Alarm bells over US lending standards

0:02Good morning from the Financial Times. Today is Thursday, September 25th. This is your FT News Briefing. A French bank is updating its policy on defense companies, and U.S. debt investors are worried about lending standards. Plus, Hong Kong and Singapore want to become hubs for gold trading. But do they actually have a shot? I'm Mark Filippino, and here's the news you need to start your day.

0:35BNP Paraba has quietly dropped a pledge to finance controversial weapons as it tries to boost its work with defense companies. That's according to people familiar with the matter. It was part of an update to the bank's defense and security sector policy earlier this year. Sources told the FT the term controversial weapons, which BNP Paribas has kept around since 2010, was deemed to be too broad. Now, this shouldn't come as a total surprise. European countries are going through a historic rearmament push, and banks want to get in on the business from that expected boom in weapons manufacturing.

1:17U.S. debt investors are worried about lax lending standards in credit markets. Trey Colore, a subprime car lender, collapsed earlier this month. Now, a car parts supplier called First Brands Group is preparing for bankruptcy. Eric Platt is our U.S. investment editor. He's here to talk about why all this could signal an even bigger problem in credit markets. Hi, Eric. Hey, how's it going? Doing well. So, Trey Colore, Tricolor, it's been pronounced a couple of different ways, and this other company, first brands. Why are people freaking out about these two together? So on their own, there are defaults all the time in corporate America.

1:56Companies have financial issues. They can't pay their debts. They have to restructure. That's par for the course. What we're seeing here is two really just sudden unraveling of businesses. And both of these businesses. We're also tapping investors in markets that are usually quite safe and have been seen as the place you would go if you're really trying to safeguard your investments. Eric, I think a really important thing that we should unpack is the fact that Tricolore and First Brands were using asset-backed debt. What does that mean? What exactly does that look like? Sure. Think of a mortgage, right?

2:36A mortgage is just a loan against a home. There is this valuable asset behind the mortgage. So if the person who owns it can't pay, there's still value to the lender, right? This is why even though mortgage-backed securities have this blemish on them from the financial crisis, they're really a big and powerful tool to the U.S. home market. They allow millions of people to take out mortgages, which are then securitized together, packaged up, and sliced into different tranches and sold to investors. And the thing is, you can do that with so many different asset classes. And Trey Calori and First Brands were doing it in slightly different ways.

3:13Trey Calori would make auto loans to customers in the South, and those loans were secured by the cars. So there's some value there. In First Brands Group, what they were doing is something sometimes known as factoring, where ultimately First Brands Group is going to sell products to a customer like AutoZone, which is an auto parts retailer. and then they're ultimately going to get paid 90, 180 days from now. But what happens is they want that cash earlier, so they'll go to a lender, they'll sell that invoice to them, and so those lenders are ultimately taking risk against not First Brand's group, but against its customers, groups like AutoZone or Walmart.

3:52Who are the lenders who lost money with Trey Colore and First Brand? Some pretty big names, right? Yeah. So with Trey Colore, it's really the who's who in the securitization market, which is many big asset managers, as well as some of the country's largest banks. So think JPMorgan Chase, Barclays in the UK, and Fifth Third. And then at First Brands Group, a lot of its lending was being done off balance sheet by really specialist credit providers. The asset management arm of Jeffries, a company called J.A. Mitsui, as well as a number of other well-known groups like the well-known hedge fund Millennium Management, as well as Pemberton, a private capital group.

4:33Eric, the idea with non-bank lending is that after the financial crisis, regulators have tried to minimize risk by shifting some borrowing away from banks so that the risk is more spread out throughout the financial system. What are we learning from the collapse of Tres Colore and First Brand being on the verge of bankruptcy and how these non-bank lending organizations are working out in practice. Yeah, these two incidents are raising a lot of questions for investors around due diligence and controls that are put in place at the organizations that are ultimately making these loans. And so when I speak to investors in the last few weeks, they're asking many more rigorous questions on new deals than maybe they were earlier this year.

5:20It does show in one regard, though, like the safety of the securitization market, right? This isn't all happening at one bank. You're not needing the federal government to intervene, at least yet, right? There's not systemic risk, which was really the goal of policymakers in the wake of the financial crisis. How do we avoid having to bail out a bank again? Instead, you're moving this risk to end investors, and they may take losses, and that may shift the risk to pension holders or endowments or sovereign wealth funds, but it is no longer a risk that, you know, a bank is going to seize up and the federal government has to step in to save them.

5:59Eric Platt is the FT's U.S. investment editor. Thanks so much, Eric. Thank you.

6:09Italy is considering freezing its retirement age at 67, which sounds great for workers, but would put pressure on the country's public finances. They've been improving lately, but are still pretty fragile. Right now, the retirement age is linked to life expectancy, which is rising. That requirement is part of a pension law that was adopted during the Eurozone debt crisis as a way to restore market confidence. Economists say a pause would send a dangerous signal to investors. If the retirement age is frozen permanently, pension costs would cause Italy's debt-to-GDP ratio to rise to 139 % by 2031.

6:47at seven percentage points higher than current forecasts for that date.

6:58When you think hubs for gold trading, you think Switzerland, you think New York, you think London, right? Well, now Hong Kong and Singapore want to get in on that action. The two territories are trying to make Asia a hotspot for the safe haven asset. But how realistic is that goal? The FT's Owen Walker in Singapore has been following the story, and he joins me now. Hi, Owen. Hi, how's it going? Yeah, not bad. So, Owen, why do Singapore and Hong Kong want to become major hubs for gold trading? Well, in the short term, if you look at what's been happening in the gold market this year, certainly, you've seen a lot of investors, a lot of institutions rushing to gold as a kind of a haven asset to escape a lot of the volatility globally.

7:46And I think if you're Singapore and you're Hong Kong, and you're seeing a lot of this activity taking place, really on the other side of the world, you know, you kind of think, well, we're big players here, we should try and get in on this action. China is now both the biggest consumer and producer of gold in the world. And it's clear that there's a lot more enthusiasm for buying gold coming from Asia. You know, just out of curiosity, Owen, what does it take to be a gold hub? I mean, you need a few bits and pieces. One is storage. You need to be able to actually have the high security facilities to actually hold the physical gold.

8:26You also need the ability to trade it and that's trade it physically, but also increasingly it's futures contracts. So you need a marketplace for doing that. And thirdly, and probably most importantly, is you need the liquidity. So you need the gold to becoming in constant supply to fuel the trading and storage. And really, for that, you need refineries. So you need to be able to actually convert either gold that's been dug up or gold that's being recycled. You need to be able to convert that into a physical asset which can be traded. Now, what are the obstacles Hong Kong and Singapore are facing here?

9:03If you think of Hong Kong, I mean, I think there are some reservations that international investors or institutions might have about parking their gold in Hong Kong, given its proximity to China. With Singapore, that's less of an issue. One of the appeals of Singapore is its kind of neutrality when it comes to alliances with various superpowers. I suppose if you are somebody looking to store a vast amount of gold, you're probably thinking you might want to wait and let these markets kind of settle in a little bit and not necessarily want to be the first mover there. I'm wondering after hearing all this, Owen, is it actually possible for Singapore and Hong Kong to be gold trading hubs?

9:43When it comes to Singapore, they've really been looking at becoming a gold center for probably a couple of decades now and quite seriously in the past 10 years. They have a refinery. There are a couple of very large storage facilities now here. one opening last year. And they've also done work with contracts on the futures market. So gold trading, the actual industry of trading here is getting more important. When it comes to Hong Kong, they have perhaps smaller storage facilities, there are more refineries, and they're also been making moves this year to develop more on the trading side when it comes to contracts.

10:23So Singapore and Hong Kong have made strides, certainly in the past year, 18 months, to further their ambitions. Though when you consider the vast majority of gold is traded in London and New York and stored and refined in those areas, plus Switzerland, I think there's still quite a long way to go for Singapore and Hong Kong to really challenge that traditional nexus. That's the FT's Owen Walker in Singapore. Thanks, Owen. Thanks very much.

11:00Before we go, just another friendly reminder that we're running a sale right now on a Financial Times digital subscription. If you go to ft.com slash briefing sale, you'll get all our fantastic journalism for 40 % off. That's ft.com slash briefing sale for 40 % off. We'll, of course, have a link to that in the show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

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