We may be about to find out, again. Remember in 2008 when we all suddenly discovered what "mortgage-backed securities" were because they were totally fucking up the economy?
According to UC Berkeley law professor Frank Portnoy in the July/August Atlantic, the US is likely facing another banking collapse, this time because of that time-honored practice of investing in "collateralized loan obligations" and "variable interest entities."
"Wait a second," you say, "I don't have any collateralized loan obligations. I just have a mortgage, a checking account and a couple credit cards. And WTF even is a variable interest entity?"
Well over the last few years while you were busy living the dream, your bank was busy building up its portfolio of collateralized loan obligations, i.e., lending money to a bunch of companies that were about to go under. This was a real shite idea even before Covid-19. And these fly as AAA investments because their "top layers" are legit, so the ratings companies say their are all good even though most of a CLO are loans to B and C rated companies. And because the loans are spread across the entire country and among many different lenders, conventional wisdom predicts it unlikely that many of them would default at the same time. You know, like the conventional wisdom about real estate markets being entirely local back in 2007-2008.
Except, pandemic.
And variable interest entities are like...well mostly no one knows because, banks, but the ones we do know know about are based on commercial loans to malls and office parks. Malls are doing really well except no...malls across the country have been closing left and right because, Amazon.com. And office parks
were great investments too... except, pandemic and Zoom meetings. FNA! And those are just the VIE's that we know something about...the rest are mystery meat.
So when the shit
the banks will be banking that the good old Fed and Congress will bail them out for a second time in less than a generation.
This can only end well.
Fuckin' banks, how do they work?
Threaded Mode
