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Old 06-13-2020, 06:08 AM
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Default Fuckin' banks, how do they work?

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 :shitfan: 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. :whup:

This can only end well.
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Old 06-13-2020, 07:08 AM
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Default Re: Fuckin' banks, how do they work?

Make some of the clowns who architected the last one of these into cabinet secretaries, what could possibly happen?

The only smug satisfaction I draw from COVID here is it fucked up their collapse timing. But now the story will be how it was the pandemic, not the fuckery in the White House.

The way the demographics are going, though, this old guard of oligarchs and their grifters are endangered, and thus must really wedge hard the splits in the Democratic party if they're going to get another few decades of points score accumulation before the beheadings start.
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Old 06-13-2020, 05:43 PM
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Default Re: Fuckin' banks, how do they work?

The New Yorker had something on this not too long ago:

The Coronavirus Is Exposing Wall Street's Reckless Gamble on Bad Debt | The New Yorker

I put this on FB along with that link:

CLOs have a decent concept - the idea is to collect riskier loans, and lump them together. As a collection, they're less likely to all fail. This has one real benefit: The loans are taken off the bank's books and frees up this money to be loaned again. This also has a benefit to Wall Street. They can divide up the CLO into investments.

There's a couple of problems with CLOs.
1. They incentivize banks to make riskier loans. The banks only need to make the loans good enough to sell to a bundler. This is what happened in the lead up to 2008, and this looks like it was happening in 2019.
2. In times of crisis, even these seemingly low risk investments become very high risk. It doesn't matter if your triple A investment gets paid first when all the loans in the CLO are shit. This also happened in 2008.

The article I read says the banks are claiming they aren't holding the junk investments this time, or at least they're not as exposed. I remain skeptical, considering the expectation Wall Street has that it will be bailed out if the problem becomes systemic

I wouldn't hold out hope that Wall Street learned any lesson from 2008, so hold onto your hats.
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Old 06-13-2020, 10:37 PM
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Default Re: Fuckin' banks, how do they work?

A wise person observed that someone who works in a flour mill is likely to have all the flour they need at home, and similarly a person who works at a paperclip factory probably never needs to actually buy any paperclips.

The commodity that bankers work with is other people's money.
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Old 06-13-2020, 11:34 PM
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Default Re: Fuckin' banks, how do they work?

Yeah, what do they care. They'll just be buoyed up by tax dollars when they can't make someone else's money make their money for them. What's the big deal?
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Old 06-14-2020, 04:10 AM
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Default Re: Fuckin' banks, how do they work?

Hey, something like 4 trill ee un dollars just propped up the whole equity and bond markets. What's that familiar refrain? Privatized profit, socialized risks.

The fracking industry is another one that's been running on borrowed money like since it was born. The Red Queen.

Thanks for the OP!

:aristocrat:
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