Senior Bankers Warn: ‘It’s Crazy, It’s a Boom, It’s a Gold Rush’

Wolf Richter's picture

Wolf Richter

Bank lending has been setting new records since mid-2013. If the prior credit bubble – when too many loans were made helter-skelter by loosey-goosey loan officers before it all blew up in 2008 – was spectacular, this one is even more spectacular. It’s based on the principle that the US economy can only grow if bank lending balloons.

In November, bank lending began to tick up at a faster clip. Then suddenly with the New Year, as if someone had opened the floodgates in a drunken stupor, bank lending started to soar. Perhaps it was a consensus within the business community that interest rates would soon go up, that the Fed would not only taper QE out of existence but also raise interest rates sooner than its cacophony suggested, that this was the last chance to get free or nearly free dough, after inflation, and they all started borrowing like madmen.

The phenomenon has become reminiscent of the final ramp-up in lending seen in mid-2008, even as all heck was breaking loose in the financial sector.

This time, economists have been brandishing the borrowing binge as a sign that investment was suddenly picking up, that these investments would soon filter into economic growth, and that after five years of false promises and sour disappointments, the ever elusive “escape velocity” could finally be achieved.

Back in April, I wrote about “The Bank Credit Bubble in America, Now Bigger Than the Last One (Which Blew Up).” Since then, the pace of lending has been relentless. And this is what the auspicious chart of core bank loans outstanding looks like (via OtterWood Capital Management):




Turns out, that jump in investment – powered by bank lending – that economists have brandished with such enthusiasm has been an illusion. And this time, it wasn’t some blogger spouting off party-pooper data, but the Financial Times, quoting sources of “senior executive” rank inside major US banks who “are privately warning” that the lending binge “should not be seen as evidence of an economic recovery.”

Instead, much of the borrowed money was used “to fund payouts to shareholders” via dividends and stock buybacks and to “finance acquisitions,” the source said. None of these activities have any productive effect. In fact, acquisitions lead companies to boast about synergies and efficiencies – that is, layoffs – at either end, as the businesses get consolidated.

And part of the borrowed money is being plowed into the US fracking boom where drillers have gotten on the terrible treadmill that fracking represents. The sharp decline rates of fracked wells force drillers to drill ever more just to maintain production, and they can never get off the treadmill because production would swoon, and with each well they have to borrow more, and then they require more production just to service the ballooning debt. Revenues have risen 5.6% over the last four years while debt that drillers have piled on has nearly doubled [read... The Fracking Shakeout].

“It’s crazy, it’s the boom, it’s the gold rush,” a senior corporate banking executive at a large US bank told the FT. “Small companies are becoming large companies overnight.”

“Loan growth doesn’t seem to be driven by the underpinning of an economic recovery in terms of new warehouses and [capital expenditure],” the executive said. “You don’t see the foundation, the real strong demand.”

Another corporate banking executive at a major regional lender told the FT: “The larger part of the usage in the market right now are loan refinancing where companies are paying dividends back out.” And that wasn’t all: “They’re requesting increased loans or usage under a lien in order to pay a dividend or equity holders of a company,” the source said. “Traditionally banks have been very cautious of that.”

The loans the source was fretting about – those that “traditionally banks have been very cautious of” – are leveraged loans that private equity firms use to strip out whatever value is left in their portfolio companies. These already overleveraged outfits borrow even more money from banks and, instead of investing it in productive activities that create revenues and cash flow with which to service the loan, they pay the money out the back door as a special dividend to the PE firms. It pushes the company deeper into the hole, enriches the PE firms, and saddles the bank with a highly dubious asset.

Bankers have thrown their now apparently silly concerns overboard, have loosened their underwriting standards, have watered down loan covenants, and whittled down risk premiums. While in the past, if they made those loans at all, they demanded being compensated for the nosebleed risks they were taking, and they’d charge an arm and a leg for these loans. As a result, companies stayed away from them. But these days, just about anything goes.

“Frothy” is how bank executives described the corporate lending market to the FT.

And how did the last lending boom of this type end? Bad deals are made in good times. Bad deals are made when the cost of money is nearly zero, when the Fed has inundated the corporate world and banks with cash, when risks have been printed out of existence. And these bad deals, the essential product of the largest credit bubble in history? They get pushed into dark recesses where they smolder quietly until they blow up. They did in 2008. And they’re going to again. It’s just a question of when.

Banks are again taking the same risks that triggered the financial crisis, and they’re understating these risks. It wasn’t an edgy blogger that issued this warning but the Office of the Comptroller of the Currency. And it explicitly blamed the Fed’s monetary policy. Read…. Federal Regulator Details Crazy Risk-Taking By Banks And Blames The Fed

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AdvancingTime's picture

Money has become so cheap to borrow that many people are now arguing that you must take it even if you don't know what to do with it. It is hard to imagine how much this is distorting the economy, markets, and reality in general.

A total disconnect between life on main street and the financial world is occurring and it is putting the economy in a very dangerous place. It is often hard to determine what is true, but a report on Bloomberg that 32 Trillion dollars in funds were held in offshore accounts around the world made me shutter. How safe is this money, and what exactly is it doing? Can you say Cyprus? More on this subject in the article below.

Chief Wonder Bread's picture

Drillers? He means Independent Producers me thinks.

Drillers drill the wells on contract for the Independents.

AdvancingTime's picture

Regardless of what you name it the "Federal Reserve Nightmare" or the "Yellen conundrum", the box Ben Bernanke made when he painted both himself and the Federal Reserve in a corner remains. Bernanke has by passing the chairmanship to Yellen escaped from the QE trap but left the rest of us fully in its grasp.

With a policy of loose and cheap money  and an inflation target of just 2% the Federal Reserve  continues to please those gambling that not fighting the Fed guarantees profits. As many Americans are forced to pay higher food, gasoline, and health insurance premiums, I wish someone would let the Fed know we are already there. Any thought that inflation is not higher has come from the false illusion brought from lower payments on things like auto loans and mortgages, this is a one off and will not continue. Trouble lurks ahead. More on this subject in the article below.

GreatUncle's picture

the principle that an economy can only grow if bank lending balloons.

Not quite, the growth not attached to anything real is the leverage on that money being borrowed, that then drives the inflation / growth with no real change in volumes consumed and also destroys the lives of the poorest.


Comte d'herblay's picture

This time is different.

Late onset ADHD's picture

the invisible soup lines are "different"...

you know it would just be "common courtesy" for the "ebt card army" to at least line up outside the wallys for an hour or two on "reload" day...

just for show...

and on a side note... what forward thinking fucknut in big-gov sold all the giant "soup pots and ladels" from the last time around?...

holding my breath in 3,2,1...


RaceToTheBottom's picture

None of this would be happening if the banks were allowed to fail in the previous crisis.  Just Nationalize them and break them into itsy/bitsy regional POS and just guarantee the loans not the banks.

Wahooo's picture

Nationalizing assumes there are two separate entities - a bank and a government. There is only one and it's already nationalized/socialized.

KingTut's picture

The propaganda against fracking is just mind-boggling Luddite nonsense.  A few years ago, eveybody, his borther and his dog jumped on the fracking bandwagon.  These were not sophisticated oil people.  They did not understand the technolgoy, the geology and the economics of the oil industry. Today all these idiots have lost their shirts and are gone.  Your so-called "terrible treadmill" has evolved into a very profitable business run by the same people who have run the industry for decades.

Now, it is much more expensive, which is just the natural expression of 'Peak Oil': all the cheap oil is gone.  It's also unlikely we will become Saudi America, but it is certain that fracking will extend humanity's use of oil and natural gas for decades.  And given the woeful economics of solar, that's probably a good thing.

MeelionDollerBogus's picture

There is no such propaganda.
There's actual evidence of poisoned water & actual video of water lighting on fire due to contamination from fracking.
This doesn't happen anywhere else.
It's solid physical evidence.
Just like global warming is proven & the hoax is that there's no global warming. It's all backed by measured physical evidence.
The gall it takes to claim physical evidence is a hoax is mind-blowing by z-tards.

OldPhart's picture

In 1995 I was an intern for a local fire department.  Their first assignment for me was to assess the taxable value for a local air force base that had been closed.  The division chief took me to the base, it was eerie, this had been a very active air force base...but looking into windows of housing, there were dishes on the table, toys lying was like a neutron bomb had gone off.

He took me down to a house that was unlocked and got a glass out of the cubboard, ran some water into it, then lit it on fire.

It was a stunning effect.  The base had been dumping jet fuel, and since it had set idle for five years that fuel had worked it's way into the waterlines.  Water and kerosine...the water tasted a lot better after burning the fuel off until the flame died.

klockwerks's picture

Bogus is a good name for you. You really do some more homework on this . You have been watching to much TV.

MeelionDollerBogus's picture

So you're saying the flammable water is special effects on TV and it never really happened?

kurt's picture

Fracking is dangerous to the water tables. They use the worst poison on earth because they get paid to force it down the hole, that's why it's "propietary". Cheney & Halliburton... 'nuf said. Peak oil is a religious belief not a scientific fact. Hey Oilboy, you must use a LOT of petrolium jelly!

RevRex's picture


MeelionDollerBogus's picture

Nope, he was completely right. You're the one full of it.

daveO's picture

A classic case of malinvestment.

Vegetius's picture

More and More Control Fraud, it appears nothing has been learned since the savings and loan frauds, the Enron control fraud. It appears to be accelerating faster and faster with less and less guile.

The corrupting influence of easy money, rotting the fibre of our society and shearing the bonds that ties us together.

Money has no smell

- Vespasian Roman Emperor AD 69 - 79


kchrisc's picture

There is nothing to be "learned."

A punk going around knocking off small stores whenever he needs cash does not care that those stores may go out of business or nearly so. There is nothing for the thief to learn. Ditto the banksters, their Wall St cronies and pol and crat puppets.


“A beast learned of the taste of humans, will only be dissuaded by death.”

Comte d'herblay's picture

Nearly all mine does.  It's Digitally originated money that doesn't smell.

But my FRNs if they're new smell pretty good.  The ones in my pocket, after a night of debauchery with Bernice, Alice and the Jetts, too much beer, and smoke from cigars and cigarettes around me, in addition to the natural emanations from my body near the indeed have a significant aroma. 

The coins have singularly metallic odor. Copper, silver, and nickel mostly.

Roman Emperors don't know everything.

Gunga's picture

The people that are making so much money from Wall Street asset stripping Main Street are not going to change the system unless they are forced to. 

Pee Wee's picture

They will already be dead.

kchrisc's picture

Yup, no "forcing to," as they will be gone--hiding, headless or 'returned.'

IANAE's picture

does anyone have a score sheet showing all the metrics that are coming into alignment with previous (1999, 2007) cyclical boom-just-before-the-bust values?

ZH reports them incrementally, but a single sheet with the flashing red indicators would be interesting to see...

the grateful unemployed's picture

first thing, the economy didn't crash, the Fed crashed it (see today's article, will the Fed collapse the economy AGAIN) 2008 was near the end of the second term of an unpopular and disengaged president who repeated in every speech, that the economy is recovering. prior to the midterm elections he appointed a Goldman head, Hank Paulsen, and he brought Bernanke into the cabinet, and made him a team player. now it was possible to throw AIG under the bus, and force Ken Lewis (BOA) to buy Merrill without disclosing any details to shareholders (clear violation of the law). if you think 2008 was an event like a hurricane please dislodge that thought from your mind. the rumor was that bush would stage another false flag event, or declare an emergency and cancel the elections. (all rumors are true, albiet this one really is). the truth is obama was elected promising answers, but very shortly arrived contrite and said lets move on. he was packaged up bought and sold before the inauguration, where John Roberts deliberately flubbed the oath as a gesture to the newly elected candidates impotence. now its eight years later and the economy is right where we left it in bad shape. what obama does, or what the power behind the office does, and if they can peacefully take control of our government, will go a long way to determining how much upheaval results from the election and whether the stock market has to crash again to send us all a message.  

Wahooo's picture

I'm not following this. The economy didn't crash, but the stock market has to crash again? Bush, Obama, et. al. deliberately planned and executed an economic crash? I think it's more accurate to say that the Fed sowed the seeds of malinvestment which led to an economic crash that TPTB took advantage of to line their pockets. Just because they took advantage quickly doesn't mean they executed the crash. Predators are the fastest animals on earth.

the grateful unemployed's picture

and nothing worries the fed, they will keep on issuing supply, they have to, in order to maintain the war in bizarrostan and points east or west. (obama said this, why he is so impeachable, about the debt ceiling, this is money we already spent, and for him that's all of it, including claims not yet made) now credit is officially a commodity (all debt is created equal)  and speculators are grabbing it up, just as bankers buy gold with their fed credit card, and rehypothecate it (this is why the price keeps falling - same scam done with the SPR regularly) unfortunately the supply begins to vanish when the price of that thing drops. evenutually the price goes to zero and there is none, which is exactly what the great depression,  nothing to buy and no money to buy it. sweet dreams 

scraping_by's picture

Asset-stripping by hedgies and massive bonuses the executives pay themselves are really the same thing, only in different contexts. Legal control of a corporation allows massive transfers of the property controlled by that corporation, essentially for any reason. Just like Congress legalized bribery, case law has legalized embezzlement.

And the results will be the same. Once-productive businesses shelled out and left to wither up and blow away.

Working for a living is so blue collar.

NotApplicable's picture

And the Fed/BIS/IMF/ECB/... will back-stop the banks, ending up owning every tangible asset in existence, while the dream of a socialist utopia will be achieved.

Poverty for all! (but the ruling class)

Memedada's picture

Socialist utopia? Please, look up the concept of socialism/communism before you spew it in all directions (together with many other ZH-readers/contributors). In your own comment you mention: “Poverty for all! (but the ruling class)”. Tell me again: what’s socialist about that? (Hint: think about class and the ‘definition of a socialist utopia’).

And: this is not to promote socialism, but to make sure we have a language (that terms don’t lose their meaning) to describe what’s going on.

lotsoffun's picture

tyler - i think a large part of this is also what we saw in 2008 - with cdo^2 - too much 'money' chasing few assets, drives the prices up, and creates the need to create 'derivatives' or artificial assets to purchase.  and since nothing backs those artificial assets, when price discovery is allowed....  poof.  gone like the dust it is.

and this is the result of the digital printing.  it's the digital printing that has never existed before, because the computing power did not.

that's the 'hyperinflation' that everybody expects from huge printing, but it hasn't been seen like this before, so it's new, it continues for longer.  it fools people.

bernacke and company know however, they know that eventually, the trillions printed out of nothing will flood the market, but in the mean time, they and their friends get rich transferring everybodies money into their own pockets.

i've got a boss currently - he is screwing everybody and always says 'you're reading too much into it'.  right.  'yes, that's my .... in your ..... but don't read too much into it, when i'm done, i will take it out'.

substitute - hand - pocket, hand - bank account, ? - ?

before the gallows, bernacke will say 'but i gave you the opportunity to get rich, if you didn't take advantage of it, is that my fault?'



disabledvet's picture

Nuances? BWHAHAHAHAHAHAHA. Sticking it right to the Government itself! "Banker Heaven."

The securities folks are taking ALL the risks...and the political "minders" are guearanteeing THE STOCK BROKERS' RISK...not the bankers.

You clowns have your heads in asses and have had them there for a LONG time. This is no "Bankers War"...this is a Wall Street deal...THEY'RE he ones ramping up the balance sheet, not the Bankers.

"The Bankers buy the debt because they want a return OF their capital" not ON their capital.

"Since the money is worthless so are all the assets." Simply put "there's ZERO COLLATTERAL TO BORROW AGAINST."

And unlike all the wishful thinking and CONJECTURE that is repeatedly brought up here and everywhere....what I speak of is a FACT. M2 hasn't budged AT ALL going on SIX YEARS!!!!

Now the Fed merely announces "taper" and the deflation literally starts the next day.

Well...not to make it sound complicated but "how do I pay for a trillion dollar deficit with real money backed by a massive asset deflation?"

The only answer I can see are a: inflating it away AND b: BORROWING MORE.

That strikes me as a banking function...not a function of The State.