Floating On a Sea of Debt - Mk. 3.0
Remember the 2007-2009 Financial Crisis? When unregulated credit swaps and derivatives trading brought global capitalism to its knees? Well, high-risk securities are back.
The Shadow Banking Sector is a newly emerged and almost entirely discrete and unregulated variation on the madness of 2008. The sector is trying its hand at trading in debt-based products such as Collateralized Loan Obligations (CLOs - see also Broadly Syndicated Loans/BSL).
In this era of deregulated interconnected and interdependent systems controlling markets there is no available framework, no lens, through which these risks can be analysed.
Some 16 years on from the chicken-into-steak smoke and mirrors of sub-prime domestic mortgage-backed securities, increasingly alarming reports and forecasts are emerging that point to the potential triggers for the next great financial industry meltdown. Government malfeasance aside, the most likely such source is widely thought likely to be Wall Street's latest bonus machine du jour - bundled loans that are linked to highly indebted companies backed by private equity firms.
A major part of the growing but opaque portion of the financial system, the Shadow Banking Sector is populated by financial businesses that face little to no regulation (compared with traditional lenders) that have been engineered from the ground up to be able to 'prosper' outside the reach, competency, capital and security reporting requirements of financial regulations.
It's a game of whack-a-mole. You regulate stuff, but the financial system finds ways around the regulation very quickly.
Every time any of us hear or read about someone in the financial services industry (or a politician) suggesting that they should be freed from the capital and liquidity requirements of systems such as Basel 1, 2 and 3 (or others, such as the already gutted Dodd Frank Act) you are hearing someone lobby in favor of increasing risk and reducing protection for 'Main Street' savers, pension investors and consumer or commercial borrowers.
"chicken into steak again"
Those Shadow Banking Sector businesses include entities such as hedge funds, private credit providers, money market funds and private equity firms and funds.
One of the indisputable common denominators between them is that these are financial intermediaries that provide credit and liquidity transformation, similar to traditional banks, but that are more closely aligned to the chicken into steak of 16 years ago, and who operate outside of standard banking regulations.
Theoretically, these institutions, often referred to as "non-bank financial intermediaries," offer potential benefits like increased credit availability and a more diversified financial system, but by definition, due to their lack of transparency, regulation and oversight, they also offer increased risk and reduced stability.
So, try this on for size - spoiler alert: reading on could seriously ruin your day. The lowest estimate I found of the value of today's global securitization market (more jargon designed for deflection) is some $6.4tn of assets, of which (as at September 2024) $3.128tn was owned in the U.S. The median estimate of Private Equity held AUM is $10.8tn. Some metrics place the figure way, way higher.
As an aside, as of May 2025 total global debt is put at $324tn, against total global 'GDP' of only $106.43tn to produce the capital to fund that debt. U.S debt is some $36tn on a GDP of around $26tn. How smelly is that?
The 'CLOs' I mentioned are types of securities that are backed by a pool of debt. They include loans to companies with low credit ratings (namely subprime borrowers - ringing any bells?) or capital constrained, start-up or mature and often family or founder owned small to mid-cap businesses (up to $1bn revenue) that generally have a low debt-to-asset ratio, or no debt at all. Namely, they are 'healthy' businesses that have been snapped up by private equity firms with the help of big loans - known as leveraged buyouts - which those businesses will have to repay to the private equity investor. Which means they can never, ever, be as 'healthy' again.
If anyone ever tells you that such deals are good value, good for the seller, good for the community or good for the economy - run away. Quickly. This is debt-as-product. Debt as civic duty. Debt as fiscal drag. Debt is the enemy of business performance and robs business of the capital resources needed to continue organic growth or M&A activity. None of this is rocket science.
So why should we in the motorcycle (or any other) industry care about this? The amount of assets managed by private equity businesses globally grew at an annual rate of about 13% from what now seems like a modest $2tn in 2012, to around $8tn in 2023. Then by the end of last year, Private Equity AUM hit an all-time high of $10.8tn, reflecting an 11.6% increase in just 12 months.
This is insane. This is out of control, and it is deregulated. Private equity's long-term expansion has seen market values surging 636% since 2009 and more than doubling since 2019. Which means those market values are themselves castles built of sand.
Many observers, analysts, economists and even many bankers, traders and politicians are now adding to the crescendo of siren voices warning that we are fast, and ever faster, approaching a tipping pint whereby business indebtedness grows exponentially, becoming a runaway train racing downhill in the dark with no brakes and no lights.
Just as was seen in 2008 this train has the potential to sweep away all before it, crashing through all guardrails and burying western economies under a tsunami of debt that will take not just 3-5 years but decades to start rebuilding from. That's why we in the motorcycle industry, all industries, need to be afraid. Very afraid.
Sources referenced in the research for this piece include but are not limited to: WSJ, FT, The Economist, New York Times, London Times, Reuters, Bloomberg, CNBC, OECD, IMF, Word Bank, IIF, Statista, The Guardian
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