Ahead of the financial crisis, a buildup of leverage on bank balance sheets that went largely undetected by regulators helped cause the worst downturn since the Great Depression. Sen. Elizabeth Warren[1] is afraid the same thing is happening again a decade later.
The Massachusetts Democrat said Thursday that she thinks the Federal Reserve[2] and its fellow watchdogs of the financial system are overlooking a dangerous buildup of loans going to companies that are already deeply in debt. The so-called leveraged loans helped undermine the financial system before and are building up again, now totaling $1.1 trillion.
In a face-to-face hearing with Fed Governor Randal Quarles, vice chairman of supervision and thus the central bank's leading bank regulator, Warren said she is worried about a lack of oversight.
"I'm not sure that I see much distinction between what you're doing now and what the Fed was doing in pre-2008, and I think that's deeply worrisome," she said. "I'm very concerned that the Fed dropped the ball before and they may be dropping it one more time."
Leveraged lending actually has declined in 2018 from its blistering pace the year before.
Total volume in the third quarter hit $177 billion, a 40 percent slide compared with the record pace of the same period in 2017, according to Thomson Reuters. Issuance so far this year is tracking at $930 billion, which is a 12 percent decline from a year ago.
Institutional share of leveraged loans edged lower to 58 percent in the third quarter, against 60 percent from 2017.
Still, Warren said she sees echoes in the current situation from what happened before the crisis, when subprime loans to underqualified borrowers helped tank the financial system....