10 ms·

The Looming Bank Collapse

135 points by sajid 6y ago

empath75 6y ago
> I ran my finger across the page to see the total for these investments, investments that Powell and Mnuchin have asserted are “outside the banking system.” > The total is $29.7 billion. It is a massive number. And it is inside the bank. What percentage of Wells Fargo's assets is that? It looks they they've 1.9 trillion in assets, so even they were worth nothing, would it have a material impact?
- tvb12 6y ago
  > The banks themselves may reveal that their CLO investments are larger than was previously understood. In fact, we’re already seeing this happen. On May 5, Wells Fargo disclosed $7.7 billion worth of CLOs in a different corner of its balance sheet than the $29.7 billion I’d found in its annual report. There might be more?
solatic 6y ago
It doesn't matter if the banks crash again if the Fed will just bail everybody out again and push stock market inflation even higher than it is now. It's clearly unsustainable, but the question is, how and why will the bubble burst? The author posits one option, of political intervention precluding another bailout. But the Federal Reserve is non-political precisely to shield it from attempted short-term political machinations. Congress will complain to the cameras and the Fed will go right back to "rescuing" the market. No, the bottom will only well and truly drop out when there's significant capital flight - when the dearth of real investment opportunities relative to currency glut becomes so acute that capital leaves American borders in search of real return. But to where? And under which circumstances?
- Answerawake 6y ago
  > But to where? And under which circumstances? Can you give some guesses? I don't see any other place that would seem more attractive than the US. Every other place has its own problems whether it be lack of developed human capital, unstable government systems, etc. Maybe in the distant future if Mars transportation takes off that can be the next big thing?
  - devalgo 6y ago
    Short of saying that a hyper inflation event in the US would probably break civilization and so allocating capital is irrelevant at that point, isn't the obvious answer Bitcoin or other crypto assets?
- mdorazio 6y ago
  Think you nailed it. The thing is, in order for capital flight to be a risk there needs to be somewhere else of comparable size and upside opportunity to the US that doesn't rhyme with "China" and it sure as hell isn't Europe. So we're back to square one in which absolutely massive sums of money are chasing returns with nowhere else to put money than the same places it already is. It's madness on a global scale.
  - clairity 6y ago
    i mean, globalism was always about helping capital find returms while hedging risk, under the guise of international trade being better for all than isolationism (but much better for capital than labor). the core problem of hoarding wealth, as exhibited by the flight of capital to the US, is the inability of small groups of people to efficiently allocate capital, to have enough imagination and ingenuity to centrally-plan their allocations. it's literally anti-capitalist.
  - burlesona 6y ago
    This is the insanity of zero interest rate policy. It’s so hard for me to understand why the economists and fed officials don’t see this.
    - QuesnayJr 6y ago
      It's not that we don't see it, but we don't agree. I honestly don't have the energy to try to explain it here anymore -- the conversation always turns unpleasant, and I need a place on the Internet where I can avoid thinking about economics for a while.
      - cryptica 6y ago
        >> the conversation always turns unpleasant Rationalizing the irrational tends to be unpleasant. I think it's a complete fabrication that people are dependent on the financial system and that we need economic stability. People enjoy drama and they are able to recover from any economic failure. Even total failure. Too big to fail is total BS. If a solar storm wiped out all records of bank accounts and all records of all financial holdings, the economy would quickly recover. The number of new opportunities that this would create would be unprecedented. From the perspective of most people, the best feature of capitalism is not its ability to provide sustenance (even communism can do that), it's its ability to provide hope for something better... Unfortunately these days our modern version is not true capitalism, it's crony-capitalism and it doesn't yield much hope - You are given a place in society and the only way you can get something better is by doing something deeply unethical and then earning hush money from your corporate masters. We are heading towards a dystopian surveillance capitalist future. Even if the economy crashes permanently and never recovers, that future doesn't look so bad compared to what would happen if we stay on course with current monetary policies.
- devalgo 6y ago
  > but the question is, how and why will the bubble burst? I'd take the Black Swan approach. There are probably a dozen each unlikely events that could cause the bubble to pop but you're unlikely to actually predict which one will do it and when it will happen. Your optimal move is to assume something is going to happen at some point and just hedge yourself against that rather than try to predict. Taleb gets called an oracle but his entire philosophy is not to predict rare events that destabilize a system but just accept they will eventually happen and prepare accordingly In this case having some portion of your net worth in BTC/Crypto seems like an obvious hedge
- throwaway1777 6y ago
  Yeah, until there’s a better market to invest in than the US or an attempt to dethrone the dollar as the reserve currency I don’t see anything changing no matter what the fed does with QE and bailouts.
ed25519FUUU 6y ago
Buried lede warning. >But there’s another threat to the economy, too. It lurks on the balance sheets of the big banks, and it could be cataclysmic. (10 paragraphs later) >I ran my finger across the page to see the total for these investments, investments that Powell and Mnuchin have asserted are “outside the banking system.” The total is $29.7 billion. It is a massive number. And it is inside the bank.
kerkeslager 6y ago
> The federal government stepped in to rescue the other big banks and forestall a panic. The intervention worked—though its success did not seem assured at the time—and the system righted itself. Of course, many Americans suffered as a result of the crash, losing homes, jobs, and wealth. An already troubling gap between America’s haves and have-nots grew wider still. Yet by March 2009, the economy was on the upswing, and the longest bull market in history had begun. This paragraph is conceding a point that should not be conceded. The system did not right itself if many Americans lost homes, jobs, and wealth. 12 years later, not everyone has recovered from the 2008 collapse.
- lazide 6y ago
  What criteria should someone use to judge 'righted itself'? No event can ever be completely undone, merely compensated for. Many of the people who lost homes should never have bought them leading up to '08 - they only were able to because of unrealistic (and sometimes predatory) underwriting standards and financing that NEVER would have worked out, and blew up shortly thereafter once the people bankrolling it figured out what was going on. The overall economy recovered, but of course it looked a bit different. It was 4-5 years later.
  - Klinky 6y ago
    Mortgages should have been heavily renegotiated, bailout given to the home owners to pay back the mortgage in a bottom-up bailout. Let's throw in existing homeowners as well, who had made proper payments in the mix, so they get some benefit from the situation. Instead lots of money handed over to banks to fix their books and toxic assets handed over to the .gov. Lots of people losing their homes and jobs, no one in the financial sector really seeing any jail time or penalty for their malfeasance. Much of the financial sector actually made off quite well during/after the crisis. We're seeing it again with big businesses getting COVID bailouts, meanwhile politicians are wringing their hands that unemployment insurance benefits are "too high" and "main street" needs to get back to work. Make sure "main street" is held accountable and/or penalized, but it seems there are a lot of golden parachutes and soft landings for big business and the finance industries.
  - 6y ago
nknealk 6y ago
> I have a checking account and a home mortgage with Wells Fargo; I decided to see how heavily invested my bank is in CLOs. I had to dig deep into the footnotes of the bank’s most recent annual report, all the way to page 144... The total is $29.7 billion. It is a massive number. And it is inside the bank. To put $29.7B that into context -- Table 4 of the most recent 10K says that Wells has ~1.7 trillion dollars of earning assets. Tables 1 & 2 indicate they hold around 180B of shareholder capital buffer.
- thephyber 6y ago
  Your appraisal seems fair... of the data you are working with. But how many other financial instruments they own are tied up in CLOs on the books of other banks? The whole point of The Big Short and Margin Call was that the banks aren't resilient, independent silos. When one bank shakes or falls, it can impact the neighboring bank which causes a domino effect. They all invest in slices of the things that the other banks invest in, they all do it with lots of leverage, and they all think they've hedged against the downside risk, but that still didn't prevent the 2008 collapse.
  - clairity 6y ago
    that's literally herding behavior, which is the loss of independence among market participants, so that risks start to align, rather than cancel each other out. it's disgusting that we haven't learned anything from 2008.
    - thephyber 6y ago
      To be fair, I think every financial instrument works this way (the transitive property of assets which own assets) all the time. Having regulations which restrict which companies are allowed to trade specific classes of instruments/services (eg. Glass Steagall) helps mitigate this, but doesn't even approach eliminating it.
      - clairity 6y ago
thephyber 6y ago
I've long read about the following still being a problem (post-2009): - CDOs (although a new generation of them have a new name/initialism) - Frank/Dodd was partially rolled back - The definition of bank size-classes was changed to reduce the regulatory burden over most regional banks that were previously more regulated - No significant adverse event happened after Standard & Poors was identified as having significantly inaccurate ratings on CDO / mortgage bond - moral hazard all over the financial sector, multiplied by large QE rounds - shadow inventory of housing (not sure if this was sold off or if banks still hold lots of houses off the market) - lots of private unicorns have opted not to try to go IPO, despite Wall Street records over the past few years (edit: I converted the indented list to individual paragraphs) But given these assumptions, are the US financial markets really that healthy? It still feels like we have a few asset bubbles, especially in the assets which QE propped up.
- yodon 6y ago
  As a head's up a huge fraction of HN's readers read on mobile where code formatting like you used here makes posts unreadable.
  - thephyber 6y ago
    Yes, I've heard, but there isn't a suitable replacement format that I've seen for a bulleted list. The formatting doc[1] is very short and doesn't include a list. [1] https://news.ycombinator.com/formatdoc https://news.ycombinator.com/formatdoc
- gridlockd 6y ago
  It's not a bubble, it's price inflation. Assets are fairly priced with a looming collapse of the dollar value in mind.
  - thephyber 6y ago
    I'm not sure I agree with the terms you are using. I get the difference between what is usually called a "bubble" and what is usually called "inflation", but I don't think you can accurately identify a bubble until it has already burst and you do it in retrospect. "Fairly priced" is strange because every transaction is "fairly priced" in the moment (given the knowledge at the time), but may turn out to be "unfairly priced" if in retrospect it appears to be fraudulent.
danielovichdk 6y ago
From an outsider living a long way from USA, for many years now I haven't understood how the financial instruments of USA work. It constantly looks like the country is merely printing more money to stay afloat.
- adammunich 6y ago
  It is
- candiodari 6y ago
  It's weird that people think that it's different anywhere else. In fact, the situation in the US is, if anything, less serious than elsewhere. Especially Europe. The ECB had to bail out quite a few banks, and several states have done the same. Even now the ECB is preparing new bailouts for European banks: https://www.brusselstimes.com/all-news/business/116135/european-central-bank-may-consider-setting-up-bad-bank/ https://www.brusselstimes.com/all-news/business/116135/europ... And when even the ECB thinks banks have behaved so appalingly they deserve to die (trust me this takes quite a bit of really, really bad behavior), the individual countries: https://www.france24.com/en/20081020-french-government-105-billion-euro-bank-bailout-financial-crisis https://www.france24.com/en/20081020-french-government-105-b...
- onion2k 6y ago
  for many years now I haven't understood how the financial instruments of USA work That's deliberate. If they're too complex for most people to understand then they're very hard to scrutinize.
  - rmrfstar 6y ago
    They aren't actually complex at all. People in finance like to jargon up the work they do. Back in '08 we heard about how "complex" CDS are. There is nothing complex about a CDS. Whenever something bad happens in the financial sector, there is always a simple story behind it. Usually a combination of fraud and leverage.
    - 6y ago
nojito 6y ago
It doesn’t matter if CLOs collapse. The capital requirements that banks operate under will ensure that they will withstand it.
- thephyber 6y ago
  From TFA > But the losses from CLOs, combined with losses from other troubled assets like those commercial-mortgage-backed securities, will lead to serious deficiencies in capital. You're making a pretty brave assertion given what we saw in 2008. I now assume that the ratings are all skewed to be too optimistic, publicly acknowledged exposure is skewed to underreport, and our ability to see the actual damage that would be caused by a system-wide collapse in CLOs isn't clear because we don't know what each opaque silo is doing to multiply or hedge those CLOs (and neither does any individual silo). Also, capital reserve requirements dry up very quickly when a panic starts to set in. The Federal Reserve saved us earlier this year and in 2008+, but there comes a point when it won't be as successful and investors may start to see other markets as being comparatively lower risk, especially after the official US debt will likely jump 20-50% this year alone and we never unrolled the $4.5trillion in QE, only added another $4trillion - $10trillion onto that.
- RandomBacon 6y ago
  That's sarcasm right? The capital requirement has recently been dropped to zero. Edit for source: https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
  - whatok 6y ago
    Reserve requirements != capital requirements. Reserve requirements are vs deposits, capital requirements are vs balance sheet items. Big difference between the two.
- floatrock 6y ago
  If that's not sarcasm, help me understand why... I'm not a finance guy. The argument made by the author was roughly something like this: - Capital requirements against the CLO's assume AAA ratings - In 2008, we learned that AAA CDO traunches were really AAA (despite not containing a single AAA-rated loan) only when assumptions about (non-)correlation of defaults remained true -- ie real estate markets are local so not everyone defaults at the same time - The problem with the AAA CDO ratings was that in a time of crisis, all the "good times" defaulting correlation assumptions go out the window and everyone defaults together. Now the magic of blending a bunch of BBB's, BB's, and B's into an AAA no longer works. So if now we're repeating the same story -- a big shock ('rona) makes a whole bunch of previously uncorrelated loans default together -- then the argument goes that the capital requirements which assumed AAA ratings are insufficient. What part of that story is wrong or incomplete?
bostik 6y ago
Having just read both Liar's Poker and Barbarians at the Gates, the concept of CLOs sounds awfully familiar. Loaning money to high-risk companies? Bundling a whole bunch of said loans into securities? High returns despite the risk of a significant fraction of defaults? Sounds like the world has been here before. If this was a B-flick, it might well be called the return (or revenge) of the junk bond monster.
- Grimm1 6y ago
  This sounds entirely the same and this time the industry probably thought they were so clever because companies are likely still less risky than individual consumers and then oops Corona!
gridlockd 6y ago
"There are more than $1 trillion worth of leveraged loans currently outstanding. The majority are held in CLOs." To get some perspective, the FED recently added almost three trillion dollars of "not QE" to the balance sheet, mostly because of COVID-19. They'll be bailed out. "But this time, the bailout proposal will likely face stiffer opposition, from both parties" Doubtful. Everything can be blamed on the virus this time.
- jandrese 6y ago
  Debt only matters if there is a Democrat in the White House.
- mrep 6y ago
  What part of the FEDs balance sheet [0] are you concerned about getting bailed out because it is pretty much entirely composed of the US government's own debt through US treasury securities and citizens homes through mortgage backed securities? [0]: https://www.federalreserve.gov/releases/h41/current/h41.htm https://www.federalreserve.gov/releases/h41/current/h41.htm
  - gridlockd 6y ago
    I'm saying the banks holding CLOs will get bailed out much in the same way as those holding mortgage-backed securities. I'd be concerned if this didn't happen.
dustingetz 6y ago
America can afford to prop it up for as long as the dollar is in demand for international trade, and she will use her naval superiority to make sure of that
- jessaustin 6y ago
  OK now I'm worried. Our navy seems unequal to the task of not running into other ships by mistake.
dia80 6y ago
Meh, the article doesn't mention recovery rates. If a loan defaults it's not usual you are getting 0 back. Typically 30-40% is the assumed rate. That means if all the loans default then the top 30% of tranches shouldn't take a loss. So now consider, most of the underlying loans have to default and the recovery rate has to be below battle tested assumptions before the top tiers get risky. This is very very unlikely to happen given the Fed and the US Govt. have done so much and are committed to do more to stave off a severe depression / recession. It's more like people were killing it buying the safer parts at distressed prices as over leveraged funds shed them on the back of margin calls in March.
- mycl 6y ago
  It says this: > We already know that a significant majority of the loans in CLOs have weak covenants that offer investors only minimal legal protection; in industry parlance, they are “cov lite.” The holders of leveraged loans will thus be fortunate to get pennies on the dollar as companies default—nothing close to the 70 cents that has been standard in the past.
  - rmrfstar 6y ago
    Also, a lot of people make 10x levered bets on AAA instruments, which means even a 10% loss can wipe you out. The trick is "repo", or repurchase agreements. (1) Buy bonds (2) Use those bonds as collateral for a low-interest loan (3) Use the loan money to buy bonds (4) goto 2 See, e.g [1] [1] https://www.bloomberg.com/news/articles/2020-04-15/how-repo-agreements-juiced-securitized-debt-leverage-quicktake https://www.bloomberg.com/news/articles/2020-04-15/how-repo-...
    - karatestomp 6y ago
      Aha. Is this how folks actually attain worthwhile rates of return on very low-return, low-risk investments? [EDIT] well no that can't be it because it requires even more money coming in for those loans, which can't provide more expected return than the bonds they're buying or the whole thing would be pointless.
    - 6y ago
rufusroflpunch 6y ago
We never "righted" the system after 2008 (or 2001). We just kicked the can down the road, making the problem worse for ourselves when we eventually do finally lose control. Our system is 100% entirely dependent upon ARTIFICIALLY low interest rates driven by Central Banks. It's the only still keeping this zombie of an economy moving, and it's the entire world, not just the United States. Central banks are doing everything in their power to keep interest rates low because if they were to tick up even a little bit, the whole house of cards will come toppling down. They can't do it forever and we're all just playing chicken with hyperinflation.
- itsoktocry 6y ago
  >Our system is 100% entirely dependent upon ARTIFICIALLY low interest rates There is no such thing as "artificial" or "natural" rates of interest. >Central banks are doing everything in their power to keep interest rates low because if they were to tick up even a little bit, the whole house of cards will come toppling down. Why would, or should, they "tick up"? Capital is abundant. If rates were higher, things would be different, yes. But that is not the world we live in. >It's the only still keeping this zombie of an economy moving, and it's the entire world I love the idea that the entire global economy is fake, artificial and zombie-like, because it doesn't operate the way you think it should. A reasonable person would take a step back and question their premises and understanding.
  - darawk 6y ago
    > There is no such thing as "artificial" or "natural" rates of interest. That is not entirely true. https://en.wikipedia.org/wiki/Natural_rate_of_interest https://en.wikipedia.org/wiki/Natural_rate_of_interest Whether the natural rate of interest is real, or is a unvariate value is a matter of some debate among economists.
  - anm89 6y ago
    >There is no such thing as "artificial" or "natural" rates of interest. In a sense this is semantically correct, there is no one true interest rate, in a hypothetical pure market there are many rates for many different types of transactions. But to say that wildly misses the point that the rates for all transactions are hugely skewed, all in the same direction, because a single player, who writes the laws, and prints the money, is putting enormous pressure on rates. So yes, there is no objective one natural rate. But all rates right now are extremely artificially skewed. > Why would, or should, they "tick up"? Capital is abundant. Capital is abundant for the sole purpose of keeping rates low. You are confusing the causality here. If they weren't being suppressed, and actors were setting rates on a per transaction basis, then they would drastically tick up as many of the underlying entities economy wide have riskier default profiles than they have in the past. This isn't conspiratorial or speculative. This is widely understood to be true by mainstream economists, even those who support the rate suppression.
apta 6y ago
The current economic system is fundamentally flawed. Unless someone has the courage to ban interest/usury, things will stay the way they are. We have known this for thousands of years now, but unfortunately greed and exploitation persists.
cm2187 6y ago
Idiotic article. First a CLO is essentially a portfolio of loans. You can call that gambling, and in a way, every financial risk is gambling, but it is the very job of a bank to take credit risk, and to lend. Then, I don't know about Wells specifically, but it is possible that these CLOs may not even be external transactions, that the bank securitised its own loans so that it stands ready to post them to the central bank as collateral to get short term funding in exchange, if a liquidity crisis hits. If it is the case, it is actually a good thing. The banking system is increadibly strong vs 2008, the amount of capital banks hold is a multiple of what they held in 2008, while having reduced the size of their balance sheets at the same time (ex Chinese banks). They hold huge amounts of liquid assets and have limits on how much short term funding they can rely on. In addition the introduction of bailin should protect tax payers in the case of a bank failure. I would be much more worried about the financial impact of money printing. The amount of QE that the Fed has introduced is unprecedented, both in size and velocity, and they keep printing. And we are only at the begining of this downturn. This will massively distord the markets. And I don't believe it will not create inflation ultimately, which is a much bigger threat to savers than their bank credit risk.
- linuxftw 6y ago
  > but it is the very job of a bank to take credit risk, and to lend. This used to be true, but isn't. The job of the bank to is play the spread. They take 0% interest loans from the Fed, loan the money to you, and then resell the loan into the market (aka, your 401k). This is why the subprime mortgage crisis was a crisis. Banks had almost 0 risk. Just let the credit rating agencies stamp AAA on the CLO, push it into the state of California's pension fund as AAA securities, profit. If any bank is not selling the loan, they're taking a completely unnecessary risk.
- whatok 6y ago
  Agree with a majority of this. US bank balance sheets are in a whole different universe than they were during the last crisis. CLOs are not only a minuscule portion of their holdings but they also hold a tiny percentage of outstanding CLOs. Japanese co-op banks on the other hand have huge CLOs holdings and would be extremely exposed if these went sour.
nine_zeros 6y ago
So what? There is only one game out there and its called printing money. We have bad loans on the books? Oops, nothing we can do here and can't have so many foreclosed lower valued assets. Print. If anyone looked at billionaire net worths, they would know that hyperinflation is rampant. The only reason it doesn't show up in the cost of Milk is because the peasants (we the people) fight for scraps and are willing to take smaller slice of the pie. In other words, the Bernanke trick of inflating assets in 2008 did its job. It inflated assets and the size of the pie increased. But 90% of the participants still have a lower share of the pie.
WarOnPrivacy 6y ago
> "I have a checking account and a home mortgage with Wells Fargo" Casting literally every inch of his financial judgment into doubt. Or maybe we've just been pranked
stuntkite 6y ago
How come no one is talking about the fact that a couple months ago our banks went from fractional reserve to zero reserve? If that doesn’t scream disaster is expected I don’t know what does. Literally anyone can form a banking org, get fdic insurance and print. money. out. of. thin. air. If you aren’t doing it yourself already, maybe you should. I’m gonna try and maybe make a medium.com post about it.
Ambele 6y ago
If the banks aren't paying interest on deposits anymore, does it now make sense to withdraw some of the money and store it under a mattress somewhere? Obviously there are theft, fire, and police confiscation risks that need to be overcome first.

135 points by sajid 6y ago

> I ran my finger across the page to see the total for these investments, investments that Powell and Mnuchin have asserted are “outside the banking system.” > The total is $29.7 billion. It is a massive number. And it is inside the bank. What percentage of Wells Fargo's assets is that? It looks they they've 1.9 trillion in assets, so even they were worth nothing, would it have a material impact?

tvb12 6y ago
> The banks themselves may reveal that their CLO investments are larger than was previously understood. In fact, we’re already seeing this happen. On May 5, Wells Fargo disclosed $7.7 billion worth of CLOs in a different corner of its balance sheet than the $29.7 billion I’d found in its annual report. There might be more?

solatic 6y ago

It doesn't matter if the banks crash again if the Fed will just bail everybody out again and push stock market inflation even higher than it is now. It's clearly unsustainable, but the question is, how and why will the bubble burst? The author posits one option, of political intervention precluding another bailout. But the Federal Reserve is non-political precisely to shield it from attempted short-term political machinations. Congress will complain to the cameras and the Fed will go right back to "rescuing" the market. No, the bottom will only well and truly drop out when there's significant capital flight - when the dearth of real investment opportunities relative to currency glut becomes so acute that capital leaves American borders in search of real return. But to where? And under which circumstances?

Answerawake 6y ago
> But to where? And under which circumstances? Can you give some guesses? I don't see any other place that would seem more attractive than the US. Every other place has its own problems whether it be lack of developed human capital, unstable government systems, etc. Maybe in the distant future if Mars transportation takes off that can be the next big thing?
- devalgo 6y ago
  Short of saying that a hyper inflation event in the US would probably break civilization and so allocating capital is irrelevant at that point, isn't the obvious answer Bitcoin or other crypto assets?
mdorazio 6y ago
Think you nailed it. The thing is, in order for capital flight to be a risk there needs to be somewhere else of comparable size and upside opportunity to the US that doesn't rhyme with "China" and it sure as hell isn't Europe. So we're back to square one in which absolutely massive sums of money are chasing returns with nowhere else to put money than the same places it already is. It's madness on a global scale.
- clairity 6y ago
  i mean, globalism was always about helping capital find returms while hedging risk, under the guise of international trade being better for all than isolationism (but much better for capital than labor). the core problem of hoarding wealth, as exhibited by the flight of capital to the US, is the inability of small groups of people to efficiently allocate capital, to have enough imagination and ingenuity to centrally-plan their allocations. it's literally anti-capitalist.
- burlesona 6y ago
  This is the insanity of zero interest rate policy. It’s so hard for me to understand why the economists and fed officials don’t see this.
  - QuesnayJr 6y ago
    It's not that we don't see it, but we don't agree. I honestly don't have the energy to try to explain it here anymore -- the conversation always turns unpleasant, and I need a place on the Internet where I can avoid thinking about economics for a while.
    - cryptica 6y ago
      >> the conversation always turns unpleasant Rationalizing the irrational tends to be unpleasant. I think it's a complete fabrication that people are dependent on the financial system and that we need economic stability. People enjoy drama and they are able to recover from any economic failure. Even total failure. Too big to fail is total BS. If a solar storm wiped out all records of bank accounts and all records of all financial holdings, the economy would quickly recover. The number of new opportunities that this would create would be unprecedented. From the perspective of most people, the best feature of capitalism is not its ability to provide sustenance (even communism can do that), it's its ability to provide hope for something better... Unfortunately these days our modern version is not true capitalism, it's crony-capitalism and it doesn't yield much hope - You are given a place in society and the only way you can get something better is by doing something deeply unethical and then earning hush money from your corporate masters. We are heading towards a dystopian surveillance capitalist future. Even if the economy crashes permanently and never recovers, that future doesn't look so bad compared to what would happen if we stay on course with current monetary policies.
devalgo 6y ago
> but the question is, how and why will the bubble burst? I'd take the Black Swan approach. There are probably a dozen each unlikely events that could cause the bubble to pop but you're unlikely to actually predict which one will do it and when it will happen. Your optimal move is to assume something is going to happen at some point and just hedge yourself against that rather than try to predict. Taleb gets called an oracle but his entire philosophy is not to predict rare events that destabilize a system but just accept they will eventually happen and prepare accordingly In this case having some portion of your net worth in BTC/Crypto seems like an obvious hedge
throwaway1777 6y ago
Yeah, until there’s a better market to invest in than the US or an attempt to dethrone the dollar as the reserve currency I don’t see anything changing no matter what the fed does with QE and bailouts.

ed25519FUUU 6y ago

Buried lede warning. >But there’s another threat to the economy, too. It lurks on the balance sheets of the big banks, and it could be cataclysmic. (10 paragraphs later) >I ran my finger across the page to see the total for these investments, investments that Powell and Mnuchin have asserted are “outside the banking system.” The total is $29.7 billion. It is a massive number. And it is inside the bank.

kerkeslager 6y ago

> The federal government stepped in to rescue the other big banks and forestall a panic. The intervention worked—though its success did not seem assured at the time—and the system righted itself. Of course, many Americans suffered as a result of the crash, losing homes, jobs, and wealth. An already troubling gap between America’s haves and have-nots grew wider still. Yet by March 2009, the economy was on the upswing, and the longest bull market in history had begun. This paragraph is conceding a point that should not be conceded. The system did not right itself if many Americans lost homes, jobs, and wealth. 12 years later, not everyone has recovered from the 2008 collapse.

lazide 6y ago
What criteria should someone use to judge 'righted itself'? No event can ever be completely undone, merely compensated for. Many of the people who lost homes should never have bought them leading up to '08 - they only were able to because of unrealistic (and sometimes predatory) underwriting standards and financing that NEVER would have worked out, and blew up shortly thereafter once the people bankrolling it figured out what was going on. The overall economy recovered, but of course it looked a bit different. It was 4-5 years later.
- Klinky 6y ago
  Mortgages should have been heavily renegotiated, bailout given to the home owners to pay back the mortgage in a bottom-up bailout. Let's throw in existing homeowners as well, who had made proper payments in the mix, so they get some benefit from the situation. Instead lots of money handed over to banks to fix their books and toxic assets handed over to the .gov. Lots of people losing their homes and jobs, no one in the financial sector really seeing any jail time or penalty for their malfeasance. Much of the financial sector actually made off quite well during/after the crisis. We're seeing it again with big businesses getting COVID bailouts, meanwhile politicians are wringing their hands that unemployment insurance benefits are "too high" and "main street" needs to get back to work. Make sure "main street" is held accountable and/or penalized, but it seems there are a lot of golden parachutes and soft landings for big business and the finance industries.
- 6y ago

nknealk 6y ago

> I have a checking account and a home mortgage with Wells Fargo; I decided to see how heavily invested my bank is in CLOs. I had to dig deep into the footnotes of the bank’s most recent annual report, all the way to page 144... The total is $29.7 billion. It is a massive number. And it is inside the bank. To put $29.7B that into context -- Table 4 of the most recent 10K says that Wells has ~1.7 trillion dollars of earning assets. Tables 1 & 2 indicate they hold around 180B of shareholder capital buffer.

thephyber 6y ago
Your appraisal seems fair... of the data you are working with. But how many other financial instruments they own are tied up in CLOs on the books of other banks? The whole point of The Big Short and Margin Call was that the banks aren't resilient, independent silos. When one bank shakes or falls, it can impact the neighboring bank which causes a domino effect. They all invest in slices of the things that the other banks invest in, they all do it with lots of leverage, and they all think they've hedged against the downside risk, but that still didn't prevent the 2008 collapse.
- clairity 6y ago
  that's literally herding behavior, which is the loss of independence among market participants, so that risks start to align, rather than cancel each other out. it's disgusting that we haven't learned anything from 2008.
  - thephyber 6y ago
    To be fair, I think every financial instrument works this way (the transitive property of assets which own assets) all the time. Having regulations which restrict which companies are allowed to trade specific classes of instruments/services (eg. Glass Steagall) helps mitigate this, but doesn't even approach eliminating it.
    - clairity 6y ago

thephyber 6y ago

I've long read about the following still being a problem (post-2009): - CDOs (although a new generation of them have a new name/initialism) - Frank/Dodd was partially rolled back - The definition of bank size-classes was changed to reduce the regulatory burden over most regional banks that were previously more regulated - No significant adverse event happened after Standard & Poors was identified as having significantly inaccurate ratings on CDO / mortgage bond - moral hazard all over the financial sector, multiplied by large QE rounds - shadow inventory of housing (not sure if this was sold off or if banks still hold lots of houses off the market) - lots of private unicorns have opted not to try to go IPO, despite Wall Street records over the past few years (edit: I converted the indented list to individual paragraphs) But given these assumptions, are the US financial markets really that healthy? It still feels like we have a few asset bubbles, especially in the assets which QE propped up.

yodon 6y ago
As a head's up a huge fraction of HN's readers read on mobile where code formatting like you used here makes posts unreadable.
- thephyber 6y ago
  Yes, I've heard, but there isn't a suitable replacement format that I've seen for a bulleted list. The formatting doc[1] is very short and doesn't include a list. [1] https://news.ycombinator.com/formatdoc https://news.ycombinator.com/formatdoc
gridlockd 6y ago
It's not a bubble, it's price inflation. Assets are fairly priced with a looming collapse of the dollar value in mind.
- thephyber 6y ago
  I'm not sure I agree with the terms you are using. I get the difference between what is usually called a "bubble" and what is usually called "inflation", but I don't think you can accurately identify a bubble until it has already burst and you do it in retrospect. "Fairly priced" is strange because every transaction is "fairly priced" in the moment (given the knowledge at the time), but may turn out to be "unfairly priced" if in retrospect it appears to be fraudulent.

danielovichdk 6y ago

From an outsider living a long way from USA, for many years now I haven't understood how the financial instruments of USA work. It constantly looks like the country is merely printing more money to stay afloat.

adammunich 6y ago
It is
candiodari 6y ago
It's weird that people think that it's different anywhere else. In fact, the situation in the US is, if anything, less serious than elsewhere. Especially Europe. The ECB had to bail out quite a few banks, and several states have done the same. Even now the ECB is preparing new bailouts for European banks: https://www.brusselstimes.com/all-news/business/116135/european-central-bank-may-consider-setting-up-bad-bank/ https://www.brusselstimes.com/all-news/business/116135/europ... And when even the ECB thinks banks have behaved so appalingly they deserve to die (trust me this takes quite a bit of really, really bad behavior), the individual countries: https://www.france24.com/en/20081020-french-government-105-billion-euro-bank-bailout-financial-crisis https://www.france24.com/en/20081020-french-government-105-b...
onion2k 6y ago
for many years now I haven't understood how the financial instruments of USA work That's deliberate. If they're too complex for most people to understand then they're very hard to scrutinize.
- rmrfstar 6y ago
  They aren't actually complex at all. People in finance like to jargon up the work they do. Back in '08 we heard about how "complex" CDS are. There is nothing complex about a CDS. Whenever something bad happens in the financial sector, there is always a simple story behind it. Usually a combination of fraud and leverage.
  - 6y ago

nojito 6y ago

It doesn’t matter if CLOs collapse. The capital requirements that banks operate under will ensure that they will withstand it.

thephyber 6y ago
From TFA > But the losses from CLOs, combined with losses from other troubled assets like those commercial-mortgage-backed securities, will lead to serious deficiencies in capital. You're making a pretty brave assertion given what we saw in 2008. I now assume that the ratings are all skewed to be too optimistic, publicly acknowledged exposure is skewed to underreport, and our ability to see the actual damage that would be caused by a system-wide collapse in CLOs isn't clear because we don't know what each opaque silo is doing to multiply or hedge those CLOs (and neither does any individual silo). Also, capital reserve requirements dry up very quickly when a panic starts to set in. The Federal Reserve saved us earlier this year and in 2008+, but there comes a point when it won't be as successful and investors may start to see other markets as being comparatively lower risk, especially after the official US debt will likely jump 20-50% this year alone and we never unrolled the $4.5trillion in QE, only added another $4trillion - $10trillion onto that.
RandomBacon 6y ago
That's sarcasm right? The capital requirement has recently been dropped to zero. Edit for source: https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
- whatok 6y ago
  Reserve requirements != capital requirements. Reserve requirements are vs deposits, capital requirements are vs balance sheet items. Big difference between the two.
floatrock 6y ago
If that's not sarcasm, help me understand why... I'm not a finance guy. The argument made by the author was roughly something like this: - Capital requirements against the CLO's assume AAA ratings - In 2008, we learned that AAA CDO traunches were really AAA (despite not containing a single AAA-rated loan) only when assumptions about (non-)correlation of defaults remained true -- ie real estate markets are local so not everyone defaults at the same time - The problem with the AAA CDO ratings was that in a time of crisis, all the "good times" defaulting correlation assumptions go out the window and everyone defaults together. Now the magic of blending a bunch of BBB's, BB's, and B's into an AAA no longer works. So if now we're repeating the same story -- a big shock ('rona) makes a whole bunch of previously uncorrelated loans default together -- then the argument goes that the capital requirements which assumed AAA ratings are insufficient. What part of that story is wrong or incomplete?

bostik 6y ago

Having just read both Liar's Poker and Barbarians at the Gates, the concept of CLOs sounds awfully familiar. Loaning money to high-risk companies? Bundling a whole bunch of said loans into securities? High returns despite the risk of a significant fraction of defaults? Sounds like the world has been here before. If this was a B-flick, it might well be called the return (or revenge) of the junk bond monster.

Grimm1 6y ago
This sounds entirely the same and this time the industry probably thought they were so clever because companies are likely still less risky than individual consumers and then oops Corona!

gridlockd 6y ago

"There are more than $1 trillion worth of leveraged loans currently outstanding. The majority are held in CLOs." To get some perspective, the FED recently added almost three trillion dollars of "not QE" to the balance sheet, mostly because of COVID-19. They'll be bailed out. "But this time, the bailout proposal will likely face stiffer opposition, from both parties" Doubtful. Everything can be blamed on the virus this time.

jandrese 6y ago
Debt only matters if there is a Democrat in the White House.
mrep 6y ago
What part of the FEDs balance sheet [0] are you concerned about getting bailed out because it is pretty much entirely composed of the US government's own debt through US treasury securities and citizens homes through mortgage backed securities? [0]: https://www.federalreserve.gov/releases/h41/current/h41.htm https://www.federalreserve.gov/releases/h41/current/h41.htm
- gridlockd 6y ago
  I'm saying the banks holding CLOs will get bailed out much in the same way as those holding mortgage-backed securities. I'd be concerned if this didn't happen.

dustingetz 6y ago

America can afford to prop it up for as long as the dollar is in demand for international trade, and she will use her naval superiority to make sure of that

jessaustin 6y ago
OK now I'm worried. Our navy seems unequal to the task of not running into other ships by mistake.

dia80 6y ago

Meh, the article doesn't mention recovery rates. If a loan defaults it's not usual you are getting 0 back. Typically 30-40% is the assumed rate. That means if all the loans default then the top 30% of tranches shouldn't take a loss. So now consider, most of the underlying loans have to default and the recovery rate has to be below battle tested assumptions before the top tiers get risky. This is very very unlikely to happen given the Fed and the US Govt. have done so much and are committed to do more to stave off a severe depression / recession. It's more like people were killing it buying the safer parts at distressed prices as over leveraged funds shed them on the back of margin calls in March.

mycl 6y ago
It says this: > We already know that a significant majority of the loans in CLOs have weak covenants that offer investors only minimal legal protection; in industry parlance, they are “cov lite.” The holders of leveraged loans will thus be fortunate to get pennies on the dollar as companies default—nothing close to the 70 cents that has been standard in the past.
- rmrfstar 6y ago
  Also, a lot of people make 10x levered bets on AAA instruments, which means even a 10% loss can wipe you out. The trick is "repo", or repurchase agreements. (1) Buy bonds (2) Use those bonds as collateral for a low-interest loan (3) Use the loan money to buy bonds (4) goto 2 See, e.g [1] [1] https://www.bloomberg.com/news/articles/2020-04-15/how-repo-agreements-juiced-securitized-debt-leverage-quicktake https://www.bloomberg.com/news/articles/2020-04-15/how-repo-...
  - karatestomp 6y ago
    Aha. Is this how folks actually attain worthwhile rates of return on very low-return, low-risk investments? [EDIT] well no that can't be it because it requires even more money coming in for those loans, which can't provide more expected return than the bonds they're buying or the whole thing would be pointless.
  - 6y ago

rufusroflpunch 6y ago

We never "righted" the system after 2008 (or 2001). We just kicked the can down the road, making the problem worse for ourselves when we eventually do finally lose control. Our system is 100% entirely dependent upon ARTIFICIALLY low interest rates driven by Central Banks. It's the only still keeping this zombie of an economy moving, and it's the entire world, not just the United States. Central banks are doing everything in their power to keep interest rates low because if they were to tick up even a little bit, the whole house of cards will come toppling down. They can't do it forever and we're all just playing chicken with hyperinflation.

itsoktocry 6y ago
>Our system is 100% entirely dependent upon ARTIFICIALLY low interest rates There is no such thing as "artificial" or "natural" rates of interest. >Central banks are doing everything in their power to keep interest rates low because if they were to tick up even a little bit, the whole house of cards will come toppling down. Why would, or should, they "tick up"? Capital is abundant. If rates were higher, things would be different, yes. But that is not the world we live in. >It's the only still keeping this zombie of an economy moving, and it's the entire world I love the idea that the entire global economy is fake, artificial and zombie-like, because it doesn't operate the way you think it should. A reasonable person would take a step back and question their premises and understanding.
- darawk 6y ago
  > There is no such thing as "artificial" or "natural" rates of interest. That is not entirely true. https://en.wikipedia.org/wiki/Natural_rate_of_interest https://en.wikipedia.org/wiki/Natural_rate_of_interest Whether the natural rate of interest is real, or is a unvariate value is a matter of some debate among economists.
- anm89 6y ago
  >There is no such thing as "artificial" or "natural" rates of interest. In a sense this is semantically correct, there is no one true interest rate, in a hypothetical pure market there are many rates for many different types of transactions. But to say that wildly misses the point that the rates for all transactions are hugely skewed, all in the same direction, because a single player, who writes the laws, and prints the money, is putting enormous pressure on rates. So yes, there is no objective one natural rate. But all rates right now are extremely artificially skewed. > Why would, or should, they "tick up"? Capital is abundant. Capital is abundant for the sole purpose of keeping rates low. You are confusing the causality here. If they weren't being suppressed, and actors were setting rates on a per transaction basis, then they would drastically tick up as many of the underlying entities economy wide have riskier default profiles than they have in the past. This isn't conspiratorial or speculative. This is widely understood to be true by mainstream economists, even those who support the rate suppression.

apta 6y ago

The current economic system is fundamentally flawed. Unless someone has the courage to ban interest/usury, things will stay the way they are. We have known this for thousands of years now, but unfortunately greed and exploitation persists.

cm2187 6y ago

Idiotic article. First a CLO is essentially a portfolio of loans. You can call that gambling, and in a way, every financial risk is gambling, but it is the very job of a bank to take credit risk, and to lend. Then, I don't know about Wells specifically, but it is possible that these CLOs may not even be external transactions, that the bank securitised its own loans so that it stands ready to post them to the central bank as collateral to get short term funding in exchange, if a liquidity crisis hits. If it is the case, it is actually a good thing. The banking system is increadibly strong vs 2008, the amount of capital banks hold is a multiple of what they held in 2008, while having reduced the size of their balance sheets at the same time (ex Chinese banks). They hold huge amounts of liquid assets and have limits on how much short term funding they can rely on. In addition the introduction of bailin should protect tax payers in the case of a bank failure. I would be much more worried about the financial impact of money printing. The amount of QE that the Fed has introduced is unprecedented, both in size and velocity, and they keep printing. And we are only at the begining of this downturn. This will massively distord the markets. And I don't believe it will not create inflation ultimately, which is a much bigger threat to savers than their bank credit risk.

linuxftw 6y ago
> but it is the very job of a bank to take credit risk, and to lend. This used to be true, but isn't. The job of the bank to is play the spread. They take 0% interest loans from the Fed, loan the money to you, and then resell the loan into the market (aka, your 401k). This is why the subprime mortgage crisis was a crisis. Banks had almost 0 risk. Just let the credit rating agencies stamp AAA on the CLO, push it into the state of California's pension fund as AAA securities, profit. If any bank is not selling the loan, they're taking a completely unnecessary risk.
whatok 6y ago
Agree with a majority of this. US bank balance sheets are in a whole different universe than they were during the last crisis. CLOs are not only a minuscule portion of their holdings but they also hold a tiny percentage of outstanding CLOs. Japanese co-op banks on the other hand have huge CLOs holdings and would be extremely exposed if these went sour.

nine_zeros 6y ago

So what? There is only one game out there and its called printing money. We have bad loans on the books? Oops, nothing we can do here and can't have so many foreclosed lower valued assets. Print. If anyone looked at billionaire net worths, they would know that hyperinflation is rampant. The only reason it doesn't show up in the cost of Milk is because the peasants (we the people) fight for scraps and are willing to take smaller slice of the pie. In other words, the Bernanke trick of inflating assets in 2008 did its job. It inflated assets and the size of the pie increased. But 90% of the participants still have a lower share of the pie.

WarOnPrivacy 6y ago

> "I have a checking account and a home mortgage with Wells Fargo" Casting literally every inch of his financial judgment into doubt. Or maybe we've just been pranked

stuntkite 6y ago

How come no one is talking about the fact that a couple months ago our banks went from fractional reserve to zero reserve? If that doesn’t scream disaster is expected I don’t know what does. Literally anyone can form a banking org, get fdic insurance and print. money. out. of. thin. air. If you aren’t doing it yourself already, maybe you should. I’m gonna try and maybe make a medium.com post about it.

Ambele 6y ago

If the banks aren't paying interest on deposits anymore, does it now make sense to withdraw some of the money and store it under a mattress somewhere? Obviously there are theft, fire, and police confiscation risks that need to be overcome first.