This week, leveraged loans received scrutiny from the House Financial Services Committee, the chairman of the SEC and the media. President Donald Trump announced his top choice for SEC commissioner, a veteran of the agency who will fill the fifth commissioner slot and restore the commission to full staff. Finally, the Chamber of Commerce released its list of the most business-friendly legislators based on their votes last Congress.
Leveraged Lending Draws Renewed Concerns
Leveraged lending continues to be a topic of concern in Washington as Congress, regulators and news outlets questioned the risk such loans could pose during an economic downturn.
House Committee “Megabank” Accountability Hearing
On Wednesday, the House Financial Services Committee held a hearing where CEOs of seven of the largest banks in the country testified on the safety and soundness of their institutions in the post-financial crisis era.
When questioned about the areas of potential risk in the financial sector, some witnesses identified leveraged lending. David Solomon, chairman and CEO of Goldman Sachs, cited leveraged lending and student lending as areas of concern. He added that such lending increasingly involves so-called “shadow banking” and other nonbank vehicles that are less regulated and transparent.
James Gorman, chairman and CEO of JPMorgan Chase & Co., said he does not believe leveraged lending is inherently dangerous, but the amount of credit in the corporate sector is large by historical standards and should be watched closely. The leaders of Citigroup and Bank of America agreed.
Remarks from SEC Chairman
While he didn’t share the same concerns regarding leveraged loans, SEC Chairman Jay Clayton said he does have concerns that leveraged loans could hurt liquidity in a downturn. Speaking earlier in the week, he characterized the loans as “a case where liquidity expectations may be out of whack.”
Clayton explained to reporters that during an economic downturn, the lenders holding leveraged loans on their books may not be able to receive payment for those loans from highly indebted companies— which in turn could hurt lenders’ ability to pay their own obligations.
Reporters Hone In
An Axios Markets newsletter this week summarized fears about the proliferation of leveraged loans. Explaining how these loans evolved, Axios highlighted the growth of “covenant-lite” loans, which have fewer safeguards than traditional loans.
The article also conveyed worries over consumer debt, which has suffered from artificially inflated credit scores that have risen over the past decade and “[mask] the real danger the riskiest borrowers pose…”
Axios noted an economic downturn could lead to a wave of defaults as cash-strapped borrowers struggle to make payments, but said a repeat of the 2007 systemic failure is unlikely.
Amid increased attention to the leveraged loan market by policymakers and the media, it is important for those in the leveraged lending space—both originators and borrowers—to be prepared to engage on these issues. They will likely remain a focus, especially with a Democrat-controlled House.
Allison Lee to Be Nominated for SEC Commissioner Role
President Trump announced he will nominate Allison Lee for the open SEC commissioner role. Lee served as counsel to previous SEC Commissioner Kara Stein, whose seat she is expected to fill.
Currently a partner at Denver-based law firm Sherman and Howard, Lee served on the commission’s Complex Financial Instruments Unit as senior counsel, in addition to other positions, from 2005 to 2018.
If confirmed, Lee will join the right-leaning SEC Commissioner Jay Clayton, Republican Commissioners Hester Peirce and Elad Roisman, and Democratic Commissioner Robert Jackson. With the appointment of a fifth commissioner, the SEC will no longer have potential stalemate votes on important issues under its purview.
U.S. Chamber of Commerce Releases “Perfect Scorecard” Legislators
The U.S. Chamber of Commerce, a top advocate for businesses across the country, released its list of the seven lawmakers it considers most friendly to the business community.
The Chamber made its decision based on votes in the 115th Congress supporting legislation that would stimulate economic growth and American job creation. Sens. Johnny Isakson, R-Ga., Mike Rounds, R-S.D., Lamar Alexander, R-Tenn., and Reps. Fred Upton, R-Mich., Elise Stefanik, R-N.Y., and Michael Turner, R-Ohio, all voted in favor of supporting businesses in critical Senate and House votes identified by the Chamber.
Strengthening relationships with members of Congress who understand and support pro-business policies is a key component of ACG’s public policy agenda. Members of Congress that support the value of pro-growth policies, such as those identified by the Chamber, are essential to the continued strength of the middle market.
Are you an ACG member who enjoys reading the public policy roundup? Join our Public Policy Interest Group to receive even more in-depth coverage of federal policy activity impacting the middle market, as well as opportunities to help shape ACG’s advocacy efforts.
Maria Wolvin is ACG Global’s vice president and senior counsel, public policy.
Ben Marsico is ACG Global’s manager of legislative and regulatory affairs.