Sumary of Leverage on Leverage Is Big Danger for Investors and Their Lenders:
- Calpers, the $495 billion California public-employee pension fund, is planning to put more money into chasing returns by taking on debt worth up to 5% of its fund value — or roughly $25 billion — to plow into financial assets.
- This seems remarkable to me: A very big pension plan, which invests in lots of different funds, including many that use leverage to boost returns, is now going to start using its own leverage on top to try to boost its returns.
- Yes, I know fresh assets get created — new companies, new bonds and new joke Shiba-Inu Coins, or whatever.
- Net borrowing on margin in brokerage accounts hit $509 billion in October, according to the latest data from the U.S. Financial Industry Regulatory Authority, or Finra.
- Another way to invest in companies is through private equity.
- U.S.-based private-equity owned companies are on course to borrow nearly $90 billion to fund dividend payouts this year, the most since Bloomberg started collecting this data in 2013.All of this is a danger for stock markets and investors, but also for banks, which provide the leverage in the first place.
- Meanwhile, the big loans that back private-equity buyouts are mostly all sold to other banks, mutual funds and structured vehicles called Collateralized Loan Obligations, or CLOs.