Foreign exchange and interest rate derivatives markets are bigger than ever before. This level of growth means investors and regulators should look carefully at the level of credit, market, liquidity, and operational risks these instruments pose.
Given the technology, data, and risk management challenges that I see almost on a daily basis at banks, I have to admit that I found the Federal Reserve report to be a lot more glowing than I would have expected. It took me until the bottom of page 13 to read “Large financial institutions are in sound financial condition, although nonfinancial weaknesses remain.” Nonfinancial refers to pretty important things like data quality, information technology infrastructure, internal controls, model risk management, and governance.
Year-to-date, leveraged loan defaults stand at close to $23 billion. This level of defaulted debt is higher than the total for all of 2018. Just from October to November 22, 2019, eleven issuers have defaulted to the tune of $7.8 billion. This represents 34% of the total default dollar value this year.
Brown, Pocan, And Warren Are Right To Ask The Carlyle Group About Its Investments In Nursing Homes And Long-Term Care Facilities
Senators Sherrod Brown and Elizabeth Warren, as well as Representative Mark Pocan, are asking important questions about The Carlyle Group’s private equity investments in nursing homes and long-term care. Senator Warren and Representative Pocan are sponsoring S.2155 and H.R.3848, ‘Stop Wall Street Looting Act’ to “ close the legal, tax, and regulatory loopholes that have long allowed private equity firms to capture rewards of their investments while passing the risk on to target companies, investors, workers, and consumers.”
Nine Democratic members of congress sent a letter to consulting and accountancy firm, Ernst & Young (EY), questioning the methodology and results of a report on private equity firms contributions to the U.S. economy, that it published together with private equity industry group, American Investment Council (AIC). In their letter, Senators Elizabeth Warren, Bernie Sanders, and Tammy Baldwin, together with Representatives Mark Pocan, Jesús G. ‘Chuy’ García, Rashida Tlaib, Pramila Jayapal, Jan Schakowsky, and Ayanna Pressley expressed concern about the way that corporations can wield their influence.
Thousands of jobs have been lost at U.S. private-equity backed companies, and nowhere is this more acute than in the retail sector. In less than a decade, almost 600,000 retail jobs in private-equity backed companies have been lost. Additionally, over 700,000 jobs have been lost at suppliers and local businesses interconnected with those retailers, making the total number of people unemployed 1.3 million.
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.