Wall Street is at it again.
In the last few months, the nation’s biggest banks and investment firms have resumed the same perilous activities that crashed the financial system and plunged the economy into the deepest slump since the Great Depression. According to a number of recent reports, there’s been a steady uptick in the type of risky bond deals that preceded the repo market bank run in 2008 leading to the default of 106-year old financial giant Lehman Brothers. With interest rates locked at zero percent and gradual improvements in the economic data, investors have been scouring the markets for better returns on their investments. This search for higher yield has triggered a gold rush on risky assets which has increased the probability of another major cataclysm. Here’s the story from CNN Money:
“The risky bond deals that were a hallmark of the pre-financial crisis boom are staging a comeback as investors continue to hunt for ways to find higher rates of return.
And companies are willing to meet the demand. Roughly $58 billion of high yield, or junk, bonds have been issued by 95 corporations since January. That’s the fastest start in 15 years, according to Dealogic.
Investment grade bonds, which offer a lower, albeit more stable yield, have also continued to attract investor interest. Since January, about $150 billion of corporate bonds have been issued by 315 companies, according to Dealogic. While that’s slightly faster than the past two years, it’s well behind the pace set in 2007, 2008 and 2009.” (“Bonds: Risk is back!”, CNN Money)
Trillions of dollars in bailouts, subsidies and other corporate welfare has restored many of the Too Big to Fail banks back to health, allowing them to reengage in transactions which, once again, put both the financial system and the broader economy in danger. And, although there have been modest efforts to re-regulate the system–particularly Dodd-Frank–the new laws fall well-short of what’s needed to decrease the vulnerabilities in the shadow banking system or to increase confidence in the bonds that are at the center of this latest investment binge. Congress has failed to pass legislation that would improve the underwriting standards of the loans that are pooled in these bonds to make sure that borrowers have the ability to repay their debts. Absent stricter standards, there’s certain to be a repeat of the collapse in the secondary market which followed the implosion in subprime mortgages. It’s deja vu all over again. Here’s more from International Financing Review:
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