Financial Crisis Anniversary: For Corporations and Investors, Debt Makes a Comeback

Looking back, J. Russell Porter said his company was "almost at death's door" when the U.S. economy hit bottom.

With credit markets near frozen, he said, Gastar Exploration in 2009 couldn't find banks or investors willing to provide the $35 million the oil-and-gas producer needed to refinance its crushing debt.

Mr. Porter, Gastar's chief executive, concentrated on survival. He sold off a major project and repaid most of the company's obligations. In financial terms, Gastar was deleveraging, or reducing its dependence on debt to minimize risk, part of a broader trend triggered by the financial crisis.

This year, Mr. Porter reversed course. Gastar borrowed $200 million in the junk-bond market to acquire oil wells in Oklahoma. It offered an 8.625% interest rate on the bond, which investors eagerly grabbed. The money fueled quick growth.

Five years after excessive debt propelled a housing-market collapse into a financial crisis and recession, similar bets are being placed across the U.S.

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Many people are chasing higher returns with margin loans that use investment portfolios as collateral. Margin debt reached a record $384 billion earlier this year, up 29% from 2012 and slightly more than the previous high set in 2008.

Gerald Schatz of Fort Washington, Pa., discovered a couple of years ago he could use the Fed's low rates in his favor. After borrowing $500,000 on margin at 1.6% from his broker, the 78-year-old earned about 6% by investing the money in stocks and bonds.

To Mr. Schatz, the move was a no-brainer—as long as interest rates stayed low, stock prices rose and bond yields stayed high. "This just made so much sense to me," said Mr. Schatz, president of a nonprofit group that operates child-care centers. "Leverage is just using cheap money. I don't consider that to be a big risk."

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Related quotes (or related warnings, if you will):

Warren Buffett on debt:

"We rarely use much debt and, when we do, we attempt to structure it on a long-term fixed rate basis. We will reject interesting opportunities rather than over-leverage our balance sheet. This conservatism has penalized our results but it is the only behavior that leaves us comfortable, considering our fiduciary obligations to policyholders, depositors, lenders and the many equity holders who have committed unusually large portions of their net worth to our care."

"In the end, alchemy, whether it is metallurgical or financial, fails. A base business can not be transformed into a golden business by tricks of accounting or capital structure. The man claiming to be a financial alchemist may become rich. But gullible investors rather than business achievements will usually be the source of his wealth.”

"You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing. I’ve never borrowed a significant amount of money in my life. Never. Never will. I’ve got no interest in it. The other reason is I never thought I would be way happier when I had 2X instead of X. You ought to have a good time all the time as you go along.”

And:

"The financial calculus that Charlie and I employ would never permit our trading a good night's sleep for a shot at a few extra percentage points of return. I've never believed in risking what my friends and family have and need in order to pursue what they don't have and don't need."