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Last night I was at a gathering and spoke with a neighbor who is a commercial loan officer of a small local bank with five (5) branches. I asked him how business was and he said relatively good. He then went on to say his bank is now using an "efficiency" methodology for pricing loans and this is having the overall effect of greater cherry-picking and higher interest rate spreads for the new loans. I asked if private equity credit was being seen in his space. He said yes and then went on to give the following information:
a. Loans his bank had originated and were holding are being closed as commercial business customers (note: we are talking about customers who are modest sized local business entities) later get loans from private equity and repay his bank.
b. His bank will not make a loan unless there is recourse: someone has agreed to make it good either personally or pledging their company assets should they (the customer) be unable to make loan payments.
c. The private equity loans are non-recourse. Non-recourse means the respective company can say, sorry, I can no longer make loan payments, and there is no string to the owner's assets for the private equity firm to pull on to bring back their investment.
d. The private equity loans are issued at competitive rates to the bank.

Years ago I loaded up on BAC three (3) days before Buffett did (he got a much better deal from BAC management than I did). Over the years we have lightened our BAC position somewhat, cut the remainder in half last year and fully exited a week ago on May 19. In my view, banks are in an untenable space going forward as the various bank controls tie their hands, private equity takes a greater share of their commercial business and innovators chip away at other parts of their space. In the past fifteen years large banks have increased profits primarily through reducing head counts and offices. While there are undoubtedly more costs banks can reduce, methinks most of the low hanging fruit has already been harvested.

I do not know where this is all leading. Like Jamie Dimon said earlier this year, the rise of private equity lending may lead to "potential heck to pay" during a business recession for those retail investors who put their 401K money into the new private equity load vehicles and for those companies who find themselves being strong-armed by desperate PE managers looking to find a find a way to pull on strings despite the non-recourse nature of the loans they made earlier.

My concern is how there still may be loans on large bank books made to individuals or companies that, in turn, have positions in private equity firms. In the event of a business and credit downturn, those zombie loans would pull on the big banks despite all of the Federal Reserve audits and ratings we have been using to evaluate banks.

Again, I am pretty much trying to make sense of "shadows on the cave wall". Because I cannot make sense of the shadows, exiting BAC was my choice for the place to raise cash in our portfolio. I'd love to hear any opinions or information about the above topics from my fellow BRK board members.

Uwharrie

c. The private equity loans are non-recourse. Non-recourse means the respective company can say, sorry, I can no longer make loan payments, and there is no string to the owner's assets for the private equity firm to pull on to bring back their investment.
d. The private equity loans are issued at competitive rates to the bank.

Sounds like Private Credit rather than Private Equity. Private credit has been growing steadily since the end of the GFC. There is concern that Private Credit could pose some systemic risks - https://www.brookings.edu/articles/what-is-private...

I had written a long 4 paragraph reply, but it got eaten by the browser before I could post it. Darn!

I had written a long 4 paragraph reply, but it got eaten by the browser before I could post it. Darn!

I learned long ago at the original TMF boards (R.I.P.) to write my post in notepad or other text editor on my computer, and then copy/past it into the board's post window, then hit preview and if it looked okay hit post.

The TMF board had a tendency to erase my text.
shrewdm is far better in that regard.

SME lending seems to be more the domain of local and regional banks and not so much the big money center banks like JPM and BAC.

However, there has been discussion of Private Credit going after larger loans - big M&A deals, restructurings, bankruptcy liquidity.

There's even been talk of Private Credit bringing deals to the money center banks so that they can syndicate and spread the credit risk around bigger groups.

I think the systemic risk could be in annuities and life insurance. Apollo merged with Athene and other Private Credit firms are trying to do the same.

They have credit assets, they collect premiums from annuities/life policies, and then they invest in private credit and other alternative assets.

Theoretically it makes sense to have long lived assets paired with long lived liabilities.

...write my post in notepad or other text editor on my computer, and then copy/past it into the board's post window, then hit preview and if it looked okay hit post.
The TMF board had a tendency to erase my text.
shrewdm is far better in that regard.

Yes, I noticed both of those.

I just hit ctrl-a ctrl-c from time to time while typing and use my paste buffer as a backup. But as you note, we no longer have the serious problem that TMF had the last couple of years we were there.

Jim

They have credit assets, they collect premiums from annuities/life policies, and then they invest in private credit and other alternative assets.

Theoretically it makes sense to have long lived assets paired with long lived liabilities.

The word "theoretically" is doing a lot of work there. This is going to blow up. Many of the assets they are investing in are their own "long life" funds and vehicles, with their own leverage and management with the same set of blind spots. Reminds me of Enron's pension assets having been invested in Enron stock.

Jim

I just hit ctrl-a ctrl-c from time to time while typing

Omg, are we all really that old here that this goes without explanation? 😂

Omg, are we all really that old here that this goes without explanation?

Older than you might suppose. I'm also fluent in both vi and emacs yank buffers. You can always tell the emacs folks, they can bench press with the left pinkie.

Jim

You can always tell the emacs folks, they can bench press with the left pinkie.

Likewise you can always tell the TECO folks, they hit escape-escape more often than they hit return.
The challenge, and the true mark of a TECO hacker, was to write the shortest self-replication set of TECO commands. I think I once got it down to 20 keystrokes.

I'm also fluent in ... vi

I thought vi was the greatest thing ever! I was slow to get a computer with a mouse because I thought it was wasted motion to take my hands off the keyboard!

Oh, man ...

Baltassar

<< Older than you might suppose. I'm also fluent in both vi and emacs yank buffers. You can always tell the emacs folks, they can bench press with the left pinkie. >>

I was an early convert to Spacemacs and even a moderator on one of their forums.

For the past few years I've been using Doom Emacs, which I've integrated
into my email and browser editing. With org-mode, magit, and other emacs
packages, I have reasonable control over my workflow in a customized
framework.

Both Spacemacs and Doom Emacs use Evil Mode as a core component, enabling
vi-style modal editing within the Emacs editor.

-Rubic

Vi finger macros for the win!

And if pressed, I can still use ed in a pinch.

The TMF board had a tendency to erase my text.
shrewdm is far better in that regard.

At the Fool I used to lose a post every month or two, would curse at the machine, go to double-working the post in some other application, transfer it over, etc. for a week or two, then lazily go back to direct posting. And then it would happen again.

Several years now, I have yet to lose a post at Shrewdm. Makes me think all that claptrap about how hard it was to “keep the code in line” was just a bunch of lame excuse making for having shitty code in the first place.

I can't speak to the credit risk aspect of bank lending vs P/E lending - but banks (at least Federally-chartered banks) have two big competitive advantages over P/E firms and other non-bank lenders. I think these advantages are significant and durable.

1) Banks create deposits when they extend a loan. This power comes from their Federal charter. People sometimes believe that this process operates in reverse (ie, banks must "gather" deposits first, then lend). The way I think about it is that a bank monetizes your IOU by creating a deposit which you can then spend. Of course, your deposit may move to another bank but in aggregate across the US entire banking sector a loan creates a loan asset and a deposit liability for the banking sector. And of course, for the non-bank private sector this is matched with a deposit asset and a loan liability. In addition, these deposits below a certain level (and sometimes above, I'm looking at you, SVB!) are guaranteed by the FDIC. Of course, banks pay a fee for that insurance but its still a huge advantage.

Other non-bank lenders can't create deposits out of thin air when they lend. They must first gather them or borrow and add capital in order to lend. Capital raising is expensive and banks have a competitive advantage here, IMHO.

2) Banks (again I'm talking Federally-chartered banks) have "checking" accounts at the Federal Reserve that gives them a "monopoly" on payment clearing (via Fedwire). If a P/E firm lends to you, they still have to deposit the funds in a bank before you can spend them. Here too, this is a competitive advantage for the banks. In fact, all forms of Federal government spending first move through the banking system (i.e., the US Treasury issues an order to the Federal Reserve to move settlement balances from its General Account to, say, JPMorgan's settlement account at the Fed. This settlement transfer immediately "lights up" electronically a corresponding deposit liability for JPM and a deposit asset for the holder of that deposit account at JPM. P/E firms don't get this flow of funds because they don't have accounts at the Fed.

Perhaps this all changes in the future and more institutions get accounts at the Fed. But for now, I think these are two huge advantages for the US banking sector over all other non-bank lenders. P/E firms could try to own a bank but that comes with a host of regulations and disclosures that they may not have the appetite to take on.

FWIW. Apologies if this old hat for everyone here.

Bill

Emacs, Vi, Teco: Thank you, guys, as contrary to you I didn´t experience the Great Depression and the Black Thursday I am feeling much younger now.

vi has two modes. Beep or ruin everything.
Emacs is for ctrl-freaks.
Never heard of TECO. Is that like Microsoft Word aka stolen Wordstar? 😀

Of course I use vi like all real men. Except for shell command line editing, feels weird to lift your fingers for escape-0 or escape-$ instead of ctrl-Aor ctrl-E.

I just hit ctrl-a ctrl-c from time to time while typing

Omg, are we all really that old here that this goes without explanation? 😂

Old? This still works in Windows, perhaps the most common operating system in the world. Even for young people.

R:)

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