Will record business debt trigger a financial crisis? And what will it do to stocks?

Total US business debt has surged to $32 trillion, three times as big as household mortgage debt, and over twice as big as total household debt. In 2008, the $10 trillion in mortgage debt was one of the factors that triggered the Financial Crisis. So when this business debt blows up, will it trigger a financial crisis? (11 minutes)

It was an ugly Thanksgiving week. One after the other, individual stocks are coming unglued. Read…  Why I Think this Sell-Off is Just One Step in Methodical Unwind of Stock Prices

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  47 comments for “THE WOLF STREET REPORT

  1. michael says:

    A very good report. I like these audio portions, you have a great audio presence.

    The thing I dislike in these share buybacks are that the average worker that depends upon a salary is being robbed by the CEO’s and boards. The big guys get to collect inflated stock options and look like geniuses for essentially fraud. They will walk away from the wreck and never look back.

    I feel sorry for the folks at GE, Toys r us, Sears, IBM, etc. The average worker loses his employment and whatever meager pension they have relied upon after years of dedicated service.

    • 2banana says:

      Pensions, by law, are separate from the business. Doesn’t mean they can’t fail or be underfunded but their assets are supposed to be “safe” from being raided.

      Any sane employee should sell his employer stock if that is accumulating in a 401k or profit sharing plan. It should be no more than 5% of investments.

      Buy backs are a fraud when done with borrowed money.

      • Bobber says:

        “Buy backs are a fraud when done with borrowed money.”

        They are a direct response to the larger fraud that occurs when central banks print money out of thin air, reducing interest rates to near zero or below zero, loading the economy up with debts that will never be repaid, thereby STEALING wealth from the future generations. This is what spineless whimps do – run from challenge and leave it for the next guy to deal with.

        • MD says:

          …but that’s just a response to a systemic issue of the need for perpetual growth in stock price, against a backdrop of falling wages.

          To pay people less to increase profits, but to then expect ever-increasing profits despite there being lower demand due to lower wages is patently a nonsense.

          Hence you get a nonsense response to a nonsensical problem – in the form of zero/negative interest rates, and companies devouring themselves by gorging on cheap debt to buy their own stock keep large investment funds happy.

          CB manipulation isn’t the cause – it’ a symptom of a ridiculous model of ordering an economy.

  2. ben says:

    with the fed doing away w/ QE and slowly increasing interest rates, the result is going to be increased amounts needed to service the all existing debt at some point in time

    since the report mentioned pension funds in passing, perhaps you might find this interesting

    this “link” is a redirect to a PDF on google docs, that outlines a big problem with various public pension portfolios (w/ in California) which are insolvent

    sadly this is another head wind for the economy, which politicians and bureaucrats do not want to admit is happening because they in fact caused the problem(s)

    • 2banana says:

      Except that pensions love bonds and love a decent interest rate coupon.

      Easy to predict returns with little risk.

      Try again.

  3. Laughing Eagle says:

    Wolf the 10 trillion in mortgage debt was not was total cause of the 2008 financial crisis from all the reading I have reviewed since the 2008 crisis. It was the bleed over into the derivatives market which was around $500 trillion as in CDS and MBS which were bought worldwide. They bailed out AIG or Goldman would have failed. Wall Street did not want anybody to know about the derivatives because they could not afford any regulations on derivatives. It is their cash cow. That is why they left Lehman fail, because they needed a diversion away from the derivatives. Read “ The Fed and Lehman Brothers” by Laurence M. Ball (2018) where the subtitle is “Setting the Record Straight on a Financial Disaster”. Lehman had enough collateral to prevent its bankruptcy.
    That is why the Fed had to secretly loan $16 trillion to American and Foreign banks after the crisis. Banks could not trust each others collateral based in MBS, so banks stop lending to each other and credit markets froze, especially after Lehman was FORCED into bankruptcy.o

    • alexander says:

      *AIG was financed because it wrote > half of all insurance in the USA, was not bankrupt, and its failure would have had a catestrophic effect on businesses and households. The claim that it was done so to prevent GS from failing, is conspiracist rubbish, which lacks evidence.
      *Lehman failed because a/ it WAS bankrupt and b/ no purchaser fronted up to buy it. simple as that. the company was cactus. The Fed had no power to assist as – unsurprisingly – the Fed cannot lend to a bankrupt bank. duh.
      *Nothing the Fed did or does, is “in secret”. if it was “in secret” then you wouldnt know about it, would you?

      • Dale says:

        The $16 trillion in loans were ‘secret’ because they were not disclosed. Instead, Bloomberg exposed the loans, which later were confirmed by the GAO. Do you remember all of the arguments over TARP? TARP was only a few hundred billion, and were unnecessary as the Fed had already allocated forty times as much money to backstop the financial sector.

        • rhodium says:

          Yep, I remember arguing with an acquaintance back in the day about how there was a lot of evidence that the fed had secretively lent trillions to hold up the banks. He said that was all a conspiracy theory and that until it was a verified fact I was crazy… Well it was verified not too long after that and I felt quite vindicated, but the point of the story is not to be more skeptical of government denial, but to not discount the lengths the fed will go to save the system. If you’re an investor these days you have to always consider the fed, because they have the power to influence so much of the system.

      • Laughing Eagle says:

        Wow. Whenever I see the word conspiracy used, I wonder who is speaking because that term was first used by the CIA. Anyone who does not like the message today uses conspiracy to belittle the message.
        Read “Repercussions: The Impact of the AIG Bailout on its Insurance Subsidies”. It was the Fed with its bailout that started the market to downgrade AIG insurance subsidiaries. And why bailout AIG FPG because the biggest losers were going to be only Goldman with $14 billion in CDS and Societe Generale with $16.5 billion. So the Fed does all it can to save banks and everything else is collateral damage.
        Alexander you need to read more and not rely on conspiracy labels.

    • pogohere says:


      As it happened, Washington drew the red line at AIG the day after the Lehman failure. Yet the relevant facts show that an AIG bankruptcy would not have started a chain reaction – – that there never was a financial doomsday lurking around the corner. In fact, none of the bailouts were necessary because the meltdown was strictly a matter confined to the canyons of Wall Street. It would have burned out there on its own had Washington allowed the free market to have its way with a handful of insolvent institutions that needed to be taken out: Morgan Stanley, Goldman, and Citigroup, among others.

      In short the financial “contagion” predicate, which triggered the bailout madness of the Bush White House and the Bernanke Fed, had no basis in fact. And the proof starts with AIG, the bailout poster-child itself, and the alleged catalyst for the purported chain reaction. The plain fact of the matter is that AIG was structurally incapable of starting a contagion. Any modest hits to the balance sheets of a handful of its huge, global banking customers owing to the collapse of it’s bogus credit default insurance (CDS) would have caused a healthy purge of busted assets. At the same time, its millions of insurance policy holders were never in harm’s way; they were always a pretext to obfuscate the real purpose of the Washington bailsters.

      At the time of the crisis, 90 percent of AIG was solvent and no danger to the financial system or anyone else. It’s $800 billion balance sheet consisted mostly of high-grade stocks and bonds that were domiciled in a manner which utterly invalidated the contagion theory. Indeed, this giant asset total was a statistical artifact of AIG’s consolidated financial statements: it’s massive horde of high-grade assets was actually parceled out into scores of insurance subsidiaries subject to legal and regulatory jurisdictions scattered all over the globe. Those lockups both protected policyholders and ensured that there would be no massive asset – dumping campaign by AIG, the presumptive catalyst for the contagion.

      So the crisis did not implicate AIG’s vast assets. It was actually all about its hemorrhaging CDS liabilities – – which could have been easily ring-fenced. They were domiciled exclusively in AIG’s holding company and accounted for less than 10 percent of its consolidated liabilities. These obligations could have been readily liquidated in bankruptcy without any disruption to the insurance companies, their solid assets, or their policyholders.

      Nevertheless, AIG was handed a massive and holy unwarranted taxpayer – funded infusion that ultimately totaled $180 billion. Hank Paulson, the most destructive unguided missile ever to rain down on the free market from the third floor of the US Treasury Building, later claimed, “If AIG went down, we faced real disaster. More than almost any financial firm I could think of, AIG was entwined in every part of the global system, touching businesses and consumers alike.”
      . . .

      The paper trail uncovered by Congressional investigators shows that the $400 billion (notational value) of busted CDS insurance issued by the AIG holding company was held by a very small number of the world’s largest financial institutions, and virtually none of it was held by the banks of Main Street America which were allegedly being shielded from AIG’s imminent collapse. Moreover, the worst – case loss faced by the dozen or so giant institutions actually exposed to an AIG bankruptcy would have amounted to no more than a few months bonus accrual.

      . . .

      As the Congressional investigators later determined, AIG’s big-bank customers were actually supplied cash from a multitude of bailout spigots that aggregated to truly stunning magnitudes. This evidence also shows that each and every recipient institution had the balance sheet capacity to absorb the AIG hit, so the bailout was all about protecting short-term earnings and current – year executive and trader bonuses. That is the shocking truth of what the AIG bailout actually accomplished. Saddling innocent taxpayers with business enterprise losses generated on the free market is always an inappropriate exercise of state power, but shattering policy rules and precedent in order to vouchsafe the bonuses of a few thousand bankers is beyond the pale.

      Not surprisingly, Goldman Sachs was the largest beneficiary of taxpayer largesse and was paid out nearly $19 billion on its various claims against AIG. But many of the other financial behemoths were not far behind, with a total of $17 billion going to France’s second largest bank, Societe Generale, while $15 billion was transferred to Deutsche Bank, $14 billion to Bank of America and Merrill Lynch, and nearly $10 billion the London-based Barclays, which also got the corpse of Lehman as a consolation prize.
      . . .

      In fact, at the time of the crisis the dozen or so giant international banks that got the AIG bailout money had $20 trillion in assets among them. By contrast, even in the worst-case outcome in which the banks lost twenty cents on the dollar for the mostly AAA paper (i.e., “super-senior”) insured by AIG, their collective exposure to losses amounted to $80 billion at most.

      Washington thus threw stupendous sums of money at AIG in a craven, discombobulated panic, yet these subventions amounted to just 0.5 percent of the elephantine balance sheets of the big global bank customers.

      Stockman, “The Great Deformation” 2013, pp5-8

  4. Lt says:

    Great report Wolf, thank you.

    While I would love to avoid another financial crisis, there are just so many variables. Student loans: default rates are rising, an entire generation mired in debt. Auto and home loans: if prices fall, I think ppl will be even more apt to walkaway from loan obligations, the last crisis set a horrible precedent where ppl could walkaway with little to no consequences.

    Between Bitcoin, FANG stocks, oil and gas just recently, a lot of wealth has been destroyed in a very short time. I suspect more like will surface soon. This will ripple through the economy and consumers.

    • 2banana says:

      Speculation and bubbles are not “wealth”

      Debt is not “wealth”

      • Nick says:

        No but all the farmland, real estate, mines, expensive art, gold, yachts, sports cars, etc. that the speculation and bubble money bought certainly are. Ted Turner owns millions of acres in Montana. Think rich like him are worried about anything? Meanwhile, Americans can’t even own enough land on average to plant a frickin garden. America is done, stick a fork in her. The middle class is dead and indebted. No way out except violent revolution. It’s disgusting, a once prosperous, thriving country basically destroying the future of it’s children in a matter of half a century. Pathetic actually. But make no mistake about it, it’s all been planned.

      • Unamused says:

        ->Debt is not “wealth”

        Sure it is. If I borrow a billion dollars, that makes me a billionaire. It’s the bank that’s poor.

        • 2banana says:

          So folks making $80,000 a year and who borrowed $1 million to buy a crack shack in San Francisco are millionaires?

          They don’t feel like millionaires. Or act like it.

          They are debt slaves.

          And now many are underwater.

  5. Lisa Murphy says:

    I’m tripping out on your accent. It sounds like a cross between Austrian, German, Australian and Texan. I think there might be something else in there but I can’t put my finger on it.

    • Dan Romig says:

      If I recall correctly, Wolf lived in Luxembourg for while???

      How many languages do you speak Wolf? And as always, thank you for this great website!

      • Wolf Richter says:


        1. Belgium (in Ixelles, French-speaking part of Brussels). Which is just a short train ride from Luxembourg, as these countries are small.

        2. In that order: English, French, German, Spanish. Attempted but failed miserably to learn Japanese :-]

        I came to Texas-Oklahoma (bouncing between the two) when I was 17 and left when I was 45. When I moved from there to the East Coast, people made fun of what they called my “southern accent,” which I gather was stronger than I had thought. People can be a little snobbish out there. So I tried to tone it down. In California, no one cares. But also, throughout my life, there were periods when I was overseas.

        • California Bob says:

          “In California, no one cares.”

          Another reason we love California!

  6. OutLookingIn says:

    As of the end of the first half of 2018

    Corporate debt in 2007 was $5.3 trillion
    } 62% rise
    Corporate debt in 2018 was $8.5 trillion

    This current debt is composed mostly of junk and levered loans with no protection. This is $5.5 trillion of debt thats now too hot to handle as the Fed is determined to raise rates higher.

    Exec’s vote themselves healthy amounts of stock and options, then vote for their stock buybacks, take their big bonuses, cash out their stock and head for the exits.
    Just in the month of May 2018 alone, buybacks set a record high of $171.3 billion.

    The most recent (June 30 2018) twice yearly Bank of International Settlements report on the over-the-counter markets sits at $532 trillion.

    When this grotesque hidden from view, rotting mass of valueless waste paper explodes, the resultant catastrophic debris field will take generation or two to clean up. If ever.

  7. ISMAR says:

    Excellent analyse Mr Richter debt+more debt=debt implosion ?control démolition.

  8. Rob says:

    Page 23, $15Tn or so Corporate debt o/s on a $20Tn economy.

    Financial debt is double counting.

    Its up from about 2/3rd GDP in 2008 to about 75%, so yes its up.

  9. kevin says:

    Corporate debt is only one piece of the jigsaw of the global debt binge.

    And considering the global debt explosion (including the use of debt as enslavement mechanism of the under-developed world by the likes of IMF and the World Bank) is a further part of the bigger political & social superstructure that is being put into place.

    However, like the vast majority of clueless or incredulous people of the world, if you’re only looking at the financial aspects of this, you will NEVER truly grasp what the reality actually is, and the primary driving force of our financial history and geo-politics since the end of WW2.

    There are many levels to this conundrum and financial fraud is only one of many cogs in the machinery of the deep state.
    In fact, I would argue that this goes as deep as the secret underground bases and their off-balance sheet programs that the shadow government and military has spent trillions on over many decades.

    One would have to have a certain breath of mind to be able to truly encompass and peel away the many “protective layers of truth” (to para-phrase the words of the late Neil Armstrong).

    If you want to know why there is a need for so much debt, and where a large portion of all the money has disappeared to, then you have to follow the money trail…into SAP (no, i don’t mean the computer company ;) the Black Budget and even the SSP (or the “Space Force All the Way!” that Trump tweets about. lol )

    This is one long interview on the many levels of global fraud but well-worth listening to carefully:

    WARNING & GENERAL DISCLAIMER: Don’t go too far into the rabbit hole if you can’t handle it, or you might just lose your sanity; with things getting “Curioser and Curioser!” as Alice in Wonderland is wont to say.

  10. Marcus says:

    Okay, just realized that I now look forward to the WS Report.

    I already loved the site, because you somehow manage to lead discussions that help me learn without the typical online political name calling. WS is all about business. The audio report builds so well on the written topics.

    Keep it coming!

  11. MC01 says:

    I have two questions.
    First, when will the stock buyback trend reverse and we’ll see ailing public companies issue more stocks to raise more capital? Last week I picked up a local newspaper in Italy and the first thing I noticed was a communication by one of those small banks sitting in the eye of the NPL maelstrom announcing an “extraordinary” shareholder meeting to seek approval to “issue €67.000.000 or more worth of new stocks”.
    A company with such a high profile (and such a negative cashflow) as Netflix should be able to raise billions in new equity without breaking a sweat, especially if they start issuing shares with no voting rights such as FaceBook and Alibaba did.
    Second, will we see the Reverse Yankee market return in high gear? So far 2018 has not been a good year for RY despite extremely favorable spreads (200bps at last check): issuance is down 48% year on year.
    It’s likely that spread will open even further next time Mario Draghi opens his mouth (if only to drink a glass of water) and given hos successful have RY been so far it would make an awful lot of sense to ride that horse until it drops dead from exhaustion.

    • Wolf Richter says:


      I’ll take a shot at your first question. Share buybacks are still happening at a record pace. At some point, investors will get worried about the debt levels of these companies and will dump the shares despite or because of the buybacks. After the share price got punished sufficiently, buybacks peter out and the company just tries to stay liquid. See GE.

      This happened during the Financial Crisis on a large scale across the board. Companies like to buy back their shares when share prices are high, and when credit is plentiful and cheap.

      When Tesla or Netflix raise money, given their high share price, they could do so — and they have done so — by issuing more shares. But this is dilutive to existing shareholders, and share prices can take a hit. So they issue debt instead. And investors buying those bonds feel assured by the high share price because they feel that the company can always service its debts by issuing more shares. As long as their share prices are high, they will be able to raise money. But once the share price plunges, suddenly raising money gets very difficult and very expensive. So these companies depend on their high share price to stay liquid. This is a very risky proposition.

      • 2banana says:


        Default on a bond payment and you are bankrupt. The bond holders will then own the company and stock holders will be wiped out.

        Dangerous game to play.

      • OutLookingIn says:

        Wolf –
        Exactly the case in what’s happening at General Motors.
        They bought back their shares when the price was high +$30 and now that the share price is threatening to become a penny stock, they are firing people and closing plants around the world in an attempt to stop the financial hemorrhaging.

        It has been announced this morning by GM that they will be closing 5 plants in the US, 1 in Canada, and 1 in Korea. Along with paring down their salaried workers by 15,000 heads.
        Contained in the announcement was this little jewel:
        “GM expects to fund the restructuring costs through a new credit facility that will further improve the company’s strong liquidity position and enhance its financial flexibility”. ZH

        If GM is enjoying a “strong liquidity position”, why seek a “new credit facility” to effect a cost cutting course?
        GM seeks to “enhance its financial flexibility”, just what does that mean? I suspect they have painted themselves into a corner and there’s no more wriggle room left!

      • MC01 says:

        Thank you very much for the explanation.

        It somehow makes Netflix look a little bit worse than it already seems.

      • Michael says:

        WOLF – What do recommend to someone who is just starting out and looking to build wealth in this financial storm? I am 34 yrs old, married, a homeowner with two kids with a third one on the way. What kind of financial advice for investments etc. would recommend? Are there any good assets out there that would be great to get into now?

        Thank you,

  12. raxadian says:

    To sum it up, the 2008 crisis was caused because banks lend money to a lot of people who was not going to be able to pay back in long term and then they forgot to get rid of that toxic debt bonds in time. Hence why it had the name “subprime” that’s lingo for “trash even a starved dog would eat.”

    This current bubble is mostly gone because it has been financed by the FED making up money by using super low rates and other countries even going by negative interest rates, but that’s changing and so debt is getting pricier and pricier and a lot of companies like Tesla and Netflix need cheap debt like a sick man needs his medicine. And companies who should know better used cheap debt to inflate their stocks and now that effect is disappearing.

    The end result: At best many companies will die but we won’t get a big economic crisis just another Tequila effect kind of thing, at worst we will have a cascade effect that will make the 2008 crisis look like a joke.

  13. lenert says:

    Meanwhile health insurance PREMIUMS for a 50’s couple with over $75K will be 20% of income next year.

    This is a darn tasty Caesar salad.

    • timbers says:

      Well, we maybe we just need to make healthcare like Wall Street and continue to finalize it.

      Maybe we should add another layer of grift and parasites to America’s health system – let folks take out loans to pay for those premiums…surprised that was not included in the ACA. But then, the ACA was written by insurance corporations (Liz Fowler of WellPoint) so I guess it never occurred to her at the time. And the Little People who would actually use the healthcare were excluded and ridiculed by the folks in power for advocating what most of the rest of Planet Earth has at half our cost with better outcomes (“I will never, ever support single payer” because my ultra rich donors told me not to).

      Maybe ACA it can be “improved” by exempting Medical debt from bankruptcy protection – like student loans.

      We could even divert the Medicare tax – which the geniuses at the Fed have so helpfully informed us are causing all those nasty deficits – and give it to Banks, who would then give it to insurance insurance corporations (after charging fees and interest of course), who will give to insurance corporations CEO bonuses who earn their bonuses by spending the Medicare tax on their own stock buy backs.

  14. smiley says:

    I read your site with breakfast every morning and also enjoy your WS report, which is more likely to be read by my spouse and millennial children who have no patience for written financial commentary. I agree that GE is the poster child for the corporate debt time bomb. When GE announced they were moving from Fairfield Connecticut to Boston for a “better workforce”, the local and national media praised GE and mourned the demise of Connecticut as a business magnet. What are they thinking now?

    • 2banana says:

      GE moved to Boston from Fairfield for lower taxes.

      That is how screwed up Connecticut is.

      Massachusetts is a lower tax and more business friendly destination.

  15. How important are these highly indebted companies to the US economy? Not much really. In the first tech bubble there was the entire PC business, which is integral to business. I dont’ see Netflix and Tesla as integral to anything

  16. petedivine says:

    I enjoyed the audio commentary. I thought it was very thought provoking. However, once again I find myself the slow man on the uptake. If the banks don’t have exposure to corporate debt and I recall from a previous article that lending entities such as Quicken Loans have replaced banks in the mortgage industry…what exactly is the role of your traditional banks in society? Are they just entities buying Treasuries and parking excess reserves at the Fed for their monthly dividend check? If they have no exposure to the real economy, what exactly is their purpose?

    • Wolf Richter says:

      The banks are exposed to corporate loans. But that’s only a portion of the total corporate debt outstanding. And as I said, they will get hit, but they’ll survive.

  17. Jason says:

    and the auditors will remain unscathed!

  18. Only in a 100 percent rigged fraud three ring circus sideshow known as the U.S. stock market could it be possible to see companies buying back shares at 6 to 10 times fair market valuations. The corporations back in the summer of 1929 had a better chance with buying back stock or shares than today. This is nothing but criminal fraud perpetrated by the central bankers telling corporations we’ll rig the stock market to the moon… sure buy back those shares.

  19. Richard says:

    Excellent commentary, Wolf. Any chance of a transcript?

    • Wolf Richter says:

      Thanks. No chance :-]

      Also, the transcript would be very very long, about three times my standard article. So just listen to it while walking your dog or sipping your favorite beverage, with your eyes meaningfully focused on the glass.

  20. NotBuying says:

    Wolf, you said at the end, “things have been good for so long”… what about those of us that started investing -after- the everything bubble expanded into what it is now? Cash position in a high interest bank? PMs? Bonds? I am very hesitant to put my money into a poorly performing 401k portfolio, there’s too many negative factors swirling around us and it would be silly of me to blindly contribute to the system in the shape that it’s in now.

    • Wolf Richter says:


      These are truly tough times if you recently started investing. Try very hard not to buy at the top :-]

      Tomorrow morning I will publish an article about bond funds. Read it carefully before you invest in bond funds at this point in time.

      At the moment, I like 1-3 year high-quality bonds (own them outright, rather than a bond fund); this could be Treasury securities (easiest). Brokered CDs offer similar rates, usually slightly higher than equivalent Treasury yields.

      I think the times of making a ton of money very quickly are over.

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