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Harbingers Appearing of a Bigger U.S. Debt Crisis

April 27, 2017 (EIRNS)—Outstanding debt of U.S. non-financial corporations is now just under $14 trillion, having zoomed up from $8 trillion less than a decade ago, and that bubble is now showing first signs of a huge breakdown on the 2017 horizon, which will take the economy down again. A crash centered in the corporate debt bubble could be worse than the blowout of the $11 trillion mortgage bubble in 2007-08, the blood and tears from which are still running. The choice was posed to elected officials and the public 20 years ago, whether to remove Franklin Roosevelt’s lasting bulwark against financial panics, the Glass-Steagall Act. After the terrible consequences of that mistake came 10 years ago, the choice was posed again in 2009-10: Restore Glass-Steagall, or accept Obama’s Wall Street-approved substitute, the Dodd-Frank Act. Again, the wrong choice was made. Now there is one more chance, requiring not only Glass-Steagall but Lyndon LaRouche’s Four Laws to save the nation.

The telltale signs this week come from three of the biggest banks. Goldman Sachs’ very poor first-quarter results were revealed to be from defaulting corporate loans. Goldman makes corporate and "industrial loans" from its Salt Lake City division. The Salt Lake Tribune reported April 24:

"Goldman Sachs’s fixed-income revenue was so unexpectedly weak in the first quarter that last week’s earnings report left the stock tumbling and Wall Street buzzing over what happened. [Fixed income revenue was $1.6 billion, Goldman’s worst quarter in a decade—pbg.] Traders got burned by a constellation of souring debts.... The bank incurred tens of millions of dollars in losses on companies including Peabody Energy and Energy Future Holdings Corp. Borrowings from retailers including Rue 21 Inc., Gymboree and Claire’s Stores also soured, the people said."

A Bloomberg headline this morning read, "Wells Fargo, JPMorgan Chase Wary of Auto Loans, Pack Them in Bonds." The story is straight out of "The Big Short," although the details are complicated. These two banks are cutting their auto loans—their subprime loans "dramatically," as by 35-50%—and getting auto loans they’ve made off their books, by packaging them into securities and selling them off as asset-backed securities/with derivatives to "money-market managers." And Morgan is lending to the managers to enable them to buy more of these!

"But giving money managers the chance to invest in debt that banks are increasingly reluctant to touch themselves can at least create the perception that they are foisting trash onto customers,"

one investment advisor is quoted. Thus went the toxic mortgage bonds, CDS and CLOs out from the Wall Street banks to greater fools worldwide in 2007-08, as the crash of those toxic assets loomed.

Edmunds just substantially lowered its estimate of U.S. auto sales in 2017 because auto debt, interest rates on it, and dealer incentives are far too high to continue.

In another harbinger, Bloomberg reported today:

"Total loans at the 15 largest U.S. regional banks declined by about $10 billion to $1.73 trillion in the first quarter, compared with the previous three-month period, the first such drop in five years, according to data compiled by Bloomberg.... A slump in commercial and industrial lending sapped growth."

One example from American Banker April 25, involving Fifth Third Bank, a large Cincinnati-based regional, was reported as follows:

"The withdrawal from auto lending was said to be a conscious choice to reduce lower-return auto originations to improve returns on shareholders equity, while the decline in C&I [commercial and industrial—ed.] lending was described as a deliberate exit...."

Commercial and industrial lending has not grown for six months, and total bank credit growth has suddenly and sharply dropped—signs this gigantic, own-stock-buying, merging and acquiring, financial engineering, Wall Street-pumping bubble of corporate debt has now "rolled over" its peak and is headed for big trouble.