What will trigger the next financial crisis? Here is a candidate

Now that everything has been said about the tenth anniversary of the bankruptcy of Lehman Brothers, we need to ask ourselves how close we are to the next crisis. In the business loan market, investors have fulfilled at least one precondition: they give up their custody.

The financial cycle has a lot to do with inattention. When something bad happens, people pay attention for a moment. So, hopefully long enough, they forget that bad things can happen. This false sense of security leads precisely to the type of behavior that precipitates the next crash.

The corporate debt market has some kind of proxy for inattention: the prevalence of restrictive covenants. When lenders are vigilant, they demand that borrowers avoid taking too much debt or generating sufficient cash for interest payments. When they relax or desperately search for someone to take their money and pay interest, such alliances disappear.

So what's going on these days? "Allegation" agreements are booming among leveraged loans, a kind of high-risk debt often used in business acquisitions. So far in 2018, they have made up about 58% of all dollar issues. This is the largest share for at least two decades, with the exception of 2017.