This is gonna suck: 538 words about another frickin’ bubble in the debt market. I would rather eat glass than even think about it. If you feel the same, just peer at the chart below and then head off for the beach (whence I shall very shortly be).
Believe me, it was torture, but yesterday I made myself wade through the Executive Summary of the Spring 2014 Semiannual Risk Perspective, issued by the Office of the Comptroller of the Currency. Gloomy reading.
While damning the economy with faint praise (economic fundamentals showed modest…blah, blah, blah), the tone of the report was harsh on bank lending, which has gone through the roof this year without resulting in economic growth, as lending standards have fallen back to the risky levels of 2007.
Two of the biggest borrowing sectors today are the oil fracking industry and companies owned by the private equity guys. The frackers are on an awful treadmill. Well life for fracked wells is so short, the drillers can’t pay off the loans on many wells before they go dry, so they keep borrowing both to pay previous loans and to keep drilling. This is a death spiral in the making, destined to leave your bank loaded with non-performing loans at the first sign of a drop in oil prices. At least the drillers are trying to do something good for the country.
The private equity guys, on the other hand, are doing things that ought to get them taken out to the parking lot and shot. Writing about these guys makes me want to punch a hole in the drywall, so I won’t. You can read about their practices at the link at the end of this essay.
At the end of a market cycle, they make leveraged loans with their companies, which means they get bankers to loan them money against company assets that are already pledged against loans. The purpose of these loans is to pay themselves rich dividends, even while saddling an already debt encumbered company with unnecessary debt. You would think company owners (and their dumbass bankers) would be more cautious. Not in these cases. Private equity investors milk the companies they buy for all they can. If the company goes bust, tough bananas. They are already out with handsome returns themselves.
Not one bit of value has been added to the companies, but at the next downturn you can be sure there will be banks stuck with bad loans looking for a taxpayer bailout.
The Comptroller of the currency is not happy, but he has no power to reign in the banking industry. The Fed seems to be encouraging this madness. And it is irksome to be reminded that market tops are confirmed when bankers are falling all over themselves lending money to people who will not be able to pay it back.
Meantime, President Obama sends me an e-mail extolling his job creation and economic growth, while the CEO of Wal-Mart says shoppers aren’t returning at the pace one might expect years after the recession peaked, despite data showing this growth (Market Watch, July 9, 2014). What’s the real story?
Told you this was a bummer of a read.
Article on private equity practices: