Here’s the thing. It’s inevitable that this story from Bloomberg about the return of leverage is going to cause all kinds of eyebrow raising.
Credit Suisse Group AG and Scotia Capital, a unit of Canada’s third-largest bank, said they’re offering credit to investors who want to purchase loans. SunTrust Banks Inc., which left the business last year, is “reaching out to clients” to provide financing, said Michael McCoy, a spokesman for the Atlanta-based bank. JPMorgan Chase & Co. and Citigroup Inc. are doing the same for loans and mortgage-backed securities, said people familiar with the situation.
“I am surprised by how quickly the market has become receptive to leverage again,” said Bob Franz, the co-head of syndicated loans in New York at Credit Suisse. The Swiss bank has seen increasing investor demand for financing to buy loans in the past two months, he said.
Yves Smith has a take, which we suspect will be kind of typical:
…Wall Street is back to its free-wheeling, high-levered ways. This is a classic example of moral hazard in action. Why worry about blowing up the bank when you know the taxpayer will bail you out?
This reaction is wrong, or at least too simplistic. The fact is, this is EXACTLY what people have been harrassing them to do. Everyone’s been complaining that banks are being too stingy — not lending enough — and restraining the economy. Well, now they’re lending money to buy loans and mortgage-backed securities, and generally doing more of what a bank does.
Let’s be clear. Lending money to buy mortgage-backed securities is not dangerous. What was dangerous was lending money to buy mortgage-backed securities when they were wildly overvalued. But that bubble has burst. That’s not going to be the problem this time around, and nothing in this story sounds like bankers trying to blow themselves up.
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