Much like the subprime bubble that sparked the 2008 financial crisis, there is a growing number of people who see the same thing happening with high-risk, low quality leverage loans. With increasingly poor underwriting standards, rapid unregulated growth, and increased risk-taking in the leveraged loan market, it’s tough not to see the direct parallels.
Better Markets has been looking at and commenting on this issue for some time, as you can see here and here. The issue has also been raised by Senator Elizabeth Warren, who expressed concerns about leveraged loans to Fed Vice Chair for Supervision, Randy Quarles. Senator Sherrod Brown, senior member of the Senate Banking Committee, is also speaking out on the issue and sent a letter to Treasury Secretary Steven Mnuchin calling on him, in his capacity as chair of the Financial Stability Oversight Council (FSOC), to examine leveraged loans.
Senator Brown highlights in his letter, however, the FSOC is comprised of Trump-appointed regulators and is more interested in deregulating the financial services industry than doing what it is meant to do, which is to serve as a watchdog and early warning system for threats to the financial system. As we pointed out in a recent blog posting, the Trump administration’s mindless deregulation has effectively put an out-of-business sign on FSOC, making the looming threat of leveraged loans that much more dangerous.