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Record Surge in Riskiest Loans Fattens Wall Street Banks

Record Surge in Riskiest Loans Fattens Wall Street Banks

Crackdown efforts by bank regulators are put on hold.

The volume of leveraged loans – the riskiest loans Wall Street banks provide – has surged 38% year-over-year and has already beaten the full-year record set in 2013, according to Dealogic. Total of leveraged loans outstanding has reached $1.25 trillion.

Nine of the 10 largest banks in the leveraged-loan business have already surpassed their respective 2016 full-year totals, according to Bloomberg data, cited by the Financial Times, including Bank of America (about $120 billion in leveraged loans so far this year); JP Morgan (about $110 billion), Goldman Sachs ($79 billion); and Barclays ($72 billion). Of the top ten, only Wells Fargo ($69 billion) is still lagging behind last year.

The fees are also record-breaking: $8.3 billion so far this year, just 6% below the full-year total of 2016.

The borrowers are junk-rated over-indebted companies. Leveraged loans are too risky for banks to keep on their balance sheet. So banks structure these loans, arrange them, and sell the structured products to loan mutual funds or ETFs so that they can be moved into retirement portfolios, or they repackage them into Collateralized Loan Obligations (CLO) to sell them to institutional investors, such as mutual-fund companies.

Leverage loans are bought and sold like securities. But the SEC, which regulates securities, considers them loans and doesn’t regulate them. No one regulates them.

Since 2013, bank regulators – the Fed, the OCC, and the FDIC – have been exhorting banks to be prudent with leverage loans, and they’ve been trying to crack down on leveraged lending because banks got stuck with these loans during the Financial Crisis. But that crackdown – however ineffectual it might have been – is now on hold because earlier this month, the Government Accountability Office questioned the legality of the standards set by the regulators.

And given the big-fat fees – potentially hitting $10 billion this year – banks are in no mood of cutting back.

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