
Corporate debt nears a record $10T, and borrowing binge poses new risks - pseudolus
https://www.washingtonpost.com/business/economy/corporate-debt-nears-a-record-10-trillion-and-borrowing-binge-poses-new-risks/2019/11/29/1f86ba3e-114b-11ea-bf62-eadd5d11f559_story.html
======
dtwest
Both the article and the comments here are cringeworthy. I come to HN for the
insightful comments, but for some reason, whenever finance is discussed,
people do not look at data and start arguing about their feelings. This is a
complex topic that requires careful analysis, unfortunately, the Washington
Post has not spent the time to do this either.

I specifically want to point to this passage from the article:

"Last month, in its twice-yearly financial stability report, the Fed warned
about the potential consequences of the market’s failure to police the rapid
increase in risky corporate debt.

During the 2009 crisis, “BBB-rated” companies — the lowest rung of investment-
grade — faced borrowing costs almost 7 percentage points higher than higher-
quality companies. Today, the difference, or “spread,” is just 1.4 percentage
points."

The way this is being framed is very dishonest reporting, 1.4% is close to
normal, 7% is the highest it has ever been. A balanced discussion on the
matter wouldn't get the same amount of clicks as fear mongering though.

Source:
[https://fred.stlouisfed.org/series/BAMLC0A4CBBB](https://fred.stlouisfed.org/series/BAMLC0A4CBBB)

If you think the financial system is evil or incompetent, please suggest a
better way of doing things or go into the specifics about what is wrong. As an
example, saying "React is evil and everyone who uses it is stupid" is
instantly recognized around here as a nonconstructive comment. Rephrasing it
as "I like Vue better for reason a, b and c" is much better. Yet when things
are finance related, this standard is not upheld.

~~~
chadmeister
This! People on hacker news have called 45 of the last 1 recessions! Having a
finance background I can't stand finance related discussions on HN anymore.
Any attempt at science immediately goes out the window and it just gets me so
tilted. Too many armchair economist, not enough people willing to admit what
they don't know and learn.

~~~
chewz
> Too many armchair economist

Isn't that the beauty of economy and meteorology? That everyone is an expert?

~~~
Frost1x
It amuses me when relatively new branches of study with poor to non-existent
predictive modeling capability criticize "arm-chair" experts on
accuracy/predictive aspects. Criticize methodology, data, or conclusions, not
authority. This should be applied even in very well established domains.

The fact is, there really are no good predictive models yet. There are a lot
of very good and legitimate reasons why there are no good predictive models
dealing with complexity, scale, and an inherent connection to human behavior.

Now, this doesn't mean we throw our hands up and anything goes: we should
still provide rationale and people should continue to study these systems
methodically as they can. At this point, much of professional economics vs
armchair economics isn't too far separated from chemistry:alchemy or
astronomy:astrology hundreds of years ago. Obviously, there was great merit in
the work early chemists, astronomers, etc. took on since we can now stand on
their shoulders. Economics shouldn't be belittled, yet at the same time, it
should be recognized for what it is: still not very predictive.

~~~
pmayrgundter
Not sure your fact is correct. I saw this linked on HN recently:

"We find that financial cycle measures have significant forecasting power both
in and out of sample, even for a three-year horizon. Moreover, they outperform
the term spread in nearly all specifications. These results are robust to
different recession specifications."

[https://www.bis.org/publ/work818.pdf](https://www.bis.org/publ/work818.pdf)

~~~
Frost1x
The authors of that paper are not nearly as convinced in overall applicable
recession predictability using their proxy measures as the abstract excerpt
that lures the reader in:

"These results suggest that financial cycle proxies _may be another indicator_
that _could be useful_ to policymakers, professional forecasters and market
participants more generally."

Emphasis added is mine. That's double the coverage of uncertainty propogation.

Unfortunately, I suspect, like most working in modern research and academic
settings, papers have to inflate success as much as possible or the
researchers lose future funding even though this type of work is high risk of
failure. This is partly to blame for the reproducibility crisis we're
encountering across the board.

I don't blame the authors (I feel their pain), but I do blame the poorly
structured incentive/disincentive system creeping ever-further into academic
research.

------
roenxi
I enjoy the topic of debt but the more time I spend staring at it the more
frustrating the framing around it seems.

Modern loans don't work the way a classic model of lending would suggest. That
has implications - loans represent a redistribution of real-world resources
away from people who have worked for them and towards people who the banks
like.

This is a very concerning dynamic given that the 2007-2008 era financial
crisis revealed that the bankers are incompetent at assessing risk. They
should not be the ones choosing who gets a home or who gets to succeed in
business. There is an ongoing trend where people in credit exposed markets
(housing, other assets) are raking in unreasonable returns at a lower-than-
advertised risk as more and more easy credit is created. It isn't fair or
clever.

~~~
TeMPOraL
> _the 2007-2008 era financial crisis revealed that the bankers are
> incompetent at assessing risk_

I think we need the inverse of Hanlon's razor[0] to be a thing. "Never
attribute to stupidity that which can be adequately explained by systemic
incentives promoting malice." A Hanlon's handgun, if you like.

What I remember from reading about the 2008 financial crisis isn't that
bankers were incompetent. It's that various parties started packaging up
financial instruments to make them look like less risky instruments, so that
they could be sold to suckers. Then they insured themselves against those
instruments blowing up. This suggests they knew well what they were doing.

In fact, banks aren't in the business of assessing risk. They're in the
business of making money, which they often do through assessing risk. The
important point is that assessing risk (or giving loans, or mortgages, etc.)
isn't their raison d'etre, but a way to make money they've specialized in. If
there's a way to make easy money by doing something else entirely, or by
compromising their core competence, there are strong economic incentives to do
that.

This applies to all other companies doing anything else as well. There's few
organizations that consider doing things they do well as a terminal value;
usually, it's only instrumental in getting money. That's something IMO we have
to keep in mind if we're trying to make accurate predictions of future
behavior of a company.

\--

[0] -
[https://en.wikipedia.org/wiki/Hanlon%27s_razor](https://en.wikipedia.org/wiki/Hanlon%27s_razor)

~~~
ThrustVectoring
The loan packaging and insurance was a symptom of the underlying problem that
drove the 2008 crisis: transatlantic transactions that worked to evade
regulations to control systematic risk.

This process _started_ , if you had to pick a place, with a US bank issuing a
mortgage. The cash part eventually wound its way to various short-term "risk-
free" assets, one of which being short-term asset-backed loans to European
financial institutions. The mortgage asset got packaged up and sold on to the
broader capital markets, of which European financial institutions
participated. So, the US banking system basically created a market in which
European financial institutions could buy mortgage-backed paper, financing the
purchase at good short-term rates generated by the cash created by issuing the
backing mortgages.

Of course, banking regulators know that just letting banks go hog-wild
creating asset-liability pairs is going to end up badly, so this is where the
regulatory arbitrage comes in. Under US banking regulations, banks had limits
to the assets on their books. There's a strong incentive to offload them into
the capital markets - the banks realize an immediate profit, and clear out
valuable space on their balance sheet. European banks, on the other hand, had
a more complex leverage limits that took into account the perceived riskiness
of various assets that they owned, with AAA-rated assets giving the highest
leverage limits.

So that, in a nutshell, is what happened in the run-up to 2008. Banks generate
more profits when they create more risk, so there's regulatory limits on
risks. US banks evaded those risk limits by selling the risk on to the capital
markets, and US regulators assumed that this process was systematically safe.
EU banks evaded those risk limits by blindly levering up to buy whatever AAA-
rated dollar-denominated assets the US capital markets handed to them, and EU
regulators assumed that high leverage on AAA-rated assets was systematically
safe. Neither regulatory regime had a good holistic view of the financial
asset vortex brewing in the Atlantic.

Anyhow, my overall point is "so that they could be sold to suckers" doesn't
really tell the entire story. The asset packaging was done in order to take as
much risk as possible under US and EU banking regulations, taking advantage of
transatlantic differences in regulatory regimes.

~~~
pjc50
There was also plenty of domestic mortgage over-expansion; Anglo-Irish blew up
by lending to far too many speculative property projects. The book on this is
excellent.

~~~
toomuchtodo
Would you happen to know the name of the book?

~~~
pjc50
"Anglo Republic" [https://www.irishtimes.com/culture/books/anglo-s-sorry-
tale-...](https://www.irishtimes.com/culture/books/anglo-s-sorry-tale-well-
told-1.602698)

------
mrfusion
Rather than this 10 trillion number I’d prefer to see how much corporate debt
has some level of default risk. Presumably some fraction of this is issued by
solid companies with Enough cash reserves or future Income to cover the debt.

~~~
riffraff
I see the above comment downvoted, but it seems correct to me. For example,
Assicurazioni Generali[0], just emitted a new 10y bond for €1B.

That would increase the total corporate debt of the world, but Generali has a
higher credit rating than most governments, so why is that significant?

[0]
[https://en.wikipedia.org/wiki/Assicurazioni_Generali](https://en.wikipedia.org/wiki/Assicurazioni_Generali)

~~~
take_a_breath
It’s not significant because $1 billion is 0.01% of the total. Also, this
article is about US corporate debt specifically.

What is significant is this quote: “sending total U.S. corporate debt to
nearly $10 trillion, or a record 47 percent of the overall economy.”

------
blackhaz
A slightly more detailed article on the topic:
[https://seekingalpha.com/article/4254042-corporate-debt-
cris...](https://seekingalpha.com/article/4254042-corporate-debt-crisis)

------
Danieru
Chart from the article shows debt growing by 3.5% since turn of the century.
Considering rates going to near zero if anything that is a low growth rate.

Sorry, but coming off the summers doomsday hype this reads like a mole hill.

~~~
formercoder
Looking at absolute levels of debt is useless clickbait, one should look at
trends in debt / ebitda.

~~~
XnoiVeX
Excellent analysis by Deloitte.
[https://www2.deloitte.com/us/en/insights/economy/issues-
by-t...](https://www2.deloitte.com/us/en/insights/economy/issues-by-the-
numbers/rising-corporate-debt-levels.html)

~~~
ummonk
I wonder how much of the rise in percent of debt that was poor quality was
fueled by investors seeking higher bond yields in a low yield environment...

------
acd
Central Banks have created a debt bubble by lowering the interest rate. Banks
create cheap loans with the debt created from central banks. Credit expands.
My personal opinion is that is that the debt cannot be payed back. Also there
is lots and lots of debt in derivatives.

I think that the debt is deflationary in the sense that companies use the
loans to automate. Prices are also kept low by globalization. Prizes of local
produced services are increasing. I am trying to say that the wage inflation
part of central bank policy is not happening on goods due to automation and
globalization.

------
ksec
Does Corporate Debt, or Corporate Debt per GDP actually matters?

There are many companies that are Cash Rich and holding Debt, for example
Apple has $100B debt but $200B cash. And due to the way US Tax Multinational
companies, most of them have Oversea Cash and they are holding Debt in US
borrowing against those cash.

And hence the Risk of those Debt, If they are Cash Rich, then it really isn't
much of a problem. Or Earning Per Debt Ratio, if they are any higher than
previous era.

Both are far more important than say Interest Rate of Total Debt. A Normal
person have $1B Debt might have been shocking, I doubt Bill Gate holding a one
billion debt would cause much of a problem.

I dont have any data or answer on hand, so I dont know if those debt are
really a problem for now.

I worry a lot more about China's Corporate Debt than US's debt.

------
cascom
I don’t quite understand how one writes an article like this without putting
the amount of debt into context, where is the critical thinking here? The S&P
500 market cap is like $25t, $10t in debt doesn’t sound crazy

~~~
rchaud
I'm not clear on how market cap relates to the amount of debt in the way
you're phrasing it.

The dollar amount of bonds + interest that corporations have to pay back
doesn't change day to day like market cap does. The S&P500 fell 33% between
Sept - Dec 2008. That didn't change the amount of debt corporations had to pay
back. Unless they received a bailout, all that changed was that they could now
borrow at near-zero rates.

~~~
cascom
My point is that if you buy something (a company in this case), financing ~29%
of the purchase price with debt ($10t/($10t+$25t)) does not feel super
levered.

You point is valid as well, and the useful context (again not provided by the
article) would be metrics like debt/EBITDA or fixed charge coverage ratios

------
netcan
Anything that happens happens. Anything that in happening, causes itself to
happen again, happens again.

Systemic (read business cycle provoking) risk takes this form, by definition.
That's what's systemic about it.

Interest rates are low. Credit is cheap. Junk bonds are junk because more junk
bonds will default. When will they default? Do defaults pile up during a
credit "crunch?" Will a pile up of defaults trigger a credit crunch?

Does the thing that happens cause itself to happen again?

------
dharma1
Share buybacks financed by debt doesn't sound like a great way to create
sustainable growth

~~~
eru
Share buybacks and dividends are about returning money to the shareholders.

That's literally what companies are for. Getting a return is the main reason
people invest in the first place.

(Yes, some people start companies to change the world. But let's be honest
here.)

Sustainable growth is eg when those shareholders re-invest the returns
somewhere in the economy. Capital returns themselves are not growth,
obviously.

Using debt to finance capital returns to equity holders is just a change in
capital structure: from equity to debt. See
[https://en.wikipedia.org/wiki/Capital_structure](https://en.wikipedia.org/wiki/Capital_structure)
about details.

[https://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theo...](https://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theorem)
suggests that the exact details of a company's capital structure depends on
'taxes, bankruptcy costs, agency costs, and asymmetric information' and other
market inefficiencies. Basically it's just about some technical trade-offs, no
moralizing necessary.

(If you want to moralize, complain that interest on debt is tax deductible,
but return on equity ain't.)

~~~
dharma1
The point wasn't to moralise or to ponder about the purpose of companies.
Nothing wrong with returning money to shareholders.

However doing it with debt, rather than with profits, sounds like financial
engineering taking advantage of tax breaks and unnaturally low interest rates
(a gift from central banks to those with investments and access to low rates)
- with potentially poor outcomes to many participants in the economy later on,
especially when the ratio of debt to profit gets out of whack and there are
tremors in the global economy.

What happens when the economy tanks, and many of these loans go sour? Over
leveraged companies go under, jobs are lost, domino effect on the real
economy. If a company takes on debt it should be used for investing in real
growth (and future profits), not for financial engineering to prop up the
share price with low interest (for now) borrowed money. The only thing that
kind of behaviour leads to is a debt-fuelled bubble.

~~~
aguyfromnb
> _unnaturally low interest rates (a gift from central banks to those with
> investments and access to low rates)_

Can you explain what an "unnaturally low" interest rate is?

The Fed sets the overnight rate at which banks lend reserves to each other.
While it is a _benchmark_ for many other interest rates, anyone, anywhere can
lend and/or borrow at any rate of their choosing. If rates are unnaturally
low, why aren't people charging more? Why are they leaving money on the table?

Side note: it's a funny thing to me, that the vast majority of American
citizens are net debtors, yet we complain about low rates and inflation. Most
people don't understand what's good for them.

~~~
dharma1
Sure, interest rates set by most major central banks have been at historical
lows, between 0% and 2% for the last 10 years, since the last crisis. And it
doesn’t look like it’s possible to raise them much in the next few years - the
economy has become accustomed to low rates and can’t take a rate hike. Nor
will it be possible to lower them much (since they already close to zero) in
case there is another downturn and the central banks need to stimulate. I
don’t think we have ever seen such a long period of low rates before, so this
is relatively uncharted waters.

Inflation of consumer goods, which central banks have a mandate to track, is
still relatively low, mostly thanks to low oil prices. But if you look at the
prices of financial assets, you’ll see a lot of “inflation” hiding there
thanks to money printing and low rates of the past 10 years.

~~~
eru
Actually, real interest rates on eg American government bonds haven't been
that low by 20th century standards. We saw much more negative real interest
rates before. Especially after taxes.

[https://www.minneapolisfed.org/article/2016/real-interest-
ra...](https://www.minneapolisfed.org/article/2016/real-interest-rates-over-
the-long-run)

Nominal interest rates however are very low, because nominal GDP growth is
low.

------
chiefalchemist
Orchastrated by Wall Street and championed by Uncle Sam. Again. It seems as if
the USA no longer has a traditional economy, but instead its depth and breadth
has been an tool in the WS financial instruments toolbox.

------
LessDmesg
Federal debt is 20T, so what? At least corporations can be held responsible in
court. When the federal government defaults on its debt (yes, that's a "when"
not an "if") it's going to take a whole army to make it pay.

~~~
onion2k
Governments can just print some more money to pay their debts. There are
significant downsides to doing that (massive inflation, high interest rates..)
but ultimately it _is_ an option, and that gives lenders a level of security
that businesses can't offer.

Also, you don't need an army to make a government pay. You just need to
threaten to stop lending in the future. Then the government _will_ pay,
because the alternative is to stop spending on things the people want like
military, police and services, and then they vote you out of power (or start a
revolution and kill you).

~~~
LessDmesg
It's an option that only works if there are buyers for that debt. That isn't
always going to be the case. For instance, all new debt issued by Italy has
been scooped up by ECB for years... The US is still a much more credible
sovereign but that's just for now.

And no, governments don't always pay, they happily and often default - just
remember Greece of recent years. And there is a word for stopping to pay for
things the people want: austerity. Haven't heard of that happening around the
world recently, I presume? The US economy is still the strongest in the world,
but the debt crisis will get it too, no doubt.

~~~
onion2k
_And there is a word for stopping to pay for things the people want:
austerity. Haven 't heard of that happening around the world recently, I
presume?_

Plenty of governments _claimed_ they were implementing austerity while their
level of borrowing has still been going up _a lot_.

~~~
anongraddebt
Agreed.

I don't want to be a reductionist, but it seems like a lot of this comes down
to policy makers (and really, just people in general) not having the courage
or integrity to follow through on their beliefs. Keynsians say, "we need
austerity, but TODAY is not the time for it" and then when the future arrives,
don't have the courage to follow through on curtailing spending. Non-Keynsians
say, "we need austerity NOW" and then lack the courage to effectuate real
austerity (instead choosing milquetoast measures like taxcuts combined with
trivial reductions in spending).

There seems to be this notion that society just doesn't have to pay-up now.
Rather, we only pay-up at some point in the future (a point in the future that
we define). That may be, but there has to be a trade-off, right? It seems
weird to think that reality doesn't force a trade-off on us. It probably does,
and it might come in the form of added complexity which reduces our ability to
successfully engineer our way to a controlled exit of our collective
responsibilites.

~~~
hirako2000
It is desired by some that we don't get ourselves out of debt. Debt means
credit somewhere.

Most people suffer the repayment of interests to those who mended. Those who
lender are fine with the situation. Repayment of capital, or a brutal wipe of
the debt would mean no interest gain, or worse, nothing at all, ground zero
for the lender.

