China’s Debt Crackdown Is Driving Borrowers Into Riskier Territory

Beijing’s game of Whac-A-Mole against financial risks is sending some borrowers into darker corners

China’s crackdown on debt is driving some companies to a murkier form of financing as it gets harder to secure bank loans or tap the bond market.

New loans from so-called trusts, firms that raise money from individuals and corporations to plow into riskier areas of the economy, reached 882.3 billion yuan ($129.5 billion) in the first four months of this year, according to data from the People’s Bank of China, nearly five times as much as the same period in 2016.

Trust firms, which often charge borrowers higher rates than banks, occupy a middle ground between banking and asset management. They are licensed and loosely regulated by China’s banking watchdog, but they lack some of banks’ protections, such as government deposit insurance, and they have more flexibility to invest in risky areas than banks do.

 .. Authorities continue to give trusts more leeway than banks to invest in risky projects, including property, steel and other sectors, where authorities have tried to dial back borrowing… A record surge in the first four months of 2013 led regulators to crack down on the sector. Two years later, trusts helped investors leverage bets to buy stocks, which contributed to a flood of borrowing that culminated in a market crash that summer.

Bankers Use Trump Rally to Cash Out

Executives, directors at nearly 100 community banks and regional players netted $1 billion in stock sales since election

 Insiders at publicly traded commercial banks with a market value greater than $1 billion, but excluding the largest national banks, sold about $1.4 billion in their company stock between the election and the end of March

.. Private-equity investors with board seats also sold. Four of them accounted for more than $310 million of the sales, or about 22% of the total, since the election. These same investors sold $46 million in 2016 before the election.

The Shattered Arguments for a New Glass-Steagall

Investment banking isn’t risky. What’s dangerous is creating stand-alone firms that can’t diversify.

The 1999 repeal of Glass-Steagall was unfairly blamed in the aftermath of the 2008 financial crisis. Some people—apparently Mr. Cohn among them—mistakenly believe that investment banking is so risky that it should be once again kept separate from commercial banking. The truth is exactly the opposite: Traditional investment banking entails very little risk. The danger is stand-alone investment banks that are not diversified enough to survive a shock.

 ..Banks are at risk of failure when they become too concentrated by geography, industry or product line. Risk needs to be diversified so that no one mistake can bring down the entire institution. Even firms like Citigroup and Bank of America that made a series of mistakes in the 2008 crisis survived because they were diversified. Investment banks that were not properly diversified did not survive: Bear Stearns, Lehman Brothers, Merrill Lynch.
..The major perpetrators of the 2008 financial crisis were 20 or so institutions that had originated, securitized and distributed exotic subprime mortgages with toxic features. About 10 investment banks packaged mortgages made by savings-and-loan associations such as Countrywide, Washington Mutual and Indy Mac, and by state-chartered mortgage brokers—many of which committed outright fraud. These S&Ls were the remnants of an industry that had cost taxpayers some $150 billion during the 1980s and early 1990s. Notably absent from this array of culprits were large commercial banks, with an exception or two.

Magerman: How ‘instant billionaires’ threaten America

In the case of Perelman, it made me want to make the school more Orthodox. Which was not what the school was. … Who am I to come in and say I have the right to own their mission and push them in my direction?… I realized hands-off is better. I can give them scholarship money and do arm’s-length things. ..
.. We have this phenonmenon I call the “Instant Billionaire.” In five or 10 years, a person can go from being a person of above average means, to close to a billionaire.
.. In the past the ultra-wealthy had similar characteristics. There were families that made investments in manufacturing, in transportation, in the infrastructure of this country. … They were partners with the government.  They had a strong investment in the status quo.
But today the instant billionaires [who have made money in intangible businesses — finance, software, liquid investments] have almost no personal investment, no ailgnment, with the status quo. They’re more like lottery winners.  Even if they’ve actually worked quite hard to earn it, they don’t have the same relationship (to American society).
.. A lot of this kind of wealth can go to very idiosyncratic projects. And not necessarily be good.

When you are that wealthy, you can make a platform to drown out everyone else’s voice.
There is I think a similarly large issue: the way people are hoarding wealth is starving out the rest of us.
.. But when you have a trading company or a hedge fund, you have a few dozen key employees at most. Your have desks, computers, tech infrastructure. You put money in. You get it back as profits.

You don’t have a lot of employees. You don’t share the profits. There’s no one involved other than a few other rich white people. You are pulling money out of the economy.
.. A lot of people blanch at a 90 percent tax rate. But I think, if you make millions of dollars a year, do you think being taxed at 90 percent above that level will affect how you do your work?

It would cause you to invest more of your earnings back in. You might take you that money and pay your people more. You might enhance your facilities.
.. As things stand, there’s no disincentive for people in my industry to take every dime as profit. People want maximum leverage. They want to take everything out so they can get whatever luxuries they buy. Or other investments …
I know, economic life is not a zero-sum game. But I see the damage done when an industry that’s supposed to be just a service industry, finance, becomes 34 percent of the economy, putting a lot of wealth into a few people’s hands.
.. I tried doing angel investing. Which I was a disaster at. I’m too generous in my valuations. People can snow me easily.
.. It isn’t anything by itself. It’s a virtual machine, that does things. It doesn’t have a lot of customers.
.. I was offering software to grammatically analyze text. I did it in grad school. It was the most useless field, it was never going to amount to anything. But I did it really well.
.. The thing that drove me was, being in a lower-middle-class environment, I wanted better. I was driven. I was frugal. I was hyper-focused on education and reaching higher.
.. I get the most constructive growth when I’ve done something wrong. It’s not usually presented to me in the nicest way. But I get a lot of value from it.
Philly isn’t New York. This city hates change. No one likes change. But this city seems much more averse to change than others.