July 6, 2007 (LPAC)--"The concern is, that all this might reverse" and crash, said the Bank for International Settlements (BIS) about the last decade's Alan Greenspan liquidity bath, which has built up huge international asset bubbles, in the BIS annual report through May 2007, released on June 22. "A change in the credit cycle might be on the way," which would suddenly cut the prices of assets internationally, the BIS warned. And it reinforced that warning by the way its "Conclusion" section begins: "Virtually no one foresaw the Great Depression of the 1930s, or the crises which affected Japan and Southeast Asia in the early and late 1990s.... Each was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a 'new era' had arrived. Around the time of the failure of LTCM in 1998 [which nearly collapsed the banking system--ed.], the firm faced price shocks in various markets which were almost 10 times larger than might reasonably have been expected based on previous history."

The BIS' strongest worry about a financial "reversal of leverage" and a breakdown, is clearly expressed about leveraged corporate takeovers, which, it notes, have been driven by private-equity buyout firms in just five months this year, to record annual levels only established in 2006. Corporate debt has leapt up by $1.45 trillion in a year in the OECD countries, to nearly 85% of GDP; it was 55% of GDP in 1991.

The report says that the credit practices of banks and takeover firms in leveraged buyouts, look more and more exactly like those of subprime lenders in the U.S. mortgage bust--bonds without covenants; "toggle" loans where the debt repayments can simply be turned into further debt; "piggy-back" lending where additional loans are stacked on top of the main loans in order to make the deals look less "super-leveraged" than they are.

"The fact that banks are now increasingly providing bridge equity, along with bridge loans, to support the still-growing number of corporate mergers and acquisitions, is not a good sign." These practices, BIS warns, threaten the failure of a major bank or banks, because the banks have more credit risk on their books than it appears, and because among the hedge funds who have bought that risk from banks, "we do not know ... who holds these risks, and [whether] they can manage them."

The BIS' primary policy recommendation, supposedly to stave off crisis, repeated over and over in one form or another, is a deadly one: a steep further decline of the U.S. dollar against all Asian currencies, and closely connected, the unwinding of the Japanese yen "carry trade."