April 2, 2018—Wall Street is racking up wins in Congress that are sure to increase the risk of the widely forecast next financial blowout. In addition to the passage of S. 2155 , which loosened capital and reporting requirements for 25 of the 38 largest banks in the United States, and the appointment of financial officials dedicated to lighter regulation, Congress has now passed the Small Business Credit Availability Act as part of the Omnibus Budget Bill.
The Small Business Credit Availability Act amends a 1940’s law which limited the leverage which a class of investment firms called Business Development Companies can exercise. An article by David Dayen of the Nation on March 22 unravels the story. He writes:
BDCs are tax-exempt vehicles largely created, owned, and operated by private-equity firms. These entities raise money through stock exchanges and are supposed to provide capital for small- and medium-sized businesses. In reality, many of their holdings are in financial companies and exotic derivatives.
With this provision, BDCs could borrow twice as much money as they hold in equity, compared to a 1:1 relationship under current rules. This increase in leverage increases returns and risk-if you gamble with someone else’s money and win, you make more for yourself, but if you lose, you have nothing to pay back the lenders. …
While this is bad news for ordinary investors in BDC stock, who will be more at risk of losing their investments, it’s great for the private equity players who own BDCs and charge fees to those investors. Ares Capital, one of the largest BDC parent companies, spent $1.44 million between 2012 and 2015 lobbying for this change, according to the labor union UniteHere. Apollo and Carlyle Group, two private-equity giants, would also benefit. Bloomberg puts the potential profit increase at 20 percent.
That’s a windfall for investment firms that have a knack for destroying companies. Toys “R” Us, liquidating its stores despite a significant market share in toy sales, is owned by private equity. So is Claire’s, which just filed for bankruptcy, and other recent bankruptcy victims like Payless, The Limited, Wet Seal, Gymboree, Tops Markets, and Southeastern Grocers, parent company of Winn-Dixie.
Dayan argues that deregulatory legislation like this, combined with laxer enforcement by the Fed, SEC, FDIC, and Comptroller of the Currency, represents a dangerous erosion of protections against a new crisis. He compares it to the 20 year campaign by Wall Street to destroy Glass-Steagall, which culminated in its destruction in 1999—only to help bring on the 2007-8 blowout. Bit by bit, the financial safety net is being eroded.