Richard Bowen

  • Home
  • About
  • Speaking
  • Videos
  • Media/Press
  • Testimonials
  • Blog
  • Contact
  • +1-214-604-5492

March 14, 2019 By Richard Bowen

The Fed Has a Concern? Really?

Grahpic: Corporate debt bubble near sharp pinAnd if they are concerned, shouldn’t we be worried as well?

For some time, many experts, including William (Bill) D. Cohan, a former investment banker and author of several books, including the most recent, Why Wall Street Matters, have been warning us about the dangers of the corporate debt bubble.

Lest we forget, the Federal Reserve had a significant role in dropping interest rates, and thus setting the stage for the financial crisis. In turn, this caused investors to seek debt instruments that paid a higher rate of return, which then led to the explosion of the mortgage-backed securities market. To meet the ever-increasing demand financial companies and their securitizers became very aggressive in making and purchasing mortgages with lesser credit quality.

And so it came as a surprise to me to read a recent article by Robert S. Kaplan, President of the Federal Reserve Bank of Dallas, now talking about corporate debt as a potential amplifier in a slowdown, of which I’ll say more.

As Bill Cohan pointed out in his August 2018 New York Times op-ed, we pay attention to the stock market’s highs and lows; when high, “we instinctively feel things are good and getting better, when it tanks… we think things are going to hell.”

However what struck me was his warning about the domestic corporate debt market, which he said, “…reveals more about our nation’s financial health. And right now, the debt market is broadcasting a dangerous message: Investors, desperate for debt instruments that pay high interest, have been overpaying for riskier and riskier obligations. University endowments, pension funds, mutual funds and hedge funds have been pouring money into the bond market with little concern that bonds can be every bit as dangerous to own as stocks.”

And Cohan sums it up by saying, “… for much of the last decade, risk has been mispriced to a staggering degree.”

So the price of these bonds and loans have not reflected the risk of borrowers credit – that those who are at risk pay a higher cost in interest giving an investor a higher return. Common sense, however since the financial crisis “investors have been paying higher prices for the debt of riskier companies and not getting properly compensated for that risk… investors assume that the good times will never end.”

And the Fed is abetting this again with its low interest rates!

Mr. Kaplan’s essay focused on trends in corporate debt growth and credit quality in the U.S. and the potential implications for economic conditions and financial stability. Mr. Kaplan gave a very thorough history of indebtedness in the U.S; and then took us to the trends he sees in nonfinancial corporate debt.Graphic: Corporate debt trends 2008 - 2018An alarming trend as “most of this debt consists primarily of bonds and loans and nonfinancial corporate bonds outstanding in the U.S. which grew from approximately $2.2 trillion in 2008 to approximately $5.7 trillion at year-end 2018.” But the most disturbing trend is the substantial increases in the total of the non-investment grade and the lowest investment grade of BBB, which totaled $1.5 trillion in 2008, growing to $3.8 trillion in 2018.

This substantial growth in BBB and lower-rated bonds is indicative of a weakening in corporate credit quality in the U.S.

Mr. Kaplan continues, “It is estimated that a substantial portion of the increase in nonfinancial corporate debt was used to fund share buybacks, dividends and merger activity.[12] This trend has been accompanied by more relaxed bond and loan covenants,[13] which have had the effect of reducing protections for investors” something I have sounded the alarm about as well.

Mr. Kaplan obviously agrees with Cohan, saying “In the event of a downturn, highly indebted companies may be more vulnerable to seeing their credit quality deteriorate … with risk of downgrades to less than investment grade.” This would “further negatively impact credit spreads and market access for more highly indebted companies.”

He notes that “vigilance is warranted as these issues have the potential to impact corporate investment and spending plans. In the event of an economic downturn, these issues could also contribute to a deterioration in financial conditions which could, in turn, amplify the severity of a growth slowdown in the U.S. economy.”

The comparisons between the mortgage securitizations market in the last financial crisis and the current nonfinancial corporate bond market are alarming. Robert Ross points out in a recent article in Newsmax Finance that “Since the end of the financial crisis, the triple-B corporate bond market has grown to twice the size of the subprime mortgage market… This market is an accident waiting to happen.”

“Corporate bonds are debt issued by companies. It’s a way for companies to raise money, and the money must be paid back. Almost every company in the world uses the corporate bond market. But just like the subprime mortgage market, it’s the poor quality of the debt that’s the problem. In a recession, BBB-rated bonds are the most vulnerable of all investment-grade bonds.”

Ross says, “According to Moody’s, 10% of BBB-rated corporate bonds become what’s known in the industry as “fallen angels” in a recession. That’s a tactful way of saying they’ve been downgraded to “junk” status.”

From my perspective, we are on the same road again, headed into the next financial crisis. And the Fed is helping this along!

Everybody Lies!
What’s the Problem with OSHA?

Tagged With: Bubble, Corporate Debt, Ethics, Financial Crisis

Ethics on your mind? Subscribe to my ezine to get my latest article delivered right to your inbox. Click Here to Subscribe

Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.

Related Posts

  • WE’RE BACK! …The corporate debt bubble strikes again!WE’RE BACK! …The corporate debt bubble strikes again!
  • Citigroup to Facebook, it’s about powerCitigroup to Facebook, it’s about power
  • The Con Docuseries More Widely AvailableThe Con Docuseries More Widely Available
  • Transparency and Ethics in IrelandTransparency and Ethics in Ireland

What People Are Saying About Richard M. Bowen

William D. Cohan"Richard Bowen is one of my heroes. His is a story of human fortitude at its best and Wall Street at its worst."

~ William D. Cohan, NY Times Best Selling Author
2017-06-30T10:08:59-05:00
"Richard Bowen is one of my heroes. His is a story of human fortitude at its best and Wall Street at its worst." ~ William D. Cohan, NY Times Best Selling Author
https://richardmbowen.com/testimonials/2556/

Eileen McDonnell"Richard Bowen reinforced my motto that "there is no right way to do a wrong thing.” Long after his presentation, the conversation has continued about personal responsibility and the courage to challenge things that appear to be wrong. We encourage this dialog and rely on it to help make our business stronger."

~ Eileen McDonnell, Chairman, CEO, & President, Penn Mutual
2015-02-13T19:51:19-06:00
"Richard Bowen reinforced my motto that "there is no right way to do a wrong thing.” Long after his presentation, the conversation has continued about personal responsibility and the courage to challenge things that appear to be wrong. We encourage this dialog and rely on it to help make our business stronger." ~ Eileen McDonnell, Chairman, CEO, & President, Penn Mutual
https://richardmbowen.com/testimonials/711/

Ben Stein"Richard Bowen, you are a star and a hero."

~ Ben Stein, Economist and Political Commentator
2015-02-13T19:50:26-06:00
"Richard Bowen, you are a star and a hero." ~ Ben Stein, Economist and Political Commentator
https://richardmbowen.com/testimonials/712/

Jim Farrell"Richard's speech at the April Financial Executives International dinner was informative, interesting, riveting, and fast moving.  The feedback from members was overwhelming positive, and Richard received one of the few standing ovations given by our membership."

~ Jim Farrell, Program Chairman, Dallas Chapter, Financial Executives International
2014-12-28T19:48:17-06:00
"Richard's speech at the April Financial Executives International dinner was informative, interesting, riveting, and fast moving.  The feedback from members was overwhelming positive, and Richard received one of the few standing ovations given by our membership." ~ Jim Farrell, Program Chairman, Dallas Chapter, Financial Executives International
https://richardmbowen.com/testimonials/532/

Dennis McCuistion"Richard Bowen has been there, done that, and has the scars to prove it, and his message of corruption at the highest levels of industry and government needs to be heard. I only wish that more bankers had the courage that Bowen exhibits. He is not only one of the most talented bankers I have ever met, he has more integrity than all the bankers on Wall Street put together. If his former employer had listened to him taxpayers would not have had to bail out Citi for the third time in the last 30 years."

~ Dennis McCuistion, Host of the McCuistion TV program
2014-12-28T19:48:06-06:00
"Richard Bowen has been there, done that, and has the scars to prove it, and his message of corruption at the highest levels of industry and government needs to be heard. I only wish that more bankers had the courage that Bowen exhibits. He is not only one of the most talented bankers I have ever met, he has more integrity than all the bankers on Wall Street put together. If his former employer had listened to him taxpayers would not have had to bail out Citi for the third time in the last 30 years." ~ Dennis McCuistion, Host of the McCuistion TV program
https://richardmbowen.com/testimonials/533/

Betty Garrett"Richard Bowen is a dynamic, entertaining speaker and story-teller - a CPA with a great personality!"

~ Betty Garrett, Garrett Speakers International
2014-12-28T19:47:50-06:00
"Richard Bowen is a dynamic, entertaining speaker and story-teller - a CPA with a great personality!" ~ Betty Garrett, Garrett Speakers International
https://richardmbowen.com/testimonials/531/

fred-timmons"I believe Richard Bowen is the only keynote speaker to ever receive a standing ovation from the Texas Society of CPA’s at any of its annual conferences."

~ Fred Timmons, Chairman of The Texas Society of CPA's
2014-12-28T19:47:22-06:00
"I believe Richard Bowen is the only keynote speaker to ever receive a standing ovation from the Texas Society of CPA’s at any of its annual conferences." ~ Fred Timmons, Chairman of The Texas Society of CPA's
https://richardmbowen.com/testimonials/530/

Presentation Topics

Playing for High Stakes: The Principles and Practice of Ethical Leadership

Dark Citi: The Story of a Whistleblower

Want to Hire Richard?

Watch Richard

See What Clients are Saying

About Richard

Recent Posts

  • What should you do before you report wrongdoing?
  • Peace and happiness this holiday season
  • Wishing you a warm and happy Thanksgiving
  • Speaking at the University of North Texas
  • Resisting Corporate and Government Corruption

Categories

  • Business Ethics
  • Congress
  • Corporate Debt
  • Corruption
  • Ethical Leadership
  • Financial Crime
  • Financial Crisis
  • Financial Crisis of 2008
  • Fraud
  • Holiday
  • International
  • Mortgage Lending
  • Mortgage Meltdown
  • Relationships
  • Resources
  • Speaking
  • Texas Politics
  • The Fed
  • Too Big To Fail
  • Uncategorized
  • Updates
  • Wall Street
  • Whistle Blowers

About Richard

Now an ethical leadership speaker, Richard Bowen was Citigroup's Business Chief Underwriter during the housing bubble.

Read more

Connect with Richard

  Facebook   Twitter   Linked   YouTube

Contact Us

Phone: +1-214-604-5492

Email: Richard@RichardMBowen.com

Contact Richard

Copyright 2021© 2023 · Richard M. Bowen | ALL RIGHTS RESERVED.

X
Sign up to receive my blog posts via email!
Subscribe >>