One prominent Senator and possible presidential candidate painted a financial picture of history repeating itself.
Randal Quarles is the Federal Reserve Vice Chairman for Supervision and he was on Capitol Hill for a second day, facing off with the US Senate on Thursday November 15, 2018.
When Elizabeth Warren, the prominent anti-Wall Street Senator from the State of Massachusetts, faced off with Quarles, she painted a corporate debt market which was akin to the sub-prime mortgage market in the run up to 2008.
“There was a record $1.1 trillion in leveraged corporate lending, that is lending to companies which already have a lot of corporate debt.” Warren said. “Former Fed Governor Dan Tarullo called for more oversight and transparency because of the risks these loans pose to the economy and former Fed Janet Yellen said she is quote ‘worried about the systemic risks associated with these loans.’”
She continued, “This market looks a lot like the sub-prime mortgage market looked pre-2008. The loans are badly underwritten, with minimal protections, like sub-prime mortgages, these loans are being packaged up and sold to investors as collateralized loan obligations, or CLOs, which spread the risk throughout the system, which take the lender off the hook for originating a bad loan, and these loans have adjustable rates.”
Warren accused the Fed sitting idly by while banks created, packaged, and securitized loans similarly, “What are you doing differently this time?”
Quarles answered mostly with platitudes, “It is an important theme of our supervision and monitoring this cycle, is monitoring the underwriting standards for leveraged loans, we’ll be looking at that carefully this supervisory cycle. We’ll also monitoring carefully how the CLO ecosystem is evolving.”
That answer did not impress Warren. “I’m not sure that I see much distinction between what you are doing now and what the Fed was doing pre-2008,” Warren said. “I’m very concerned the Fed dropped the ball before and maybe dropping it one more time on this.”
Quarles testimony, along with his testimony in front of the House, is statutorily required.
His office was created as part of Dodd/Frank and was required to update Congress bi-annually.
Democrats believed that the Federal Reserve did not provide enough regulation, enforcement, and other oversight to the banks and wanted to give it more tools, and by extension more power.
As a result, the Federal Reserve now does everything from setting numbers for bank stress tests, measurements of bank health, the Volcker rule, identifying systemic risk.