Warnings of looming systemic financial risk getting louder

Nick Beams

At first, it was just a few outlier remarks, but now there is a stream of warnings that the US stock market and the financial system more broadly is a bubble set to burst with potentially very serious consequences.

A trader works on the floor of the New York Stock Exchange, March 20, 2024. as U.S. Federal Reserve Board Chairman Jerome Powell announced that there was no rate cuts but signaled there may be later in the year. [AP Photo/Craig Ruttle]

There are two central concerns: first, that the explosive growth of private credit, largely unregulated, has led to the loosening of standards and is resembling conditions that preceded the crash of 2008; and second, that the surge on Wall Street is dominated by a handful of high-tech and artificial intelligence-based stocks in a way that recalls the dot-com bubble at the start of the century with potentially greater consequences.

Concerns about the private credit market were voiced this week by the chair of the global Swiss-based bank UBS, Colm Kelleher.

Speaking at a Hong Kong finance and investment conference, he said there was a “looming systemic risk” to global finance because of the way insurance companies were looking around for better ratings on their private credit assets.

According to a report of his remarks in the Financial Times, he said, “The insurance industry, especially in the US, was engaging in ‘ratings arbitrage’ akin to what other institutions did with subprime loans before the 2008 financial crisis.”

In the past, the insurance industry might have been the last place one would have considered to be the source of a financial crisis.

Insurance companies were regarded as staid, conservative financial institutions with straightforward business models selling long-term policies and investing in long-term assets to meet their obligations, providing a source of stability for financial markets. Not anymore, as an extensive analysis published last week by the Bank for International Settlements (BIS) made clear.

It said that since the crisis of 2008, the insurance sector had undergone “profound structural changes.” The extended period of ultra-low interest rates on government debt following the crisis meant that the old business model, based on investment in such assets, was no longer viable, and insurance firms had increased their involvement with private equity firms.

And beyond that, the BIS analysis explained, “life insurers have increasingly shifted their investment strategies towards riskier and opaque assets, such as real estate and alternative credit instruments. These assets often lack transparency and liquidity, making them more challenging to value accurately, which poses potential risks to financial stability in the form of drains to liquidity from fire sales that can amplify price movements during periods of economic stress.”

In other words, the book value of these assets is artificially inflated, and this is revealed in conditions of turbulence when the actual market value is revealed. But before that happens, the fiction is maintained by shopping around for agencies that will provide a higher rating.

Kelleher pointed to this phenomenon in his remarks.

“What you’re seeing now is a massive growth in small rating agencies ticking the boxes for compliance of investment,” he said.

The BIS said the smaller agencies, whose numbers have grown rapidly, faced commercial pressure to assign more favorable ratings, and this could “lead to inflated assessments of creditworthiness” and “obscure the true risk of complex assets.”

The role of private credit has come to the fore in the wake of the collapse of the US auto firm First Brands and the subprime auto lender Tricolor, which had complex relationships with private credit, or what is termed non-depository financial institutions (NDFIs).

A series of frauds involving some middle-sized companies in recent weeks is another area of concern. It has caused a market crisis, but, in the words of one analyst cited by the Wall Street Journal, it is “sending out ripples in the credit markets” with people starting to ask, “How does this happen?”

A recent note by JP Morgan Chase analysts said that while the First Brands situation was the result of poor management, it also revealed, “more importantly, very poor disclosure in relation to [NFDIs] across the banking system.”

In other words, there is little knowledge about the connections between the major banks and the non-banking credit system. The International Monetary Fund has been calling for greater oversight of this area and repeated it last month, noting that US and European banks are estimated to have $4.5 trillion of exposure to non-bank financial institutions.

The growing domination of tech stocks on Wall Street as a result of the AI surge is also causing alarm bells to ring.

The significance of tech stocks was demonstrated on October 28. Such is their weight and that of AI-related companies that the S&P 500 closed at a record high—its 36th for the year—even though 397 stocks in the index fell.

An FT article this week provided some significant details of the tech-AI dominance. Eight of the 10 biggest stocks in the S&P 500 are tech stocks, and they account for 36 percent of the entire US market value. Some 60 percent of the gains since the market downturn in April are the result of the rise of these stocks, and they account for 80 percent of the S&P’s income growth in the past year.

The market value of the AI chipmaker Nvidia has hit $5 trillion and is now greater than the market value of the stock exchanges of Germany, France and the UK combined.

The market weight of the US AI and tech stocks is indicated by the fact that almost one-quarter of the market capitalization of the MSCI All World Index, which comprises more than 2,000 companies from more than 40 countries, results from the eight dominant US groups.

The divorce of US market valuation from the real economy is revealed by the fact that for most of the period since 1970, it has averaged about 85 percent of the country’s GDP. It has now risen to 225 percent of GDP.

This has significant economic implications because, however much stock prices may rise, they remain fictitious capital. That is, in the final analysis, they do not embody real value, but are a claim on the value in the underlying real economy and, above all, on the surplus value extracted from the working class, the producers of all wealth.

The financial oligarchy, which has enriched itself to a historically unprecedented degree via the Wall Street surge—financed to a great degree by the cheap money provided by the Fed—is acutely conscious of this relationship, as evidenced by the tremors that pass through the market whenever there is a significant upsurge in the class struggle.

23 killed in convenience store explosion in Hermosillo, Mexico

Josh Varlin

On Saturday, November 1, an explosion at a low-cost retailer in downtown Hermosillo, capital of the state of Sonora in northwestern Mexico, killed 23 people and injured 15 more. Children were among the dead and injured.

Many of the victims were shopping at the Waldo’s outlet for supplies for El Día de los Muertos (Day of the Dead) festivities.

As of this writing, three victims remain hospitalized: 81-year-old Marcos Segundos Reyes, afflicted with third-degree burns on 90 percent of his body; 20-year-old María Isabel Morales Bracamontes, who has been transferred to a hospital in Phoenix, Arizona, for specialist care; and 16-year-old Danna Valeria, who was passing outside the store when the explosion occurred. Their families have expressed gratitude at the outpouring of popular support, including blood donations.

Sonoran Attorney General Gustavo Rómulo Salas Chávez told the media that, based on the initial investigation, most of the deceased died due to “inhalation of toxic gases.”

The State Attorney General’s Office (FGJE Sonora) is interviewing public servants at the municipal, state and federal levels, with a focus on the licensing of and permits for the store.

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The FGJE quickly identified an electrical transformer as the probable cause of the fire. The explosion was preceded by two brief blackouts; the consequent stress on the transformer likely precipitated the inferno.

Risk management and civil protection consultant Mariano Katase Ruiz, speaking to Hermosillo newspaper El Imparcial, said that the Waldo’s location had two serious irregularities: improper installation of the transformer indoors and a lack of an emergency exit.

Either of these faults would present an “imminent risk” and should have resulted in authorities closing the establishment, Katase Ruiz told the paper.

“There are two very grave violations,” he said, “a transformer inside the property and a property without emergency exits. From my own very personal point of view, the emergency exit is non-negotiable, if an establishment doesn’t have an emergency exit, it cannot operate.”

All indications point to government negligence, if not outright corruption.

State Governing Minister Adolfo Salazar Razo confirmed that the store’s civil protection plan was rejected in 2021, under the current administration, and that it had been operating without one since then.

El Mitotero, a local independent journalist who writes under a pseudonym, cited an anonymous source who shared images and information about the transformer, which was effectively a “ticking time bomb.”

“The problem was reported and they ignored it. The transformer was improperly installed, enclosed and without ventilation. … That was dangerous. I’m doing [sharing] this because what happened hurts me; it could have been avoided,” the source said.

The fire has retraumatized Hermosillans who experienced or remember the June 5, 2009, ABC Day Care Center fire, which killed 49 children and injured dozens more, along with several adults. That fire began in an adjacent part of the improperly converted warehouse containing government financial documents before spreading to the day care.

That tragedy was the result of rank corruption. The facility lacked fire extinguishers and emergency exits but was nevertheless allowed to operate and receive federal funds. It was co-owned by the wives of two state officials from the Institutional Revolutionary Party (Partido Revolucionario Institucional, PRI), one of whom was also the cousin of Margarita Zavala, wife of then-President Felipe Calderón of the National Action Party (Partido Acción Nacional, PAN).

Hermosillans, with parents of ABC victims playing a leading role, are demanding action to ensure that such a catastrophe cannot happen again.

The June 5 Movement (El Movimiento de Cinco de Junio), an association of ABC survivors and victims’ parents, issued an emotional statement calling for a protest on November 5.

“To the families of the victims of the Waldo’s store fire, we say that you are not alone, just as we have never been. We want you to know that we know exactly what you are going through, that our thoughts and hearts have been with you since the first minute we learned of the magnitude of the fire. We want you to know that for 16 years we have fought to prevent the repetition of a tragedy similar to the one that of our sons and daughters. … We are sorry, we failed you.”

Hundreds responded to this call and marched to the Government Palace, chanting “49+23, how many more?”, “Never again” and “It was not an accident, it was corruption.”

Rosalinda Ríos, mother of deceased Waldo’s worker Jesús Ana María Cortez Ríos, spoke of her daughter, “She was a responsible young woman and that cost her her life.”

Mexican President Claudia Sheinbaum and Sonoran Governor Alfonso Durazo, both members of the National Regeneration Movement (Movimiento de Regeneración Nacional, MORENA), expressed their condolences for the victims and promised investigations. The corporate leadership of Waldo’s likewise expressed its condolences.

The crocodile tears of these politicians should be viewed with the same skepticism as those of the business owners. MORENA, no less than the PRI and PAN, is committed to the maintenance of private property and the subordination of Mexico to US imperialism, even under fascist President Donald Trump.

It is impossible to secure safe working conditions and public spaces within this framework. While certain of the issues involved are more endemic, or at least more prominent, in “developing” countries like Mexico, conditions in the imperialist centers are regressing due to the decades-long social counterrevolution, which is being rapidly accelerated under Trump and other far-right politicians, as evidenced in the frequency of workplace deaths in America’s own industrial slaughterhouse.

Australia’s Liberal-National Coalition in spiraling crisis

Oscar Grenfell

The decision by the National Party to formally abandon any commitment to a “net zero” climate policy at a meeting last Sunday has brought a protracted crisis of the Australian ruling elite’s main conservative political formation to a new level.

Throughout the post-war period, that conservative formation has been based upon a coalition between the rural and regional-based Nationals and the urban Liberal Party. But the social constituency and political foundation of a stable and traditional conservative outfit no longer exists, with a break in the Coalition on the cards and the Liberals facing complete disintegration.

The immediate function of the Nationals’ announcement was to place immense pressure on the Liberals to outline their position on “net zero.” The Nationals did that, under conditions where they were well aware of sharp differences within the Liberal Party on climate and a host of other issues.

The Coalition’s former pledge to reach “net zero” carbon emissions by 2050 was always a sham, with no clear policies to reach it. Even on its face the program was a million miles behind what is required to address the existential threat of climate change.

Far more than disputes about climate policy are involved. The issue of “net zero” is something of a symbol, behind which competing agendas are being fought out, in terms of the social orientation and political appeal that the Coalition and its constituent components should make.

The move to abandon “net zero,” both by the Nationals and sections of the Liberal Party, is bound up with a broader shift to the right. In both parties, there are forces watching the rise of far-right elements internationally, including the fascistic President Donald Trump in the US and Nigel Farage’s Reform in the UK, and considering emulating them.

Those within the Liberal Party who are calling for the maintenance of “net zero” are warning that its abandonment would confirm the party’s inability to make any appeal in the major cities. They are also fearful that a turn to explicit climate change denial will put the Liberals out of step with major sections of business that are making substantial money from renewables.

Liberal Party leader Sussan Ley [Photo: Facebook/Sussan Ley MP]

Since the National announcement, Liberal leader Sussan Ley has desperately sought to hold the party together and to delay any decision on “net zero,” for fear that it will provoke a rupture within the Liberal Party.

That holding act has characterised Ley’s tenure as leader, since her ascension after the May federal election. The election was a rout for the Coalition and above all the Liberal Party. Masses of people cast a ballot against the Coalition, because they identified it with Trump and his agenda of trade war, militarism and authoritarianism.

The Liberal vote was its lowest since the party was formed in 1944. Previous Liberal leader Peter Dutton lost his own seat, and overall the Liberals retained just nine out of 88 metropolitan seats. That confirmed a pattern that was evident in the previous two elections, of former safe Liberal seats falling to Teal independents, who appeal to affluent layers of the middle and upper classes, based on pro-business policies and genuflections to concerns over the climate.

Ley, who hails from former Prime Minister Scott Morrison’s “centre-right” faction, has been described as a “moderate” since the election, itself an indication of a shift to the right within the Liberal Party.

She only secured the leadership by a handful of votes, against a right-wing ticket headed by Angus Taylor and Jacinta Price, who had defected from the Nationals in the immediate aftermath of the election. Price’s defection pointed to the role of elements of the National Party, in pushing the Liberals further to the right, again on display in the current furore around “net zero.”

Ley’s leadership has been marked by a series of public attempts to undermine her. In September, Price refused to affirm her support for Ley and was demoted to the backbench. She called for a more openly right-wing pitch, based on virulent nationalism, anti-immigrant xenophobia and other staples of Trumpian politics.

Andrew Hastie raised a similar flag last month. He demanded a far greater cut to immigration numbers than the Liberal Party is already committed to and insisted on the need to drop “net zero.” Hastie also went to the backbench and has continued his right-wing, nationalist agitation.

Ley, despite remaining as leader, has been widely viewed as a placeholder figure, and it seems likely that her day of reckoning is coming. The attempt to put off the issues of dispute has its limits, and today it was confirmed that there will be a Liberal Party meeting to decide the issue next Wednesday.

Liberal Senator Sarah Henderson this morning declared that Ley is “losing support” and refused to provide her own backing for the party leader. There is growing discussion in the press, based on internal Liberal leaks, that Taylor may make a bid for the leadership.

Whatever the immediate fate of Ley, the crisis of her leadership is emblematic of a more deep-going and objective crisis, the trajectory of which is towards a rupture or implosion.

Right-wing figures, such as Hastie, have publicly made clear that they will not abide by the maintenance of “net zero.” Meanwhile, the “moderate” Liberals have indicated that they are no less hostile to the abandonment of the policy. The logic is towards a split.

As the WSWS has previously outlined in analysing the crisis of the Liberals, it is rooted in far-reaching changes to class relations. The party, which emerged and gained an ascendency under conditions of the post-World War II boom, was based socially upon a relatively broad middle-class constituency, including small businesspeople and professionals. But after decades of social polarisation, that constituency no longer exists as the social buffer between the capitalist class and the working class. The conditions, work loads and pay freezes experienced by many sections of professionals including teachers, doctors, nurses and layers of the public service are parallel to those of broad sections of workers.

Whether the divisions in the Liberal Party can be held together next week or not, a realignment in right-wing politics is already taking place. That was made clear by a report yesterday in the Australian that more than 200 members of the Liberal Party in South Australia have quit, citing their hostility to “net zero.”

The report indicated that the resignations accounted for roughly 5 percent of the Liberal membership in South Australia. That itself is a marker of crisis, indicating that the Liberals, nominally a party of government, have just 4,000 members in a state with a population of almost two million.

There is an intensive discussion within sections of the ruling elite, over the need for a far-right formation, in line with the rise of Trump in the US, Farage in the UK and similar forces throughout Europe. There have evidently been questions as to whether that can be carried out through shifting the Coalition to the right, or through the establishment of a new formation.

Gina Rinehart, the country’s richest individual, has been involved and has been a prominent backer of Price and Hastie within the Coalition.

She has been in the US, attending a Great Gatsby themed Halloween Party hosted by Trump over the weekend and then the Conservative Political Action Conference.

Significantly, Pauline Hanson, the leader of the far-right One Nation outfit also attended both events. One Nation’s polling is higher than ever before, with a Newspoll published by the Australian this week showing it receiving a primary vote of 15 percent. This morning, the Australian claimed that One Nation has doubled its membership since the May election.

Nationals MP Barnaby Joyce, who formerly headed the party, has been in talks with Hanson about defecting to One Nation. Senior Liberal figures pushing the abandonment of “net zero” and a more explicit lurch to the right, have insisted that such a course is necessary to prevent what remains of the party’s base from shifting to One Nation and other right-wing outfits.

The issue they all have is that as the federal election showed, there is currently no mass constituency for far-right politics. As in the US and elsewhere, the drive to the right is being led by sections of the ruling elite, who recognise that more openly authoritarian forms of rule are necessary to enforce an inherently unpopular agenda of imperialist war abroad and ruthless austerity measures.

The Newspoll showed that the crisis of the Coalition is a crisis of the entire official political establishment. At 60 percent, the combined support for the Coalition and Labor, the two formations of capitalist rule, was the lowest since polling began in 1985.

With the Coalition meltdown deepening, the bourgeoisie is more dependent on Labor and its affiliated trade union bureaucracy than ever. Since returning to office in 2022, Labor has completely aligned itself with the interests of the capitalist class.

On the social front, the Labor government is carrying out massive attacks on the working class, aimed at returning it to the conditions that existed in the 1930s. That goes hand in hand with its transformation of Australia into a frontline state for war with China and major attacks on democratic rights.

Elon Musk, world’s richest man, awarded $1 trillion pay package

Andre Damon

Elon Musk gives a Nazi salute at an indoor presidential Inauguration event in Washington, Monday, January 20, 2025. [AP Photo]

Elon Musk, the world’s richest man with a net worth of $461 billion, has been awarded a $1 trillion pay package over ten years, putting the CEO on course to become the world’s first trillionaire.

Commenting on the scale of the payout, which was approved Thursday, consumer advocacy group Public Citizen wrote, “One trillion dollars is unfathomable. A million seconds is about 11 days. A billion seconds is about three decades. A trillion—30,000 years. If Musk works a 40-hour work week with two weeks’ vacation, or about 200,000 hours for 10 years, that’s $50 million an hour.”

Musk’s unprecedented payout came the same week as the Trump administration announced plans to slash food stamp benefits, threatening tens of millions of American families with hunger.

The pay package was awarded following a vote of approval by 75 percent of Tesla shareholders. Among the institutions voting in favor were financial services company Charles Schwab Corporation and Morgan Stanley’s Counterpoint Global fund. “We firmly believe that supporting this proposal aligns both management and shareholder interests,” Charles Schwab said in a statement.

The prominent endorsement of Musk’s pay package by Schwab Corporation and Morgan Stanley, coupled with behind-the-scenes “yes” votes by other major financial institutions, points to its broader significance. The massive payout for Musk sends a clear message from Wall Street that the sky is the limit for CEO pay and the enrichment of the financial oligarchy.

Musk, a fascist who welcomed the second inauguration of US President Donald Trump with a public Sieg Heil salute, said his primary motivation in seeking the pay package was to secure direct personal control over life-and-death decisions for humanity. “I don’t feel comfortable building a robot army if I don’t have at least a strong influence,” Musk said.

The payout would make Musk’s wealth equivalent to the entire market capitalization of Tesla, which currently stands at $1.5 trillion. Musk controls 15 percent of Tesla’s shares, which will increase to nearly 28 percent under the share agreement. The stock will be dispersed in twelve chunks over ten years.

The public justification given for the pay package, the largest in history by nearly an order of magnitude, is to align the interests of Musk and Tesla shareholders by incentivizing the CEO to meet sales and share targets.

But this is just a pretense, and the agreement allows Tesla’s board, largely consisting of Musk’s cronies, to award him the shares even if he fails to meet the goals set out. “While it purports to be tied to some very ambitious goals, in fact it gives the board discretion to award him the amount of shares whether he meets those goals or not,” said corporate governance expert Nell Minow, who is chair of ValueEdge Advisors.

Tesla has been facing increasingly stiff global competition from Chinese automakers, and its profits have fallen 9 percent year on year.

Musk said the vote opens a “whole new book” in the history of Tesla. The company is planning to refocus on making humanoid robots, Musk said, declaring, “You start getting into like, some pretty wild sci-fi sort of scenarios.”

Tesla has been peddling statements like this throughout its existence, repeatedly declaring that self-driving cars, together with self-driving taxis and semi-trucks, were constantly around the corner. These claims have repeatedly failed to materialize.

What has materialized, however, is the continued rise in Tesla’s share prices, which closed at an all-time record Thursday and have doubled since April.

In addition to being the largest shareholder in Tesla, Musk owns major stakes in SpaceX, the space launch monopoly that controls 84 percent of the market for space launch; and X, the social media network previously known as Twitter, which Musk is using to train X’s Grok Large Language Model.

Musk’s pay package is orders of magnitude larger than anything awarded to any chief executive in history. According to the AFL-CIO’s database on executive compensation, Microsoft CEO Satya Nadella earned just over $79 million in 2024. Apple CEO Tim Cook made about $75 million, and Starbucks CEO Brian Niccol received slightly less than $96 million.

In 1965, a typical CEO made 20 times the pay of an average worker. This figure reached 122 in 2016 and grew to 348 by 2016.

In the past 12 months alone, the 10 richest US billionaires became approximately $700 billion richer. Over this period, their wealth grew by a staggering 40 percent, from $1.79 trillion to $2.5 trillion.

Earlier this week, the Oxfam charity reported that since 2020, the inflation-adjusted wealth of the ten richest men in America has increased six-fold. Elon Musk, whose wealth stood at $33 billion in March 2020, has since surged to $469 billion, a 14-fold increase.

US President Donald Trump, himself a billionaire, has pledged to do everything possible to expand the wealth of this financial oligarchy, which forms the constituency for his effort to transform the United States into a presidential dictatorship.