with Bastien Inzaurralde


Sen. Elizabeth Warren is sounding the alarm about a danger she says could set off another financial crisis if regulators don't police it.  

The pileup of lending to companies that are carrying high debt loads poses a gathering threat to the economy, the Massachusetts Democrat and likely 2020 presidential contender argued in a Thursday hearing and in letters to regulators. The problem, as she sees it, is that underwriting standards for the loans have grown too loose in a market that tops $1 trillion, much as they did for subprime mortgages before the meltdown a decade ago. 

“I'm not sure that I see much distinction between what you're doing now and the Fed was doing pre-2008, and I think that's deeply worrisome,” Warren told Randal Quarles, the Federal Reserve’s vice chairman for supervision, at a Senate Banking Committee hearing. “I'm very concerned that the Fed dropped the ball before and may be dropping it one more time on this.”

Quarles said the volume of the loans isn’t as relevant as “the structures that these loans are being held in,” and the central bank is “looking very closely” at the matter. But he resisted Warren’s suggestion that the Fed should come down harder on those making the loans, as they did as recently as five years ago. “It’s not a rule,” he said. “To enforce guidance is inappropriate.” Instead, he said, the Fed is holding banks “to standards of safety and soundness.”

Warren, as she noted, is not alone in her rising concern.

Among others, Former Fed chair Janet Yellen recently argued the United States needs to confront a “huge deterioration” in corporate lending standards, especially to firms with weaker credit ratings. “I am worried about the systemic risks associated with these loans,” Yellen told the Financial Times in a recent interview. Yellen said the lessons of the last crash could be lost as banks push to roll back the rules that followed it. “There are a lot of weaknesses in the system, and instead of looking to remedy those weaknesses I feel things have turned in a very deregulatory direction.”

In an earlier interview with Bloomberg, she called on regulators to speak out. “They should make it clear to the public and the Congress there are things they are concerned about and they don’t have the tools to fix it,” she said. 

And the phenomenon drew a warning from Todd Vermilyea, the Fed’s head of risk surveillance and data. He told bankers at a recent conference in New York their lending looks increasingly dangerous. “There may be a material loosening of terms and weaknesses in risk management,” he said. “Some institutions could be taking on risk without the appropriate mitigating controls.” But Quarles’s comments Thursday, from higher up the Fed's org chart, indicate the central bank won’t be coordinating a crackdown. 

The Trump administration’s broader deregulatory push has accelerated the development. As Bloomberg explained last month: 

“On leveraged lending, the industry got an assist last year when regulators had to step back from the 2013 guidelines, which had driven a number of transactions to nonbank lenders. At the prodding of Republicans in Congress, the Government Accountability Office reviewed the guidance and determined that the Fed and other agencies had overstepped their authority and needed congressional approval for it to be a rule. 

“Following the decision, Comptroller of the Currency Joseph Otting said banks could do as much leveraged lending as they wanted provided they had sufficient capital to offset the risks, and it doesn’t impair their soundness. Just last week, Otting said the banking industry had ‘really kind of stayed on the rails’ and that private-equity firms were doing the riskiest leveraged lending.”

So far, defaults on the loans remain minimal — a testament to the ease with which the companies that have taken them are keeping up with their payments amid humming economic conditions. The picture could change if the economy hits a skid. Or, per hedge fund billionaire Paul Tudor Jones, rising interest rates could do the trick. “We’re going to stress test our whole corporate credit market for the first time,” Jones said Thursday at the Greenwich Economic Forum. “From a markets perspective, it’s going to be interesting. There probably will be some really scary moments in corporate credit.”

In addition to the hearing, Warren also laid out her case in a letter to Federal Reserve Chairman Jerome Powell, Treasury Secretary Steven Mnuchin, Securities and Exchange Commission Chairman Jay Clayton, Federal Deposit Insurance Corporation Chairman Jelena McWilliams, and Otting — and asked for responses by Dec. 11. 


Tech stock rebound leads a rally. WSJ's Riva Gold and Jessica Menton: "U.S. stocks bounced back Thursday as technology shares staged a rebound, helping the S&P 500 snap a five-session losing streak. Thursday’s session marked another volatile day on Wall Street, with the Dow Jones Industrial Average swinging more than 550 points from its high to its low. Major indexes appeared to get a boost after the Financial Times reported that U.S. Trade Representative Robert Lighthizer has said the next round of tariffs on Chinese imports has been put on hold."

This year's volatility just hit a benchmark, LPL Financial's Ryan Detrick noted: 

Economists split on midterms' potential effect on markets. WSJ's Harriet Torry: “Economists surveyed by The Wall Street Journal were roughly split on whether the outcome of the recent midterm elections would dispel or increase uncertainty for the economy and financial markets in the coming months. . . . Nearly half of respondents in the economists’ survey, 46%, said economic uncertainty would increase somewhat following the midterms, while 40% of respondents expected it would decline somewhat after the vote... Half of economists expected the next recession to start in 2020... One point economists appeared to agree on is they expected the labor market to remain strong.”

Investors have had nowhere to hide. The Associated Press's Stan Choe: “Even the most balanced investors have gotten knocked on their heels this year. Typically, spreading one’s bets across several different types of investments has helped deliver steadier returns. When U.S. stocks slide, say, bonds and gold can hopefully help offset the losses. Or maybe stocks abroad will hold up better than their U.S. counterparts. Not so this year. U.S. stocks have endured some breathtaking drops the last several weeks, slicing the S&P 500′s year-to-date return to 2.2 percent after including dividends . . . The investments that are supposed to offer safer returns have also struggled at the same time. It’s a rude reminder that one of the bedrock tenets of investing — don’t keep too much of your portfolio concentrated in any one thing — doesn’t guarantee success by itself. But it’s also important to remember that this year’s struggles have been a relative anomaly.”

Powell: Fed could pause rate hikes. Bloomberg's Rich Miller: "Powell has laid out a scenario for a pause in the central bank’s interest-rate hiking campaign sometime next year by highlighting potential headwinds to the U.S. economy. While generally upbeat about the outlook, Powell on Wednesday listed three possible challenges to growth in 2019: slowing demand abroad, fading fiscal stimulus at home and the lagged economic impact of the Fed’s past rate increases. 'These are things we are well aware of,’' he said in an appearance at the Dallas Fed.

Also Powell: Fed knows some people are struggling. NYT's Binyamin Appelbaum, reporting from Houston: "Powell walked the streets of a struggling neighborhood in this otherwise prospering city on Thursday before meeting with community leaders in a visit intended to demonstrate the Fed’s concern about those who have been left behind by a decade of economic growth. Mr. Powell… delivered his standard upbeat message about the health of the broader economy, but he added, ‘I want you to know that we are well aware and very focused on the fact that there are some people who are outside of that.’

“The steady expansion of the American economy has driven the stock market to record heights and dropped the unemployment rate to 3.7 percent, the lowest level in a half-century. But the gains are uneven. The wealthy have prospered while median wages have only recently started to rise at a stronger pace, and millions of adults, especially younger men, have dropped out of the work force. As is often the case, minority communities have seen the smallest gains.”

The central bank will review itself. CNBC's Jeff Cox: “The Federal Reserve in 2019 will launch a broad look at how it conducts policy and conveys what it is doing to the public. Central bank officials announced Thursday that they will look at ‘strategies, tools, and communication practices’ the Fed uses to formulate monetary policy. Such a review has been a topic of discussion at recent Federal Open Market Committee meetings. ‘With labor market conditions close to maximum employment and inflation near our 2 percent objective, now is a good time to take stock of how we formulate, conduct, and communicate monetary policy,’ Fed Chairman Jerome Powell said in a statement.”



— U.S. and China try to work it out. FT's Demetri Sevastopulo and James Politi: “The US and China have intensified efforts to strike a truce at the G20 that would curb their trade war. Negotiators stepped up efforts after [Trump], and Xi Jinping, his Chinese counterpart, spoke on the phone on November 1 and agreed to discuss trade when they meet on the G20 sidelines... Following the call, China responded to US requests to address a range of sticking points, and the possibility of concessions was discussed in several telephone negotiations between senior officials in Beijing and Washington... One person familiar with the situation said [Lighthizer] had told some industry executives the next tranche of levies was already on hold. A spokesman for the trade representative said: 'Ambassador Lighthizer has made no representations to industry executives that future Section 301 tariffs are on hold... Any reports to the contrary are incorrect.'"

Ross: Don't expect a major breakthrough. Bloomberg: "The U.S. still plans to raise tariffs on Chinese imports in January with [Trump] and China’s Xi Jinping likely at best to agree to a “framework” for further talks to resolve trade tensions at an upcoming meeting, Commerce Secretary Wilbur Ross said... When asked about a report that China this week had presented a list of possible concessions ahead of the talks, Ross said in an interview Thursday that everything leading up to the meeting is just 'preparatory.'"

(Meanwhile, Politico reports that Ross could be out of a job as part of a broader cabinet shake-up as soon as January, with budget director Mick Mulvaney talking up his interest in replacing him.) 


Prosecutors inadvertently revealed that WikiLeaks founder Julian Assange has been charged under seal, according to a recently unsealed court filing. (Drea Cornejo/The Washington Post)

— Taxpayers pitched in for Trump Jr.'s India trip. The Post's Annie Gowen: “Donald Trump Jr.’s lavish trip to India to sell his family’s luxury condominium projects cost U.S. taxpayers nearly $100,000, documents obtained by The Washington Post show. The Department of Homeland Security, responding to a Freedom of Information request, released 47 pages of purchase orders, requisition forms and planning work sheets showing Trump Jr.’s February trip cost more than $97,805 for hotel rooms, airfare, car rental and overtime for Secret Service agents. The costs were incurred on a February tour of four Indian cities — New Delhi, Mumbai, Pune and Kolkata — where the Trump family has licensed its name to luxury high-rise projects. Trump Jr., 40, is the executive vice president of the family real estate company that the president still owns, although the elder Trump says he has stepped back from day-to-day control.”


Zuckerberg tries damage control, again. NYT's Cecilia Kang and co.: "On Thursday, Mark Zuckerberg, Facebook’s chief executive and chairman, held a conference call with reporters to discuss how the social network manages problematic posts and its community standards. The call quickly went sideways. For more than an hour, the 34-year-old billionaire instead fielded questions about how he and his No. 2, Sheryl Sandberg, obfuscated problems such as Russian interference on Facebook and how the company had gone on the attack against rivals and critics. In response, Mr. Zuckerberg — at times defiant and at times conciliatory — defended the social network, Ms. Sandberg and his own record. 'The reality of running a company of more than 10,000 people is that you’re not going to know everything that’s going on,' he said at one point.

"Yet even as Mr. Zuckerberg was making his case, a furor against his company was gathering momentum. In Washington, Republicans and Democrats threatened to restrain Facebook through competition laws and to open investigations into possible campaign finance violations. Shareholders ramped up calls to oust Mr. Zuckerberg as Facebook’s chairman. And activists filed a complaint to the Federal Trade Commission about the social network’s privacy policies and condemned Ms. Sandberg, the chief operating officer, for overseeing a campaign to secretly attack opponents."

Soros wants Facebook internal investigation. The Post's Hamza Shaban: “Liberal philanthropist George Soros has called on Facebook to initiate an independent, internal investigation of its lobbying and public relations work. The call comes after the New York Times published a report claiming the company had hired an opposition research firm to discredit critics by linking them to Soros, a frequent target of conservatives and anti-Semitic vitriol from the far right. ‘These efforts appear to have been part of a deliberate strategy to distract from the very real accountability problems your company continues to grapple with,’ wrote Patrick Gaspard, the president of the Open Society Foundations, a philanthropic organization founded by Soros.”

Opinion, from The Post's Helaine Olen: "The moral and ethical rot at Mark Zuckerberg and Sheryl Sandberg’s Facebook."

— Solomon "outraged" by 1MDB scandal. Bloomberg News's Keith Campbell and Jennifer Surane: “David Solomon had a message for Goldman Sachs Group Inc. employees shaken by the firm’s involvement in a multibillion fraud scandal: This isn’t us. ‘I am personally outraged that any employee of the firm would undertake the actions spelled out in the government’s pleadings,' the firm’s chief executive officer said in a voicemail left with employees on Wednesday. 'The behavior of those individuals is reprehensible and inconsistent with the good work and integrity that defines work that 40,000 of you do every day.’ The bank’s stock has suffered since prosecutors implicated a trio of Goldman Sachs bankers in a multibillion-dollar Malaysian fraud early this month. On Monday — when the country’s finance minister said he would seek a full refund of all the fees it paid for 1MDB deals — Goldman’s shares tumbled the most in seven years.”

— Size of the gig economy is bigger than estimated. Bloomberg News's Katia Dmitrieva: “The hardest people to pin down in America’s labor market may be the gig workers: How many hours do they put in, where, and just how many are out there? The Labor Department, in a report Wednesday, said there are a lot more than thought: at least 657,000 and as many as 4.6 million more people earning income but not counted as employed, according to an analysis of data spanning 2012 to 2016. Their labor — which includes babysitting, basket weaving, and listing items online for sale — if counted as jobs, would increase total employment by between 0.4 percent and 3 percent.”


Pelosi says she has the votes to become Speaker. The Post's John Wagner and co.: "An unbowed Democratic leader Nancy Pelosi insisted on Thursday that she has the votes to become the next House speaker despite the emergence of a possible challenger who claimed party dissidents can block her historic bid. In a flurry of one-on-one meetings, Pelosi courted wavering lawmakers, paying particular attention to the incoming, majority-making class of freshmen. She appeared to make headway as leaders of the Congressional Progressive Caucus described their session with her as a “productive and successful conversation” that they would share with their 70-plus membership. The veteran Democratic leader is also relying on an aggressive outside campaign to lobby lawmakers, made up of liberal interest group leaders and high-profile Democrats, including one of former president Barack Obama’s closest advisers — former chief of staff Denis McDonough."

GOP leaders aim to avoid shutdown. But Trump isn't making promises. The Post's Erica Werner and Damian Paletta: "Trump did not commit Thursday to avoiding a partial government shutdown next month if lawmakers don’t give him money to build a border wall, a top Republican senator said, raising the potential for a high-stakes budget battle as the GOP prepares to lose its grip on Congress.

"Senate Appropriations Chairman Richard C. Shelby (Ala.) and other GOP leaders met with Trump on Thursday about ways to fund the government. Shelby said Trump did not commit to signing a bill that does not give him all the money he wants to fund construction of a wall along the Mexico border. Shelby said Trump was noncommittal about how he planned to proceed."


Coming soon

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How ranked-choice voting tipped the scales in Maine's tight 2nd District:

Maine pioneered ranked-choice voting in its federal elections this fall, and it could change everything about the way that candidates campaign — and win. (Jenny Starrs, Daron Taylor/The Washington Post)

Three charged in GoFundMe scam involving homeless veteran:

Burlington County, N.J., Prosecutor Scott A. Coffina on Nov. 15 announced charges against three people involved in an online fundraising scam. (Reuters)

Saudi prosecutor seeks death penalty for five suspects in Khashoggi killing:

Saudi Arabia's public prosecutor said Crown Prince Mohammed bin Salman had no knowledge of the operation. The CIA's latest findings contradict that assertion. (Joyce Lee, Jason Aldag, Monica Akhtar/The Washington Post)