Does JPMorgan's AT&T Loan Signal a Credit Bubble?

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The giant $20 billion bridge loan JPMorgan Chase made to finance AT&T's acquisition of T-Mobile USA may be a leading indicator that a new credit bubble is forming.

Moody's is warning that the loan might encourage other banks to take on too much risk in pursuit of underwriting fees, in a repeat of the mad rush to make loans we saw in the second half of 2007, according to the Financial Times.

JPMorgan decided to commit to the loan without first seeking to syndicate the commitments, guaranteeing that it would make the full $20 billion loan even if no other banks wanted to join with it. Since then JPMorgan has reportedly been attempting to sell off pieces of the loan.

Moody's says the danger of the loan is that if it is perceived as giving JPMorgan an advantage in winning the mandate to underwrite the bonds that will replace the bridge loan, other banks may also feel compelled to take on similarly giant exposures.

This fear is well-founded. The fees on bank loan financings in mergers and acquisitions tend to be small enough that banks typically view them not as profit drivers but as relationship loans that can help win mandates for bond deals, which pay much higher fees. Technically, tying together bank lending and bond underwriting violates banking laws, but banks push as close to this prohibition as they can.

So the risk of the JPMorgan loan to AT&T isn't that the loan itself might go bad — no one really believes AT&T wont pay its debts or be able to raise money to take out the bridge loan. It's that the loan will encourage banks to increase their exposures to large loans, introducing more and more risk into the financial system.


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