling to establish business credit and get decent financing, especially if they haven't been in business long and/or don't have high revenue streams. Do the companies you mention have decent revenue, even if they also have debt?? Your situation is one many of our customers would love to be in.
- 8y ago

magila 8y ago

The FED certainly still remembers the mortgage mess, considering they still hold some $1.6 trillion in mortgage backed securities on their books. One wonders what they will do when the next debt crisis hits. Will they take on another trillion in corporate debt? Clearly this can't go on forever, but there seems to be little political will to let credit markets normalize. For me the whole situation is really scary.

hn_throwaway_99 8y ago
That's the scary thing that makes it so difficult to argue invest in my opinion, in that really ever since the late 90s Asian financial crisis we've been on these huge boom/bust/boom/bust cycles, all fueled by the Fed encouraging people to take more risk to lessen the blow of the bust.
- twblalock 8y ago
  We've been on large boom and bust cycles since the 19th century at least. This isn't new.
- pishpash 8y ago
  And look where it got us in exchange: a new economy, the potential for AI and new medicine. Booms and busts don't matter in the grand scheme of things, so long as people remain productive and energy remains plentiful.

tcbawo 8y ago

Beware financial analysis and economic forecasts. Confirmation bias is rampant.

heifetz 8y ago

no it's not. The subprime crisis was precipitated by a lot of people taking out mortgages with either blatantly or coerced false income information in their mortgage applications on homes that had inflated values. Once home prices stopped going up as much and interest rates started increasing, these people were no longer able to make their mortgage payments. Leveraged loans at 7x ebitda are still less leverage than someone taking out 90% LTV mortgage (90% LTV can be thought of as 9x leverage against your equity). Companies usually also have more flexibility to increase their income, or decrease their expenses compared to an average person. And mortgages have required amortization where as most levered loans to my knowledge are interest only. All in all, unless a significant % of companies taking out levered loans are submitting fraudulent financial filings, this is nothing like the subprime crisis.

jayalpha 8y ago
> no it's not. It is easy to make fundamental predictions in finance. It is impossible to predict timings. > Once home prices stopped going up as much and interest rates started increasing, these people were no longer able to make their mortgage payments. When was the last time you looked at the Case–Shiller index?
FireBeyond 8y ago
> The subprime crisis was precipitated by a lot of people taking out mortgages with either blatantly or coerced false income information in their mortgage applications on homes that had inflated values. Whereas what, companies would never utilize non-standard accounting methods or falsified or exaggerated earnings reports or forecasts?
- heifetz 8y ago
  Sure companies will and can do that, there has been pretty good history of really large companies committing financial fraud. However, I don't think there ever has been systematic fraud in the US, unlike with subprime mortgages
  - luckydata 8y ago

zjaffee 8y ago

People have been saying this since 2015. While the conditions for debt refinancing have certainly changed, it's not clear by any means that this is the sort of problem that would cause any sort of cascading recession all at once.

jcranmer 8y ago
There's a great saying... economists have predicted the last 7 of 5 recessions. A more interesting question to ask is why we shifted from the student loan crisis to corporate debt as the very-definite-hiding-in-plain-sight cause of the impending crash.
- anongraddebt 8y ago
  My two cents: (Full disclosure. Not an economist) The great depression seemed to have ~5-8 primary causes to it. These causes came from many different directions and converged on a single year (or handful of years) in time. Since then, the recessions we've had have seemed to have occured due to a single or unitary primary cause. That is, they did not seem like the convergence of a multitude of quite distinct causes. A problem here is how fine a line you draw between separate causes. On one interpretation, there was a convergence of a multitude of causes leading up to 2008. The only thing I will say here is that the multitude of causes for 2008 seem much fewer in number and distinctness than 1929, and our present situation feels more similar - in that way - to 1929 than 2008.
  - onlyrealcuzzo 8y ago
    Ray Dalio is saying our current situation most closely resembles 1937, and 2008 most closely resembled 1929.
    - aaronblohowiak 8y ago
      Source? I’d love to learn more

paxys 8y ago

The economy is always in one of two states - recession, or people predicting that the next recession is just around the corner.

marcrosoft 8y ago
Here are two more things lurking behind the corner that can drastically effect the economy: Inflation Deflation

caublestone 8y ago

When markets crash they tend to crash fast after seeming to be in a slow motion. I wonder what the kickoff will be? If it’s this week it will go something like this: 1. People realize that they aren’t getting their tax returns because of the shutdown and it has an outsized effect because consumer savings rates are low. Market wobbles. 2. Treasury issues short term debt at high yields and long term debt at low yield yields Thursday, market crumbles Friday. 3. Fed meets next week to discuss the debt window and if they need to slow down QT or go back to QE. They don’t know. Market goes volatile. 4. Government shutdown ends at first sending stocks up. Then key economic data releases showing consumer spending is going to be weak because real wages were down. Anyways, it’s more likely we’d have to see a couple of blue chips go bankrupt first like a big state utility company or a classic old American tech company.

marcrosoft 8y ago
For awhile now I've been preaching my prediction which is: When (not if) the market crashes again, it will happen MUCH faster than previous crashes due to increasing automated trading and general speed of news. Expect a flash crash within minutes instead of days. And, if there is a halt in trading it will crash even faster.
umeshunni 8y ago
Your first statement (People realize that they aren’t getting their tax returns because of the shutdown) is incorrect: https://www.bloomberg.com/news/articles/2019-01-07/irs-will-pay-refunds-during-government-shutdown-official-says https://www.bloomberg.com/news/articles/2019-01-07/irs-will-...

travisoneill1 8y ago

The difference is that everybody knows that leveraged loans are risky. The mortgage crisis wasn't triggered by the fact that complex mortgage backed securities were risky, but by the fact that people thought they were pretty much risk free and were blindsided.

interlocutor 8y ago
Whoever is determining credit worthiness needs to have skin in the game. This is what Dodd-Frank did. It required security bankers retain 5% of the overall risk of the security. Known as the Volcker Rule, it is now being rolled back: https://www.washingtonpost.com/business/economy/trump-signs-law-rolling-back-post-financial-crisis-banking-rules/2018/05/24/077e3aa8-5f6c-11e8-a4a4-c070ef53f315_story.html https://www.washingtonpost.com/business/economy/trump-signs-...

WheelsAtLarge 8y ago

You have to take all these gloom and doom articles with a grain of salt. And take them as a reminder that all economic booms reverse. Yes, some are right. Yet, most are not. Question is which and when? We can't know and won't know until after the next financial disaster happens. Even as we go through one we won't know until months after it starts. The last recession started at the end of 2007 yet we didn't really start feeling it until well into 2008. Financial collapses are more like earthquakes. You never know when they will happen. But by the time they happen, it's too late to get ready so you better be ready to avoid a major disaster beforehand.

m3kw9 8y ago

Are these debt misclassified as AAA, I don’t think so because of what happened before at Moody’s, I think they changed some rules

abakker 8y ago
No, they’re junk bonds, I.e. not investment grade.

platz 8y ago

does that mean VCSH (Short term investment grade debt) is a good or bad play? https://investor.vanguard.com/etf/profile/VCSH https://investor.vanguard.com/etf/profile/VCSH

acd 8y ago

The current financial system does not price taking care of the environment. Tragedy of the commons, air co2, oceans pollution. Further it is unstable there is always credit booms and busts in cyclical fashion. Further besides thrashing the planet it sends wealth from the middle class up to the top of the pyramid. I am curious why the middle class tolerates it? Could it be that most people do not understand the financial system?

collyw 8y ago
I am sure that it is made deliberately complicated so that only those in the know can make money from it. I don't doubt that I could make money from it myself, but I don't have the time to learn all the intricacies of the system. Well that's my excuse.

steve_gh 8y ago

A lot of the problem isn't in the debt as such, it is in the collateralization. When you bundle the debt and sell it on in slices with different risk profiles (i.e. separating out who gets paid first (least risky) to last (most risky) then it becomes really hard to understand how risky the debt slices are (which dictates how much they are worth). People assume that the least risky debt (sometimes called super-senior) is worth its face value. The problem is that when things go wrong, investors lose confidence in the valuation of the debt. And suddenly a bank with say $1T of super-senior debt finds it is only worth $100B on the open market. And that means that the bank doesn't have the assets to back the loans it has made - so has to raise money by selling things. Selling things when you are in trouble is never a good idea, as you are forced to accept a discount. So you now have the market flooding with cheap assets (say securities), which then drops the value of the securities that other banks hold - which gives them problems in backing the loans they have made. Then they have to start selling. And that's how a financial earthquake begins...

honestoHeminway 8y ago

Seems like having all smart people working as fractal fleas in the banking sector, instead of developing products produces crisass. We need more self-regulation.