Bank for International Settlements Warns To Beware of Bank Crash from Heavy Corporate Debt
June 30, 2019 (EIRNS)—The so-called “central bank of central banks,” the Basel, Switzerland-based Bank for International Settlements (BIS), has warned again of a bank crash from corporate overindebtedness in the advanced economies, in its Annual Economic Report released June 30. The Guardian’s headline on the report, “Corporate Debt Could Be the Next Sub-Prime Crisis, Warns Banking Body,” was typical; it added a kicker: “Group for central banks says borrowing by firms with low credit scores is growing alarmingly, especially in U.S. and U.K.”
The report says that the $3.5 trillion market in what are called “leveraged loans”—loans to already overindebted corporations, now dominating whole economic sectors such as oil/gas and retail in the United States—is greatly “overheated,” and could lead to a bank panic as did the sub-prime mortgage bubble in the 2007-08 global financial crash. Agustín Carstens, who was formerly governor of Mexico’s central bank and is now BIS managing director, is quoted about the report,
“While firms in the U.S.—and, to a lesser extent, the U.K.—have accounted for the bulk of the issuance [of this junk debt], holdings are spread out more widely. There is most concern about corporate debt, more than the household or sovereign sectors.”
The BIS report adds that even though major banks insist they own only the safest tranches of the collateralized loan obligations (CLOs) made up of these over-leveraged corporate debts, those major banks are in danger of being hit by large numbers of defaults in these sectors.
This is coming closer with the global recession underway. The big London and Wall Street banks also thought they were playing it safe with the collateralized debt obligations (CDOs) made up of sub-prime mortgage securities in the 2004-07 period, keeping only the AAA or AA-rated tranches of those CDOs. When the mortgage securities bubble imploded, Morgan Stanley infamously led the way by suddenly losing $14 billion that way.
The major Wall Street bank holding companies and their investment banking and speculative units have continued to defraud and steal, as ever when poorly regulated. On June 25 the U.S. Justice Department announced that
“Merrill Lynch Commodities (MLCI), a global commodities trading business, agreed to pay $25 million to resolve the government’s investigation into a seven-year scheme by MLCI precious metals traders to mislead the market for precious metals futures contracts on the COMEX (Commodity Exchange Inc.).”
MLCI admitted that “beginning by at least 2008 and continuing through 2014, precious metals traders employed by MLCI schemed to deceive other market participants by injecting materially false and misleading information into the precious metals futures market,” according to the DOJ press release. They placed tens of thousands of fraudulent orders, which they would then cancel at the last moment before execution. Naturally, Justice Department settled for a deferred prosecution agreement and minor fine.
CDS and CDOs based on mortgage-backed securities, and now rent-backed securities, have again been introduced, by JPMorgan Chase and Bank of America, and $30 billion of them have been sold this year.
It also appears that a “zombie company” in the oil sector of leveraged loan debt—which is the largest such sector—is causing a significant rise in gas prices in the United States this summer. The company is Sunoco Logistics which ran the largest oil refinery on the East Coast, called Philadelphia Energy Solutions (PES). It was processing 335,000 barrels/day; U.S. oil products consumption is about 9 million bpd, so roughly 3.6% of U.S. oil products. Carlyle Group, as a big lender to it, had already had to become a part owner. PES went bankrupt 18 months ago, acquiring thus Credit Suisse as majority owner. It was laying off workers and cutting maintenance costs, until major sections of the refinery were destroyed in a huge fire last week. PES now says it will close permanently.