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Potential economic pain from a corner of the corporate-debt market could hit the economy more quickly than the crisis that ravished Wall Street in 2008, Sheila Bair, former head of the Federal Deposit Insurance Corp., has warned.

As head of the FDIC, Bair was on the front lines of the subprime-mortgage bubble which rocked the global financial system more than a decade ago. The FDIC was one of the key policy makers which oversaw a wave of bank busts in the aftermath of the 2008-09 financial debacle.

Now, the former bank regulator worries that too little is being done to stave off another crisis, which could be sparked by leveraged lending, or risky loans made to companies with less-than-stelar credit.

The outspoken 65-year-old thinks that if debt-laden companies can’t repay their loans, the economic impact on the economy could hit jobs and economic growth faster than the slow-rolling mortgage crisis did a decade ago.

“I do think that we are going to see distress in the corporate market, which can have a very strong and significant impact on the real economy,” she told MarketWatch in an interview.

“With subprime, at least you had a bit of a flow-through,” she said. “It took a while. There was a market shock. But in terms of the real economic impact, it was more gradual.”

Subprime lending giant Countrywide Financial started to feel the pain of falling home prices and rising defaults in early 2007, but it still took months before the credit-rating firms acted and slashed billions worth of AAA-rated mortgage bonds to junk status. It was not until March 2008, that Bear Stearns, teetering on failure, was snapped up by JPMorgan Chase & Co. with the help of...

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