7 ms·

no it's not. The subprime crisis was precipitated by a lot of people taking out mortgages with either blatantly or coerced false income information in their mo

no it's not. The subprime crisis was precipitated by a lot of people taking out mortgages with either blatantly or coerced false income information in their mortgage applications on homes that had inflated values. Once home prices stopped going up as much and interest rates started increasing, these people were no longer able to make their mortgage payments. Leveraged loans at 7x ebitda are still less leverage than someone taking out 90% LTV mortgage (90% LTV can be thought of as 9x leverage against your equity). Companies usually also have more flexibility to increase their income, or decrease their expenses compared to an average person. And mortgages have required amortization where as most levered loans to my knowledge are interest only. All in all, unless a significant % of companies taking out levered loans are submitting fraudulent financial filings, this is nothing like the subprime crisis.

FireBeyond 8y ago
> The subprime crisis was precipitated by a lot of people taking out mortgages with either blatantly or coerced false income information in their mortgage applications on homes that had inflated values. Whereas what, companies would never utilize non-standard accounting methods or falsified or exaggerated earnings reports or forecasts?
- heifetz 8y ago
  Sure companies will and can do that, there has been pretty good history of really large companies committing financial fraud. However, I don't think there ever has been systematic fraud in the US, unlike with subprime mortgages
  - Retric 8y ago
    When you just look at companies that fail, it ends up looking a lot like systematic fraud. Also, it was not really single family home owners that defaulted in mass. Investors, even those with prime credit ratings, were much more likely to default than non-investors when prices fell.[8][9][10] https://en.wikipedia.org/wiki/Subprime_mortgage_crisis https://en.wikipedia.org/wiki/Subprime_mortgage_crisis People talk about subrime morgages as if they meant poor people. However, largely it was people buying up large numbers of homes and then strategically defaulting that caused the real damage.
  - luckydata 8y ago
    Are you really sure there's no systematic fraud? The US is pretty corrupt as far as checks and balances on financial dealings goes, I wouldn't be surprised if this became another one of those "who could have known".
  - slededit 8y ago
    Fraud was cited as a major factor contributing to the S&L crises. In companies it tends to be in the form of Control Fraud where insiders fleece the corporation. https://en.wikipedia.org/wiki/Savings_and_loan_crisis https://en.wikipedia.org/wiki/Savings_and_loan_crisis
  - grey-area 8y ago
    You probably mean systemic fraud, because there has been plenty of systematic fraud. The subprime mortgage crisis is in fact an excellent example of systemic fraud which happened in the US, fraud committed by ratings agencies (AAA CDOs) and banks (autosign). The system was corrupt, and probably still is - the incentives are all wrong.
- notfromhere 8y ago
  The bank's role is to verify that the provided information is valid. Banks didn't care because they were going to sell off the mortgage and they didn't care about the underlying stability of the loan
cinquemb 8y ago
> 9x leverage against your equity From where I'm from, physical collateral is valued more highly than paper collateral that can go to zero if such a companies earnings per share are already less than 0…
- heifetz 8y ago
  most companies also have hard assets, e.g. inventory, real estate, IP, equipment, etc. If you're ok with paying 15x P/E which is the average S&P P/E, then 7x leverage isn't so bad... Although the companies with these levered loans are a lot smaller than S&P 500 companies.
  - cinquemb 8y ago
    Leverage agaisnt hard assets != leverage agaisnt equity (which you were talking about), and we're talking about individual companies P/E. Everyone cannot hold an index (if everyone does so, there is no incentive to weed out bad companies), some of which are good about not including neg eps companies in the P/E caluclation [0]. [0] https://www.marketwatch.com/story/heres-the-shocking-truth-about-the-russell-2000s-pe-ratio-2017-08-18 https://www.marketwatch.com/story/heres-the-shocking-truth-a...
    - heifetz 8y ago
      no it's not, and I know the two are different definitions. However, what I'm saying is that a 7x 1st lien leveraged loan against a company that is trading at 14x P/E is essential 50% the market value of the company. Of course, the hard assets of the company is probably a lot less than that.
  - nickles 8y ago
    > Although the companies with these levered loans are a lot smaller than S&P 500 companies. Netflix isn't an S&P 500 company?
inetknght 8y ago
> Companies usually also have more flexibility to increase their income, or decrease their expenses compared to an average person. What actions do companies have available to them which consumers do not with regards to income or expense management??
- DeonPenny 8y ago
  For example, if you're GM and a lot of cars aren't selling you can shut down factories, repatriate assets, do stock buybacks, increase automation and more. If you're a person whose major asset is a house if you can't sell the house for enough to catch up on your debts or get a way better job. What can you do.
- brisance 8y ago
  File for Chapter 11 bankruptcy. This gives the company some time to get things under control to pay off its creditors. Or if it's a GigaCorp like $GM, $F etc go complain to the politicians and hope they do something, although seeing how dysfunctional things are with parts of the US Government itself shut down, a good outcome is unlikely.
- gammateam 8y ago
  I KNOW THIS ONE! Public companies have the capability of selling treasury shares, and also diluting all shares and selling the newly minted shares Public and also closely held companies also have the capability of offering new corporate loans on specific revenue streams Finally, both public and closely held companies have a greater timeline. They issue 5-10 year loans in a good market and low interest environment, pay low amounts of interest for several years during a bad market, and then issuing new loans in a good market again. And of course, bankruptcy not affecting the cash finances of any particular person in the company, or that individual's ability to acquire new credit. While the company entity itself takes the temporary reputational hit.
unclebucknasty 8y ago
>a lot of people taking out mortgages with either blatantly or coerced false income information Money flowed freely b/c the mortgages didn't matter. It was the ability to bundle the mortgages and leverage them that fueled low-standards and drove much of the lending frenzy. >The subprime crisis was precipitated by a lot of people taking out mortgages...these people were no longer able to make their mortgage payments No. Again, mortgage debt alone was a mere fraction of the problem. Those loans were levered up many multiples through CDOs and other exotic instruments, which was the real problem. In 2008 there was a lot of effort made to blame poor people/subprime debtors. But, it's been covered ad nauseam since then, so it's kind of surprising to hear someone still making those claims in 2019.
- heifetz 8y ago
  The derivatives were created and rated on the assumption that the borrower's default rates were consistent with historical default rates. Of course that was not the case, and losses became multiples higher, and blew up derivatives that were highly levered. However, derivatives didn't cause the losses, borrowers defaulted!
  - unclebucknasty 8y ago
    Well, sure, we can play the chicken-and-egg game and posit that if they'd never defaulted, the house of cards would've remained standing. But, that's the not the predominant issue for many reasons, some of which are embedded directly in your statements. For example: >rated on the assumption that the borrower's default rates were consistent with historical default rates Why would they be rated as such if the viability of the underlying mortgages was not, in aggregate, consistent with those that produced the historical rates? That alone tells the story. The derivatives drove the outsized lending which ballooned the number of riskier subprime mortgages in the first place. Then, the many layers of leverage just exacerbated the problem. At the end of the day, increases in subprime loan defaults could have been weathered. The derivatives were responsible for turning a containable downturn into a full-blown crisis.
  - DeonPenny 8y ago
deleted 8y ago
[deleted]
berberous 8y ago
The definition of "EBITDA" keeps getting looser each year, so the true leverage is likely somewhat higher than you'd expect by just looking at the max leverage a credit agreement permits. Also, most leveraged loans (i.e. institutional term B loans) require de minimis principal repayment in addition to interest (1%/year).
- StudentStuff 8y ago
  Any chance you have a comparison of EBITDA over the years? You've piqued my interest :P
  - berberous 8y ago
    Here's an article that describes the issue: https://www.reuters.com/article/us-ebitda-loans/adjusted-ebitda-masks-higher-leverage-on-buyout-loans-idUSKBN1JW2HU https://www.reuters.com/article/us-ebitda-loans/adjusted-ebi... This article describes some of the addbacks in more detail (scroll down to the section entitled "EBITDA add-backs and other adjustments"): https://www.hoganlovells.com/publications/the-evolving-fiction-of-ebitda-in-the-european-leveraged-finance-loans-market https://www.hoganlovells.com/publications/the-evolving-ficti...
    - XnoiVeX 8y ago
      That's an eye opener for me. Thanks!
gammateam 8y ago
> The subprime crisis was precipitated by a lot of people taking out mortgages with either blatantly or coerced false income information in their mortgage applications on homes that had inflated values. Yes but this was exacerbated because it wasn't as many people as what you said seems to suggest. The investment banks were so highly leveraged on the collateralized debt that it only took 7% of the mortgage holders missing payments at once to bring down the whole financial system. This suggests that the vast majority of people lying can actually be trusted to make payments, and would prefer to not be shut out of the credit system.
- heifetz 8y ago
  15 - 20% of subprime borrowers defaulted on their mortgages. That's a lot of people! Imagine, 1 in 5 of your neighbors defaulted and were foreclosed upon. This is not suppose to happen. https://www.chicagofed.org/publications/profitwise-news-and-views/2010/pnv-september2010 https://www.chicagofed.org/publications/profitwise-news-and-...
  - gammateam 8y ago
    Thanks, yes thats a lot. I'll double down on what I wrote as the CDOs contained a mix of all borrowers of all levels of credit worthiness. It is likely we are agreeing on our stats, but I will concede that the subprime variant therefore can't be reliably trusted to make payments, just as the models predict.
jayalpha 8y ago
> no it's not. It is easy to make fundamental predictions in finance. It is impossible to predict timings. > Once home prices stopped going up as much and interest rates started increasing, these people were no longer able to make their mortgage payments. When was the last time you looked at the Case–Shiller index?

FireBeyond 8y ago

> The subprime crisis was precipitated by a lot of people taking out mortgages with either blatantly or coerced false income information in their mortgage applications on homes that had inflated values. Whereas what, companies would never utilize non-standard accounting methods or falsified or exaggerated earnings reports or forecasts?

heifetz 8y ago
Sure companies will and can do that, there has been pretty good history of really large companies committing financial fraud. However, I don't think there ever has been systematic fraud in the US, unlike with subprime mortgages
- Retric 8y ago
  When you just look at companies that fail, it ends up looking a lot like systematic fraud. Also, it was not really single family home owners that defaulted in mass. Investors, even those with prime credit ratings, were much more likely to default than non-investors when prices fell.[8][9][10] https://en.wikipedia.org/wiki/Subprime_mortgage_crisis https://en.wikipedia.org/wiki/Subprime_mortgage_crisis People talk about subrime morgages as if they meant poor people. However, largely it was people buying up large numbers of homes and then strategically defaulting that caused the real damage.
- luckydata 8y ago
  Are you really sure there's no systematic fraud? The US is pretty corrupt as far as checks and balances on financial dealings goes, I wouldn't be surprised if this became another one of those "who could have known".
- slededit 8y ago
  Fraud was cited as a major factor contributing to the S&L crises. In companies it tends to be in the form of Control Fraud where insiders fleece the corporation. https://en.wikipedia.org/wiki/Savings_and_loan_crisis https://en.wikipedia.org/wiki/Savings_and_loan_crisis
- grey-area 8y ago
  You probably mean systemic fraud, because there has been plenty of systematic fraud. The subprime mortgage crisis is in fact an excellent example of systemic fraud which happened in the US, fraud committed by ratings agencies (AAA CDOs) and banks (autosign). The system was corrupt, and probably still is - the incentives are all wrong.
notfromhere 8y ago
The bank's role is to verify that the provided information is valid. Banks didn't care because they were going to sell off the mortgage and they didn't care about the underlying stability of the loan

cinquemb 8y ago

> 9x leverage against your equity From where I'm from, physical collateral is valued more highly than paper collateral that can go to zero if such a companies earnings per share are already less than 0…

heifetz 8y ago
most companies also have hard assets, e.g. inventory, real estate, IP, equipment, etc. If you're ok with paying 15x P/E which is the average S&P P/E, then 7x leverage isn't so bad... Although the companies with these levered loans are a lot smaller than S&P 500 companies.
- cinquemb 8y ago
  Leverage agaisnt hard assets != leverage agaisnt equity (which you were talking about), and we're talking about individual companies P/E. Everyone cannot hold an index (if everyone does so, there is no incentive to weed out bad companies), some of which are good about not including neg eps companies in the P/E caluclation [0]. [0] https://www.marketwatch.com/story/heres-the-shocking-truth-about-the-russell-2000s-pe-ratio-2017-08-18 https://www.marketwatch.com/story/heres-the-shocking-truth-a...
  - heifetz 8y ago
    no it's not, and I know the two are different definitions. However, what I'm saying is that a 7x 1st lien leveraged loan against a company that is trading at 14x P/E is essential 50% the market value of the company. Of course, the hard assets of the company is probably a lot less than that.
- nickles 8y ago
  > Although the companies with these levered loans are a lot smaller than S&P 500 companies. Netflix isn't an S&P 500 company?

inetknght 8y ago

> Companies usually also have more flexibility to increase their income, or decrease their expenses compared to an average person. What actions do companies have available to them which consumers do not with regards to income or expense management??

DeonPenny 8y ago
For example, if you're GM and a lot of cars aren't selling you can shut down factories, repatriate assets, do stock buybacks, increase automation and more. If you're a person whose major asset is a house if you can't sell the house for enough to catch up on your debts or get a way better job. What can you do.
brisance 8y ago
File for Chapter 11 bankruptcy. This gives the company some time to get things under control to pay off its creditors. Or if it's a GigaCorp like $GM, $F etc go complain to the politicians and hope they do something, although seeing how dysfunctional things are with parts of the US Government itself shut down, a good outcome is unlikely.
gammateam 8y ago
I KNOW THIS ONE! Public companies have the capability of selling treasury shares, and also diluting all shares and selling the newly minted shares Public and also closely held companies also have the capability of offering new corporate loans on specific revenue streams Finally, both public and closely held companies have a greater timeline. They issue 5-10 year loans in a good market and low interest environment, pay low amounts of interest for several years during a bad market, and then issuing new loans in a good market again. And of course, bankruptcy not affecting the cash finances of any particular person in the company, or that individual's ability to acquire new credit. While the company entity itself takes the temporary reputational hit.

unclebucknasty 8y ago

>a lot of people taking out mortgages with either blatantly or coerced false income information Money flowed freely b/c the mortgages didn't matter. It was the ability to bundle the mortgages and leverage them that fueled low-standards and drove much of the lending frenzy. >The subprime crisis was precipitated by a lot of people taking out mortgages...these people were no longer able to make their mortgage payments No. Again, mortgage debt alone was a mere fraction of the problem. Those loans were levered up many multiples through CDOs and other exotic instruments, which was the real problem. In 2008 there was a lot of effort made to blame poor people/subprime debtors. But, it's been covered ad nauseam since then, so it's kind of surprising to hear someone still making those claims in 2019.

heifetz 8y ago
The derivatives were created and rated on the assumption that the borrower's default rates were consistent with historical default rates. Of course that was not the case, and losses became multiples higher, and blew up derivatives that were highly levered. However, derivatives didn't cause the losses, borrowers defaulted!
- unclebucknasty 8y ago
  Well, sure, we can play the chicken-and-egg game and posit that if they'd never defaulted, the house of cards would've remained standing. But, that's the not the predominant issue for many reasons, some of which are embedded directly in your statements. For example: >rated on the assumption that the borrower's default rates were consistent with historical default rates Why would they be rated as such if the viability of the underlying mortgages was not, in aggregate, consistent with those that produced the historical rates? That alone tells the story. The derivatives drove the outsized lending which ballooned the number of riskier subprime mortgages in the first place. Then, the many layers of leverage just exacerbated the problem. At the end of the day, increases in subprime loan defaults could have been weathered. The derivatives were responsible for turning a containable downturn into a full-blown crisis.
- DeonPenny 8y ago

deleted 8y ago

[deleted]

berberous 8y ago

The definition of "EBITDA" keeps getting looser each year, so the true leverage is likely somewhat higher than you'd expect by just looking at the max leverage a credit agreement permits. Also, most leveraged loans (i.e. institutional term B loans) require de minimis principal repayment in addition to interest (1%/year).

StudentStuff 8y ago
Any chance you have a comparison of EBITDA over the years? You've piqued my interest :P
- berberous 8y ago
  Here's an article that describes the issue: https://www.reuters.com/article/us-ebitda-loans/adjusted-ebitda-masks-higher-leverage-on-buyout-loans-idUSKBN1JW2HU https://www.reuters.com/article/us-ebitda-loans/adjusted-ebi... This article describes some of the addbacks in more detail (scroll down to the section entitled "EBITDA add-backs and other adjustments"): https://www.hoganlovells.com/publications/the-evolving-fiction-of-ebitda-in-the-european-leveraged-finance-loans-market https://www.hoganlovells.com/publications/the-evolving-ficti...
  - XnoiVeX 8y ago
    That's an eye opener for me. Thanks!

gammateam 8y ago

> The subprime crisis was precipitated by a lot of people taking out mortgages with either blatantly or coerced false income information in their mortgage applications on homes that had inflated values. Yes but this was exacerbated because it wasn't as many people as what you said seems to suggest. The investment banks were so highly leveraged on the collateralized debt that it only took 7% of the mortgage holders missing payments at once to bring down the whole financial system. This suggests that the vast majority of people lying can actually be trusted to make payments, and would prefer to not be shut out of the credit system.

heifetz 8y ago
15 - 20% of subprime borrowers defaulted on their mortgages. That's a lot of people! Imagine, 1 in 5 of your neighbors defaulted and were foreclosed upon. This is not suppose to happen. https://www.chicagofed.org/publications/profitwise-news-and-views/2010/pnv-september2010 https://www.chicagofed.org/publications/profitwise-news-and-...
- gammateam 8y ago
  Thanks, yes thats a lot. I'll double down on what I wrote as the CDOs contained a mix of all borrowers of all levels of credit worthiness. It is likely we are agreeing on our stats, but I will concede that the subprime variant therefore can't be reliably trusted to make payments, just as the models predict.

jayalpha 8y ago

> no it's not. It is easy to make fundamental predictions in finance. It is impossible to predict timings. > Once home prices stopped going up as much and interest rates started increasing, these people were no longer able to make their mortgage payments. When was the last time you looked at the Case–Shiller index?