Private equity companies are not job creators. In fact, private equity firms cause significant unemployment. All too often when private equity professionals tout their cost cutting strategies, they do not mention that cost cutting means firing people and taking away their livelihoods.
The significant rise in the stock market in the last few years has masked how private equity firms have really performed. According to the private equity team of Bain and Company, an analysis of private equity deal results versus fund projections for 65 mature buyouts invested since the financial crisis, showed that over 70% of private equity deals fell short of their projected margins by an average of 330 basis points below forecasts.
The number of private equity backed companies, which credit ratings are in distress, has risen by almost 30% since last year. Distressed rated companies are those that are rated B- or worse and which also have a negative outlook.
The Government Accountability Office (GAO), the U.S. legislative agency that monitors and audits government spending and operations, is conducting an assessment of how financial regulators monitor and oversee risks to banking institutions and financial stability from leveraged lending. Importantly, the GAO is trying to determine what actions the Financial Stability Oversight Council (FSOC), the Office of Financial Research (OFR), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC) have taken to identify and mitigate potential risks to financial stability posed by leveraged lending.
The IMF’s Global Financial Stability Report has serious warnings about significant financial stability vulnerabilities in the U.S. and the rest of the world. IMF researchers’ analysis shows that if a major economic downturn occurs, “corporate debt at risk of default would rise to $19 trillion, or nearly 40 percent of the total debt in eight major economies.” The IMF report bluntly pointed out that “Surges in financial risk-taking usually precede economic downturns.”
A thorough study of over 9,000 private equity buyouts sheds important light on job losses and wage decreases in thousands of private equity transactions. Legislators in Europe and the US will continue to focus on how to reduce adverse economic effects of private equity on their constituents. here
Senator Elizabeth Warren and Representatives Mark Pocan and Alexandria Ocasio-Cortez wrote private equity firms, BlueMountain Capital Management, H.I.G. Capital, American Securities, Apax Partners, and Platinum Equity, requesting information about their ties to private prisons and detention centers.
Despite a growing U.S. economy, 40 states cannot afford to pay all of their bills. Unless state legislators can find a way to improve our states’ financial health, all of us will have to pay more taxes, receive less in services, or both. Many legislators are likely to push the can down the road.
In the last twelve months, I have written almost thirty articles about leveraged loans and collateralized loan obligations (CLOs), because these instruments are all too often illiquid and opaque. Moreover, measuring their market, credit, and market liquidity risks is difficult, especially in an economic or market downturn. The Bank for International Settlements, in its Quarterly Review released today, estimates that the global leveraged loan market is about $1.4 trillion, a rise of 100% since 2007. The vast majority of those leveraged loans, $1.2 trillion, are in U.S. dollars, with the remainder mostly denominated in Euros. here.
Despite claims from financial regulation critics, capital rules and the Volcker Rule have not decreased capital markets trading. Foreign exchange trading and Over-the-Counter interest rate derivatives just reached historic highs. In a low interest rate environment, trading growth will continue.
Not only are Federal Reserve officials not ‘boneheads’, Trump’s insults are dangerous to the economic well-being of Americans and to financial stability. Trump needs to disclose any financial gain conflicts that might explain his obsession with low interest rates. Accountability is imperative.
The slowing global economy, along with low interest rates, trade tensions, and intensifying Brexit uncertainty will weigh on banks’ profitability. What worries me is that these factors, coupled with increasing deregulation in the US, will embolden banks to take excessive risks and hurt taxpayers.
Since American taxpayers bailed out banks, surely it is our right to ask banks whether they lend to firearm manufacturers, ammunition producers and gun retailers. California and New York are in the vanguard of gun control legislation and in pressuring banks to cut ties with the firearm industry. here
The Trump bank deregulatory train is speeding at a breakneck pace. We have not even gone through a credit cycle to test how well the Volcker Rule would work in an economic downturn, and it has already been gutted, endangering depositors and taxpayers. here
U.S. nonfinancial corporate debt continues to rise. Credit protections for investors of high yield bonds are at record weak levels. Sophisticated investors, as well as ordinary citizens, stand to be adversely affected when a global recession arrives. here.
Bond markets in the U.S., U.K. and Europe are signaling rising odds of a global recession. However, we are in unchartered territory. Financial institution risk managers urgently need to evaluate their risk models in order to mitigate credit, market, liquidity, and operational risks.