Law of Unintended Consequences: Corporate Borrowing Binge

The Fed’s zero percent interest rates forever policy was meant to stoke end demand, help financial institutions get on solid enough footing to begin lending again, put a floor under home prices and create the conditions necessary for a self-sufficient economic recovery and a return to hiring and fuller employment.

It did none of those things.

But here’s what it is accomplishing – a brand new borrowing binge by large, high-quality corporations that, frankly, don’t realy need the money.  But when you can borrow at 3% and buy back enough stock to juice your earnings, why not?  And IBM and JNJ are doing it, why shouldn’t everyone elese of similar creditquality and financial strength.

Unfortunately, this does nothing for anyone other than the executives of the company and its investors, along with the small coven of Wall Streeters engaged in the banking end of this new borrowing binge.

Here are some stats courtesy of CNBC’s Jeff Cox via USA Today:

So far in 2011, syndicated loan volume has increased a whopping 56% compared to 2010, according to Dealogic. The total of $1.76 trillion is the highest single-year sum since the pre-financial crisis days of 2007.

This came even though fourth-quarter activity saw a pretty big tail — the $354.5 billion total was the lowest in more than a year, since the $246.6 billion in the third quarter of 2010, Dealogic said.

Moreover, the U.S. was the biggest player in the space, with 47% of the total global loan volume, up 9 percentage points over 2010.

The bulk of the loans went to the most credit-worthy.

Investment grade volume increased to $1.03 trillion, also the highest since 2007, representing a 68% year-over-year gain.

Globally, syndicated loan volume grew 27% to $3.74 trillion — again, the highest since 2007, Dealogic said.

This is yet another unintended consequence of zero percent rates.  Investment grade companies increasing their borrowing by 68% year over year has certainly not led to hiring.  Maybe we can just say that perhaps it stalls the pace of further layoffs, we seem to have gotten good at merely accepting “saved jobs” these days anyhow.

And so the Balance Sheet Recession continues apace for the deleveraging consumer while those with the greatest ability to borrow (and, god forbid, spend) continue to pad their balance sheets with fresh cash.  That they have no need for.

Nicely done.


Banks not lending? Corporate borrowing soars in 2011 (USA Today)




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