FROM EIR DAILY ALERT
To Stop Big Banks’ Pre-Crash Dumping, Restore Glass-Steagall Now
Dec. 22, 2018 (EIRNS)—Writing for Project Syndicate (“The Biggest Emerging Debt Problem Is in America,” Dec. 20) Harvard Professor and former investment banker Carmen Reinhart identifies the major Wall Street banks’ dangerous dumping of increasingly toxic debt on all kinds of investors as a crash nears.
It is this massive “handing over of losses” by the big banks which is the most immediate urgency of a restoration of Glass-Steagall by Congress, and by other nations through a new monetary agreement. Glass-Steagall bank separation will stop those majors from creation of hundreds of billions “worth” of securities by which they dump the debt off their books and rob the population of its wealth in a meltdown.
The securities Reinhart is writing about are derivatives, collateralized loan obligations or CLOs, also singled out by former Fed Chair Janet Yellen in her warning of Dec. 10.
Reinhart reports,
“According to the Securities Industry and Financial Markets Association, new issues of conventional high-yield corporate bonds peaked in 2017 and are off significantly this year (about 35% through November). New issuance activity has shifted to the CLO market, where the amounts outstanding have soared, hitting new peaks almost daily. The S&P/LSTA US Leveraged Loan 100 Index shows an increase of about 70% in early December from its 2012 lows, with issuance hitting record highs in 2018. In the language of emerging markets, the USEM [‘U.S. emerging market’, her shorthand for junk U.S. corporate debt] is attracting large capital inflows.”
Thus the junk debt markets have cracked in the second half of 2018, as EIR has reported; big banks and shadow banks are taking losses and withdrawing, leaving those markets illiquid. But the market for certain derivatives of junk debt has soared at the same time. Reinhart make clear the purpose of those derivatives, with reference to the 2008 crash:
“These CLOs share many similarities with the mortgage-backed securities that set the stage for the subprime crisis a decade ago. During that boom, banks bundled together loans and shed risk from their balance sheets. Over time, this fueled a surge in low-quality lending, as banks did not have to live with the consequences.”
She notes in conclusion that as in 2008,
“CLOs have also gained in popularity in Europe. Higher investor appetite for European CLOs has predictably led to a surge in issuance (up almost 40% in 2018). Japanese banks, desperately seeking higher yields, have swelled the ranks of buyers. The networks for financial contagion, should things turn ugly, are already in place.”
