Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Odd Thoughts Podcast.
Speaker 2: I'm Tracy Allaway.
Speaker 3: And I'm Joe Wisenthal.
Speaker 2: Joe, do you ever wonder what this show would have
Speaker 2: been like if we had been doing the podcast before
Speaker 2: two thousand.
Speaker 3: And eight, Well, we would have had plenty to talk
Speaker 3: about it, you know, I actually have it right, It
Speaker 3: would have, man, now, I wish we could. We would
Speaker 3: have had like five bonus episodes every single week, so
Speaker 3: there were just so much content on those days.
Speaker 2: I'm actually glad we weren't doing it back in two
Speaker 2: thousand and eight because I feel like that was a
Speaker 2: time when we, along with everyone else in the market,
Speaker 2: were still learning a lot about how everything works. But
Speaker 2: the one thing I'm kind of sad about is, uh,
Speaker 2: you know, there was a lot of interesting stuff happening
Speaker 2: in structured finance in the securitization market back then, lots
Speaker 2: of interesting deal structures, and there aren't that many of
Speaker 2: those since two thousan and eight for obvious reasons.
Speaker 3: No, you're totally right, Like, you know, we don't do
Speaker 3: many like credit credit default swaps episodes or CDOs or
Speaker 3: various other versions of structured finance, which I know that
Speaker 3: you know, you've covered quite a bit. You know, you
Speaker 3: hear about that stuff a little bit less. But yes,
Speaker 3: that would have been a buffet of topics for us
Speaker 3: to choose from back then.
Speaker 2: A buffet is a good way of putting it, okay,
Speaker 2: So I'm very happy to say this is an episode
Speaker 2: I have wanted to do for a while.
Speaker 4: We are going to.
Speaker 2: Gorge ourselves on a particular type of structured finance deal,
Speaker 2: something that's been happening in the market for a number
Speaker 2: of years now, but it really seems to be booming
Speaker 2: in some respects in recent years. We're going to be
Speaker 2: talking about synthetic risk transfers or SRTs.
Speaker 3: I have to admit that up until like two days ago,
Speaker 3: I had no idea what a synthetic risk transfer is.
Speaker 3: I also still don't have any idea what a synthetic
Speaker 3: risk transfer is. But I, like, you know, get the
Speaker 3: impression that basically this is what I seem to know
Speaker 3: based on a couple of things I've read. There's only
Speaker 3: so much risk or balance sheet that regulated financial institution
Speaker 3: like a bank is supposed to take, and at some point,
Speaker 3: if they want to continue to make loans and continue
Speaker 3: to maintain a relationship with a client, whoever it is,
Speaker 3: some of that risk in order for regulatory balance sheet
Speaker 3: purposes whatever has to be unloaded to some third party entity.
Speaker 5: Right.
Speaker 2: So the interesting thing about these transactions is they didn't
Speaker 2: always used to be called synthetic risk transfers. I remember,
Speaker 2: I mean, I am so old that I remember when
Speaker 2: they were just called balance sheet securitizations or synthetic balance
Speaker 2: sheet clos collateralized loan obligations. I remember when they were
Speaker 2: called regulatory capital trades or regular relief trades instead of SRT,
Speaker 2: and I think that name actually gives a much more
Speaker 2: concrete idea of what is happening here. So banks have
Speaker 2: portfolios of loans, they have to hold regulatory capital against
Speaker 2: those loans. Post two thousand and eight and all the
Speaker 2: regulatory reform that we've seen, they have to hold more capital,
Speaker 2: and so they've looked at creative ways of lessening some
Speaker 2: of that burden. And one of the things they've come
Speaker 2: up with is this SRT idea. So this idea that
Speaker 2: you purchase basically insurance protection on a portfolio of loans,
Speaker 2: and then if you do it in the right way,
Speaker 2: you get to hold less capital against it, and it
Speaker 2: frees up your balance sheet allows you to do more lending. Now,
Speaker 2: the interesting thing about these deals is, as I alluded to,
Speaker 2: they actually have a long history, Like in some respects,
Speaker 2: they're sort of the essence of securitization itself, this idea
Speaker 2: of risk transfer, and you can kind of trace the
Speaker 2: history all the way back to JP Morgan and first
Speaker 2: pistro trades and.
Speaker 4: Stuff like that.
Speaker 2: Maybe we'll get all the way back to the nineteen
Speaker 2: nineties and JP Morgan in this conversation. I'm not sure,
Speaker 2: but there's definitely a lot to discuss, primarily why these
Speaker 2: things seem to be growing now. So I think there
Speaker 2: was about twenty five billion worth of SRTs issued in
Speaker 2: twenty twenty three. The average number of banks that have
Speaker 2: been tapping the market has gone from something like eight
Speaker 2: in sort of the twenty fourteen to twenty twenty period
Speaker 2: to something like thirty seven now, So that's.
Speaker 4: A big jump.
Speaker 2: More banks are doing this, investors are getting interested in this.
Speaker 2: One funny thing that I just realized is like some
Speaker 2: of the do you remember the trade press on structured credit?
Speaker 2: Like structured credit investor I used to read them all
Speaker 2: the time, sort of two thousand and eight to twenty ten,
Speaker 2: and it was all about you know, CDOs and rmbs
Speaker 2: and housing reform. It is now all about SRTs. So
Speaker 2: you can see the sort of like transition that of
Speaker 2: the market happening in real time.
Speaker 3: I am really looking forward to this conversation, you know,
Speaker 3: I think to me, conceptually, part of my question what
Speaker 3: I want to learn is like a financial institution hedging
Speaker 3: out some of their credit risk exposure, counterparty exposure, whatever
Speaker 3: it is, is not really new. And we had this
Speaker 3: whole thing, you know that we would have talked about
Speaker 3: a lot in two thousand and eight, which is the
Speaker 3: credit default swaps market. And conceptually, to me, this idea
Speaker 3: of like, okay, here's an entity it wants to use
Speaker 3: someone else's capital, you know, to essentially buy ensure or
Speaker 3: ensure away or risk. That was a thing. Then a
Speaker 3: lot of that market sort of dried up, and now
Speaker 3: there is this new market. So I want to understand
Speaker 3: a little bit more about how this is conceptually different
Speaker 3: or similar to right.
Speaker 2: This is a very big debate in this space, like
Speaker 2: to what degree do these potentially pose a risk to
Speaker 2: financial stability? There's been some excellent coverage by our colleagues
Speaker 2: at Bloomberg about one particular aspect of this that seems
Speaker 2: kind of sketchy. We are going to get into that,
Speaker 2: but I have to say we really do have the
Speaker 2: perfect guest to discuss this, someone I've been wanting to
Speaker 2: speak to about this for a long time. We're going
Speaker 2: to be talking to Michael Shemy. He is the North
Speaker 2: America structured credit lead at Guy Carpenter. So, Michael Mickey,
Speaker 2: welcome to the show.
Speaker 5: Thank you Tracy, thank you Joe for having me. Appreciate it.
Speaker 5: It's great to be here.
Speaker 4: What does Guy Carpenter actually do?
Speaker 5: Guy Carpenter is part of the Marsh McLennan family of
Speaker 5: companies that includes risk and insurance services Guy Carpenter Marsh,
Speaker 5: along with consulting Oliver Wyman and Mercer. Guy Carpenter is
Speaker 5: Marsh mcclennan's reinsurance specialist advisor broker. I lead the North
Speaker 5: America Structure credit business within the Global Mortgage and Structured
Speaker 5: Credit segment. I joined Guy Carpenter in late twenty twenty three.
Speaker 5: I've spent my career in ass management and banking, working
Speaker 5: with financial institution on matters related to regulatory capital, capital management,
Speaker 5: risk transfer. Most immediately before my current position, I had
Speaker 5: spent time working at a regulatory agency at FHFA, the
Speaker 5: Federal Housing Finance Agency, working on similar issues but specifically
Speaker 5: related to the GCS. To Fannie May and Freddie Guy
Speaker 5: Carpenter has presence in the Americas, Europe globally structuring and
Speaker 5: placing credit risk transfer synthetic risk transfer for various financial institutions.
Speaker 5: We generally place this risk with multiline reinsurance companies in
Speaker 5: reinsurance format, but also place this risk into the capital markets.
Speaker 5: We recently published with our colleagues at Marsh and Oliver
Speaker 5: Wyman a white paper in June about the potential for
Speaker 5: expanding banks portfolio management toolkit and exploring specific opportunities for
Speaker 5: North America banks to bail themselves of credit risk transfer
Speaker 5: transactions in that space. Much has been written about this recently.
Speaker 5: As you both alluded to, this was a bit different
Speaker 5: geared towards bank issuers discussed as benefits of credit risk transfer,
Speaker 5: give some historic context, and also you know, discusses what
Speaker 5: is required of a bank to launch such a program.
Speaker 2: It's a good paper and I made sure to read
Speaker 2: it before this conversation, So why don't we, given your expertise,
Speaker 2: have you fact check us in real time? Both Joe
Speaker 2: and I sort of explained the way we think of
Speaker 2: SRTs or redcap trades. Talk to us about what's your
Speaker 2: understanding and maybe give us a specific example, like in
Speaker 2: the evolution of one of these deals, how does it
Speaker 2: start and how does it actually come to market?
Speaker 5: Yeah, so there are a few things to say upfront.
Speaker 5: I would also say, you know your introduction. I think
Speaker 5: I agreed with basically every word there. Thank you, So
Speaker 5: that's an accomplishment. There are huge differences between what happens
Speaker 5: now in this market versus what happened in two thousand
Speaker 5: and eight, or more specifically in the lead up to
Speaker 5: two thousand and eight. But generally speaking, as you both
Speaker 5: describe banks or regulated institutions, they face a variety of
Speaker 5: constraints on their balance sheets, their business, liquidity, capital, and
Speaker 5: they have developed tools to manage those constraints. There could
Speaker 5: be loan sales, it could be loan participations, that could
Speaker 5: be partnerships and securitizations. Credit risk transfer synthetic risk transfer
Speaker 5: is just one of those tools to manage these constraints
Speaker 5: through a securitization in the banking framework, they're really conceptually
Speaker 5: two sorts of securitizations. There's a traditional securitization that involves
Speaker 5: actual sale of assets out of a financial institution.
Speaker 4: Where you put them in like a trust.
Speaker 5: Basically there's an SPV, there's a trust, there's an actual
Speaker 5: sales and outright sale of the assets. And then there's
Speaker 5: synthetic securitizations, which does not involve actual sale of assets.
Speaker 5: Assets remain on balance sheet, customer relationships aren't interrupted. Only
Speaker 5: credit risk is transferred out of the institution. What's also
Speaker 5: important here in these transactions, you know, people think of
Speaker 5: like two thousand and eight and credit risk and shedding
Speaker 5: credit risk and bad assets. This really is not strictly
Speaker 5: about shedding credit risk. Certainly it's a risk management tools
Speaker 5: and we'll get into the benefits, but it also really
Speaker 5: has become for banks and other regulated financial institutions like
Speaker 5: Fannyman Freddie MAC, more of a capital management tool than
Speaker 5: anything else. And just one thing I'll say in terms
Speaker 5: of nomenclature, because there's a lot of this floating around.
Speaker 5: CRT SRT probably the largest single program for these types
Speaker 5: of transactions is Fanny May and Freddie Mac's program that's
Speaker 5: referred to here in the US as credit risk transfer CRT.
Speaker 5: If you see some of the US regional banks who
Speaker 5: have become inaugural issuers of these transactions, even in two
Speaker 5: Q earnings, they refer to these transactions as credit risk
Speaker 5: transfers CRT. Globally, outside of the US and Europe specifically,
Speaker 5: these are generally referred to as SRT significant risk transfer,
Speaker 5: even synthetic risk transfer, and SRT is really a regulated term.
Speaker 5: It's a formal regulatory term in that context, but ultimately
Speaker 5: it's all the same. Generally speaking, it's the pulling of
Speaker 5: credit exposures by a financial institution, transferring a subordinated portion
Speaker 5: of the risk to a third party, either through a
Speaker 5: synthetic securitization rather than a traditional securitization.
Speaker 2: Joe I did an etymological study of what people are
Speaker 2: calling these deals. I think I published it like a
Speaker 2: month or maybe two months ago because I was bored,
Speaker 2: and it was more than a thousand words long, just
Speaker 2: tracing like the change in the nomenclature or what we
Speaker 2: actually call these things over time.
Speaker 4: It's funny how many.
Speaker 2: Different like phrases and words have fallen in and out
Speaker 2: of fashion to call these things.
Speaker 3: I feel like synthetic is one of those words that
Speaker 3: like raises alarms, Yeah it's not real, or something like that.
Speaker 3: But why do you explain to us from the perspective
Speaker 3: of a bank. You mentioned the two ways that they
Speaker 3: can offload credit risk. One is outright selling it, the
Speaker 3: other one is keeping it on the balance sheet, and
Speaker 3: then you know, offloading some of the credit specific risk.
Speaker 3: We'll get to how that's structured and who's buying and
Speaker 3: who's on the other side. But what do you explain
Speaker 3: from a regulatory or bank capital efficiency standpoint, why the
Speaker 3: risk is attractive rather than the outright sale dyes.
Speaker 2: Oh, and just to add on to that, because it's related,
Speaker 2: but why don't banks just raise more capital for their loans?
Speaker 5: So I think it's important to understand some of the
Speaker 5: conceptual foundations for bank regulatory capital, what it's designed to
Speaker 5: achieve and what it isn't designed to achieve. At the
Speaker 5: very highest level, financial institutions, again, whether you're a bank
Speaker 5: or a GSE or anything in between, generally face expected
Speaker 5: losses and they face unexpected losses. Expected losses perceived as
Speaker 5: a cost of doing business, bank's price for expected losses
Speaker 5: through lending an account for expected losses also through loan
Speaker 5: loss provisioning. In their normal course of business, banks don't
Speaker 5: hold regulatory capital for expected losses. In essence, what concerns
Speaker 5: bank regulators is unexpected losses, the losses above expected losses,
Speaker 5: and regulatory capital is there to absorb these unexpected losses
Speaker 5: as defined by regulators. And so you can really see
Speaker 5: bank capital as a proxy for those unexpected levels of
Speaker 5: loss above expected loss for which banks provision and price for. Now,
Speaker 5: how do bank regulators sort of transcribe that sort of
Speaker 5: philosophically into capital requirements while they look at two general
Speaker 5: frameworks right now, there's a risk based capital requirement and
Speaker 5: then there's a leverage capital requirement. Leverage capital requirements sort
Speaker 5: of assign same requirements to different asset classes, no matter
Speaker 5: the risk, same amount of capital. So whether you have
Speaker 5: one hundred dollars of a treasury security of cash on
Speaker 5: balance sheet, a mortgage, a corporate loan, you know that
Speaker 5: same hundred dollars of exposure will attract the same level
Speaker 5: of capital. For risk based capital requirements, the RBC assigns
Speaker 5: different capital requirements to different exposures based on the perceived
Speaker 5: risk they post to the bank by assigning different risk
Speaker 5: quits risk based capital. Oh yes, excuse me, yes, yeah, yeah,
Speaker 5: we're diving.
Speaker 2: Into the episode with a lot of acronyms.
Speaker 3: I keep going.
Speaker 5: So, unlike the leverage framework, right, cash on balance sheet
Speaker 5: right will attract far less than capital requirements than a
Speaker 5: mortgage loan or corporate loan or a consumer loan. And
Speaker 5: because of this differentiation in riskiness under the risk based
Speaker 5: capital framework, not the leverage capital requirements, banks seek to
Speaker 5: execute these transactions. So bringing this together, right, credit risk
Speaker 5: transfer transactions transfer a portion of the credit risk, typically
Speaker 5: the unexpected levels of loss as defined by regulators for
Speaker 5: an identified pool of assets at the bank. And so
Speaker 5: as a result, for the risk based capital framework, the
Speaker 5: bank can demonstrate to its regulator that the bank faces
Speaker 5: a significantly lower level of unexpected loss and thus is
Speaker 5: permitted to hold less and regulatory capital. Less regulatory capital,
Speaker 5: not no regulatory capital, right right, And the bank is
Speaker 5: relieved of some of this capital it held pre transaction.
Speaker 5: And that's sort of where the concept r trace you
Speaker 5: mentioned before, where the concept of capital relief trades comes in.
Speaker 5: And I think From there, we can talk about some
Speaker 5: of the more specific structures that we're seeing.
Speaker 2: I definitely want to get into structures. I want to
Speaker 2: ask one question before we move to that, though, and
Speaker 2: it's sort of I think it fills out the regulatory
Speaker 2: aspect of this, But why is it that the market
Speaker 2: for these things seems to be much more mature and
Speaker 2: larger in Europe, so for European bank issuers then in
Speaker 2: the US. In the US it's really only begun to
Speaker 2: take off in the past year or so, despite a
Speaker 2: lot of bankers. I remember in like twenty thirteen or
Speaker 2: something having conversations with I think it was someone at
Speaker 2: City Group talking about how they wanted to structure a
Speaker 2: bunch of red cap trades for smaller banks and then
Speaker 2: lo and behold. Ten years later, it feels like the
Speaker 2: US market is actually starting to do something. So why
Speaker 2: was there that discrepancy?
Speaker 5: So you're absolutely right, in contrast to the global experience,
Speaker 5: credit risk transfer never expanded meaningfully in the US beyond
Speaker 5: the GSCs in any programmatic way. And there's several reasons
Speaker 5: for that. We just hit on one of them. Regulatory
Speaker 5: capital differences are one. You know, we talked about the
Speaker 5: capital requirements risk based capital versus leverage. These transactions were
Speaker 5: more embedded in Europe already pre two thousand and eight,
Speaker 5: because banks had already adopted did what's known as the
Speaker 5: BOZEL two framework that had a lot more risk sensitive
Speaker 5: risk base capital requirements. The US, on the other hand,
Speaker 5: was delayed in that process in transitioning from BOZEL one
Speaker 5: to BOZL two, continue to operate under BASIL one for
Speaker 5: a while, and then in around twenty twelve thirteen sort
Speaker 5: of leapfrog straight to BASL three from BOZEL one. And
Speaker 5: another aspect of this, I think that's important to note.
Speaker 5: One of the post GFC, post Global Financial Crisis reforms
Speaker 5: in BOSL three and the bank capital reforms was the
Speaker 5: introduction of this leverage ratio requirement, right, So it was
Speaker 5: all sort of risk base capital based beforehand, and now
Speaker 5: the leverage ratio requirement is supposed to be sort of
Speaker 5: a backstop. But interestingly, in the US, and earlier than
Speaker 5: two thousand and eight and earlier than BASIL three reforms,
Speaker 5: the US banking regulators already subjected banks to a leverage
Speaker 5: capital requirement unlike their global peers, and in that regime,
Speaker 5: banks don't benefit from the impacts of credit risk transfer,
Speaker 5: since all risks are treated equally, and so there was
Speaker 5: also just up until now, less of a focus historically
Speaker 5: on risk based capital requirements in the US, so implicitly
Speaker 5: less of a focus on credit risk transfer. You know.
Speaker 5: On top of that, during this transition into Basel three,
Speaker 5: there wasn't much regulatory clarity about the treatment of these
Speaker 5: transactions here in the US. So it's real, there's real
Speaker 5: regulatory capital regime differences between the US VERSUS Europe, even
Speaker 5: between the US and say Canada. But I also don't
Speaker 5: want to put this all at the feet of regulators
Speaker 5: because in my view, you know, Tracy, you mentioned having
Speaker 5: conversations in twenty twelve and twenty thirteen around this for
Speaker 5: US banks. In my view, and maybe this is a
Speaker 5: minority view, but I think it's been born out. Credit
Speaker 5: risk transfer for US banks in the years following the
Speaker 5: financial crisis was a solution in search of a problem.
Speaker 5: Coming out of the financial crisis, US banks race capital
Speaker 5: to shore up balance sheet. You know, maybe they were
Speaker 5: forced to do so. Actually, I think I think you
Speaker 5: would ask certain bank bank bank managements. You know, they
Speaker 5: were subjected to regulatory stress tests early on. They have
Speaker 5: been were and have been perceived to be better capitalized
Speaker 5: with stronger balance sheets than their global peers. They were
Speaker 5: never really balance sheet constrained in the years coming out
Speaker 5: of QE, and this is also reflected in their valuations
Speaker 5: across their capital structure. I mean, most of these banks
Speaker 5: traded a premium to book value. So if a bank
Speaker 5: and tracy you pose this question earlier. So if a
Speaker 5: bank did need to raise capital for something, you know,
Speaker 5: it was relatively easy to do, you know, at attractive valuations.
Speaker 5: So the business need wasn't clear for US banks in
Speaker 5: my opinion, as it was for European banks who did
Speaker 5: not recapitalize in the same way as US banks did
Speaker 5: post GFC. They were and are risk based capital constrained,
Speaker 5: and again that was reflected in their valuations where most
Speaker 5: of these banks still trade at a discount to book value.
Speaker 5: And I just think, you know, sort of post two
Speaker 5: thousand and eight around like the lingering sagas for banks
Speaker 5: across the continent right in the European sovereign debt crisis,
Speaker 5: but even even beyond, I would also say, you know,
Speaker 5: moving out of the banks a little bit, the gcs
Speaker 5: like European banks in a way you know, similar but
Speaker 5: not the same. The use case was clear there as well,
Speaker 5: you know, the need to sort of de risk the
Speaker 5: tax payer during the conservatorship and going through the capital
Speaker 5: build process. But you know, in any event, you know, ultimately,
Speaker 5: in addition to regulatory uncertainty here in the US, banks
Speaker 5: and bank managements generally didn't really prioritize active balance sheet
Speaker 5: management as as they are now.
Speaker 3: That was a fantastic and very clear answer, and it
Speaker 3: makes a lot of sense why setting aside regulations, why
Speaker 3: economically there wasn't much need to prioritize these sort of
Speaker 3: balance sheet trades. All right, let's talk about how these
Speaker 3: are structured. So I'm the first bank of Joe, and
Speaker 3: I want to take off some of my books, some
Speaker 3: of my credit risk, and you're some other entity. What's
Speaker 3: our deal? First of all, two, I guess there's two questions.
Speaker 3: Who are you? Are you like a hedge fund, are
Speaker 3: you a pension fund?
Speaker 5: Like?
Speaker 3: Who is taking sure an insurer? Who is taking on
Speaker 3: this credit risk? And then, in the most vanilla example,
Speaker 3: what is the deal that we're striking?
Speaker 5: Right? I think that's an important question also to to
Speaker 5: sort of think about who the counterparty is. Generally in
Speaker 5: these transactions. These are done in what's sort of known
Speaker 5: as fully funded format. There's a synthetic securitization. We're taking
Speaker 5: a loan pool, and a bank typically hedges the mezzanine
Speaker 5: level of risk while retaining the first loss. Right, that's
Speaker 5: really the expected loss we were talking about a few
Speaker 5: minutes ago, and retain then the senior.
Speaker 4: Trunch, So mezzanine is like the middle, that's right.
Speaker 2: The clue is in the name. But also this is
Speaker 2: kind of different to the securitizations, the synthetic securitizations of old,
Speaker 2: where I think they were mostly selling the senior right.
Speaker 5: Yeah, and those were even selling full stack securitizations, right,
Speaker 5: And I mean one of the key differences, and we
Speaker 5: can get into this as well, right, One of the
Speaker 5: key differences then was really to sort of allow uncapped
Speaker 5: leverage speculation. Where we're here. What we're talking about is
Speaker 5: a bank, first Bank of Joe, having actual credit exposure
Speaker 5: on their balance sheet through normal course of lending operations,
Speaker 5: and then seeking to hedge a portion of that risk
Speaker 5: capital purposes for risk management purposes. And so the whole
Speaker 5: point of departure for this transaction is not speculation, it's
Speaker 5: actual hedging, right, and there's there's actually but going back.
Speaker 3: To you on the other end of this trade, I
Speaker 3: don't know if it's right to say you're a speculator,
Speaker 3: but you're looking to make money on this trade. I'm
Speaker 3: looking to hedge risk or I'm looking to deal with
Speaker 3: some balance sheet and you're looking.
Speaker 4: To collect you get paid a premium.
Speaker 3: Right, So what's the deal that we do?
Speaker 5: Right? So so so again, A financial institution pools credit
Speaker 5: risk together transfers a portion of the risk out of
Speaker 5: the bank. The loans remain on balance sheet. You know,
Speaker 5: assets are not sold, only credit risk trans is transferred.
Speaker 5: We've we gather a loan pool in what we've seen
Speaker 5: here in the US, just to just to take up
Speaker 5: sort of a hypothetical transaction. A in what's become a
Speaker 5: popular asset class is auto loans, and so a bank
Speaker 5: has a certain amount of auto loan lending exposures on
Speaker 5: balance sheet, they have have to risk weight that according
Speaker 5: to current regulation at one hundred percent. They take an
Speaker 5: identified subset of that pool and put it into a
Speaker 5: synthetic securitization. They trunch up securitize that risk. Generally speaking, right,
Speaker 5: they retain the first one or one and a half
Speaker 5: percent of cumulative portfolio losses, that's the expected losses. They
Speaker 5: sell the mezzanine tranch that references the next levels of loss,
Speaker 5: the unexpected loss You can say, maybe that's next ten
Speaker 5: or eleven percent of losses, and then they retain again
Speaker 5: the very remote senior levels of loss, referencing the remaining
Speaker 5: whatever it is, eighty seven eighty eight percent of loans
Speaker 5: after credit protection is exhausted. Different act classes, different geographies
Speaker 5: will have different tranching, but that's the basic capital structure
Speaker 5: that generally stays the same. There are instances where banks
Speaker 5: also buy first loss protection. A bank can demonstrate to
Speaker 5: the regulator that the bulk of the unexpected losses transferred
Speaker 5: out of the bank. Regulatory capital treatment is then transformed
Speaker 5: from just a normal loan pool to a synthetic securitization
Speaker 5: with different tranches of risk being risk weighted according to
Speaker 5: the risk they represent to the bank. Now that's the
Speaker 5: capital structure, Joe, I think more specifically to your questions, like,
Speaker 5: what is the actual mechanism that transfer? Is this exactly that?
Speaker 5: What is the actual mechanism for a bank to actually
Speaker 5: transact and acquire credit protection. Generally, what happens is that
Speaker 5: a bank enters a derivative or a financial guarantee that's
Speaker 5: transformed into a credit link note, which is a bond. Right.
Speaker 5: An investor hedge fund, pension fund, buys a bond from
Speaker 5: the bank, a credit link note CLN, and the performance
Speaker 5: of that bond that CLN is linked to the performance
Speaker 5: of the underlying reference polls as losses arise. Should they arise,
Speaker 5: then those losses rather than being allocated to the bank
Speaker 5: or allocated to this bond, right, and what does the
Speaker 5: investor receive, Well, you know, the investor puts up money upfront,
Speaker 5: fully collateralizes the transaction and buying this bond, they get
Speaker 5: interest income over time, and then at the end of
Speaker 5: the transaction they get whatever money remains there less losses.
Speaker 3: Terracy. It reminds me a little bit of like a
Speaker 3: catastrophe bond or something like that, where it's like you
Speaker 3: put up a bunch of money and you get interest,
Speaker 3: and if there's no hurricanes, you get all the money back,
Speaker 3: but if there are some hurricanes, you get a little
Speaker 3: less money back.
Speaker 5: So I can't tell you why. That is a perfect analogy, right,
Speaker 5: and that is really the sort of genesis of many
Speaker 5: of these of these transactions. Maybe genesis isn't the right word,
Speaker 5: but the right parallel. And what we've also seen is that,
Speaker 5: you know, I just described sort of fully funded you know,
Speaker 5: sort of bond format transactions. You know, what we also do,
Speaker 5: this is sort of a Guy Carpenter specialty, is put
Speaker 5: this risk in the form of a reinsurance contract with
Speaker 5: diversified reinsures.
Speaker 4: Interesting, there's another layer.
Speaker 5: There's another layer, or or better yet, a different execution alternative.
Speaker 5: So if you look at globally the bank credit risk
Speaker 5: transfer market, most of it is in this sort of
Speaker 5: credit link note bond format that I just described, probably
Speaker 5: about eighty five ninety percent of it, probably about ten percent,
Speaker 5: and it's growing, is in this reinsurance format with multiline
Speaker 5: diversified reinsures. If you look at Fanny May and Freddie
Speaker 5: Mack right now in terms of outstanding not not volumes
Speaker 5: outstanding credit risk transfer, you know they have about almost
Speaker 5: ninety billion dollars in a risk transfer outstanding right now.
Speaker 5: I would say the latest reporting roughly thirty five percent
Speaker 5: of that is in reinsurance market in about sixty five
Speaker 5: percent of that or so is in this bond credit
Speaker 5: link note like format.
Speaker 2: So I really like the cat bond for banks analogy
Speaker 2: where you're sort of getting insurance on the unexpected lost
Speaker 2: portion of your portfolio. I mean, explain again, who's on
Speaker 2: the other side of me. So you mentioned insurers, but
Speaker 2: I believe there are lots of hedge funds involved as well.
Speaker 2: And then secondly, I'm still unclear on the genesis of
Speaker 2: these trades and who approaches Who is it the bank
Speaker 2: issuer that goes out and talks to a potential counterparty
Speaker 2: and says, hey, we're looking to do this, or.
Speaker 3: Do they approach they approach you and they find us
Speaker 3: a counter part?
Speaker 5: Yeah?
Speaker 2: And then also how do they decide exactly which loans
Speaker 2: to put into these structures? Because my understanding is one
Speaker 2: of the criticism of some of these deals is that
Speaker 2: sometimes hedge funds are just offering to ensure these things
Speaker 2: basically without actually knowing what's in the underlying portfolio.
Speaker 4: It can be opaque at times.
Speaker 5: So there are a lot of questions in this life.
Speaker 4: I know, I'm sorry, I think that might have been
Speaker 4: four questions.
Speaker 5: So let me start off with that last bit tracy
Speaker 5: around sort of what are the typical ask the class
Speaker 5: is the banks put into these transactions, and then we
Speaker 5: can get into you know, part three, four, five, and
Speaker 5: seventeen of your of your multipart question. I think one
Speaker 5: important to make upfront is that generally speaking, these transactions
Speaker 5: are programmatic issuances from from banks that have issued them, right,
Speaker 5: So it's not like there's a one off deal they've
Speaker 5: identified some bad asset on their balance sheet and then
Speaker 5: they want to get rid of it and then they
Speaker 5: go home. No, it's more around programmatic issuances and transactions
Speaker 5: typically reference assets and businesses that the bank likes. Transactions
Speaker 5: reference assets that the banks wants to grow and they're
Speaker 5: looking for tools to support that growth. Now, the assets
Speaker 5: span a whole range of them, and reference pools really
Speaker 5: range from very granular exposures like consumer and mortgage and
Speaker 5: auto loan type of of exposures you know, to to
Speaker 5: single borrowers too much chunkier portfolios like corporate exposures that
Speaker 5: a bank has on balancey, like lending to large corporate corporations.
Speaker 5: And then you have also asset classes somewhere in the
Speaker 5: middle in Europe. You know, these are sort of known
Speaker 5: as SMEs small and medium enterprises here in the US
Speaker 5: more commonly known as just the middle market companies. And
Speaker 5: it's important to just to just bear that in mind.
Speaker 5: You know, that's that's a big part of how reference
Speaker 5: assets are selected, and underlying borrowers may have a much
Speaker 5: broader relationship with the bank rather than just this loan.
Speaker 5: There could be involved in other fee generating activities for
Speaker 5: the bank. They're just looking and the bank is looking
Speaker 5: for ways to protect that borrower relationship another aspect of
Speaker 5: it for a bank. So so in terms of assets selection, right,
Speaker 5: So for the GSCs, they're sort of you know, monoligned guaranteurs, right,
Speaker 5: they do single family and then you know multifamily acquisitions,
Speaker 5: you know, so mortgages are really their business. A bank
Speaker 5: would typically look across its asset portfolio and say, well,
Speaker 5: what's the most capital intense, right, So, from a cost
Speaker 5: of capital perspective, what makes the most sense in terms
Speaker 5: of targeting for capital relief?
Speaker 2: Right.
Speaker 5: So oftentimes exposures like mortgages, conversely to the gcs, may
Speaker 5: not make the most sense for a bank to see
Speaker 5: capital relief on because they have lower capital and they're
Speaker 5: just lower capital requirements on on mortgages versus say a
Speaker 5: corporate or a consumer loan that that draws double in
Speaker 5: the capital requirements a bank is required to hold. And
Speaker 5: so just implicitly, there's also that calculation for a bank,
Speaker 5: you know, what is the most capital intensive asset I
Speaker 5: have on balance sheet? You know, and where does it
Speaker 5: make most sense to seek capital relief?
Speaker 2: What about the transparency of the low portfolio? If I
Speaker 2: agree to do this, you know, if I'm a hedge
Speaker 2: fund or an insurer on the other side, how much
Speaker 2: visibility do I get into the loans?
Speaker 5: Right? And so that relates to sort of the granularity
Speaker 5: of the transaction or of the reference pool. So in
Speaker 5: very granular pools, really what you're looking at is more
Speaker 5: of a statistical exercise, right, with not a lot of
Speaker 5: visibility into like the identity of like one individual borrow.
Speaker 5: You'll have a loan tape, You'll have all the relevant
Speaker 5: credit and performance information that you need, but like picking
Speaker 5: one loan out of thousands won't necessarily help you in
Speaker 5: your credit work. It has to sort of be seen together. Conversely,
Speaker 5: in chunk your portfolios, including portfolios that include corporate exposures,
Speaker 5: they're usually individual obligors are identified in their names identified,
Speaker 5: and so the investors on the other side can do
Speaker 5: their own individual credit work on top of what the
Speaker 5: bank already already provides. You know, one can question, you know,
Speaker 5: how much merit that additional credit work actually has or
Speaker 5: provides to the transaction. But there's certain investors that just generally,
Speaker 5: at because of their investment requirements, just require sort of
Speaker 5: full disclosure of all their borrowers in an underlying reference pool,
Speaker 5: that just may not look at more granular sort of
Speaker 5: consumer assets and rather just look at at corporate exposures.
Speaker 3: For example, can you walk me through a sort of
Speaker 3: simplified math, So you're going to take this risk off
Speaker 3: my book, but I'm going to pay you for that service.
Speaker 3: I'm going to pay you some spread over whatever, some
Speaker 3: risk free reference rate, whatever. I don't know, walk us
Speaker 3: through like the really simplified math of how much it's
Speaker 3: worth me to pay you for that, because it frees
Speaker 3: up regulatory capital for me.
Speaker 5: So in the example that that we just discussed a
Speaker 5: few minutes ago, you know, around that hypothetical auto loan transaction,
Speaker 5: now we would probably estimate and that sort of capital structure.
Speaker 5: You know, the capital requirement for the bank just dropped
Speaker 5: by sixty percent. Okay, right, because the risk weighting on
Speaker 5: that portfolio has dropped from one hundred percent and just
Speaker 5: like outright bank holding auto loans to roughly forty percent.
Speaker 5: Under this synthetic securitization framework, typically the different tranches of
Speaker 5: risk you know, will have different different pricing you know
Speaker 5: what we've seen more recently for that type of mes
Speaker 5: tranching on balance right, And this is just this isn't
Speaker 5: just spread. This is sort of all in coupon. We're
Speaker 5: probably talking about, you know, mid to high single digits
Speaker 5: type of payment on the mezzanine tranch. Now, that's sort
Speaker 5: of the headline coupon that a bank has for these transactions.
Speaker 5: A bank, however, won't just look at the headline coupon
Speaker 5: say you know, this is this is what we're paying.
Speaker 5: What the bank will do is say, okay, these are
Speaker 5: our annual costs no on the mes tranch, on the
Speaker 5: mezzanine tranch, and they will compare that relative to the
Speaker 5: amount of capital that's freed up and together they'll take
Speaker 5: a look and say, okay, well that's my cost of capital,
Speaker 5: the amount of paying investors relative to the amount of
Speaker 5: capital I freed up. That's my cost of capital. And
Speaker 5: then they can also look, the bank can look and say, well,
Speaker 5: what are my alternatives. Well, I can go out and
Speaker 5: issue common equity, but the cost of common equity will
Speaker 5: probably be far north of anything I just described. It
Speaker 5: could issue preferred equity, right, but even on yields today
Speaker 5: will probably be far north of what I just described
Speaker 5: without that same sort of common equity benefit. And that's
Speaker 5: sort of like the general approach a bank would take
Speaker 5: to pricing and really sort of assessing the financial viability
Speaker 5: of these of these transactions.
Speaker 2: Okay, so it has to make financial sense for the bank,
Speaker 2: for the issuer. Can't cost more than issuing equity for instance.
Speaker 2: My understanding, and now we're getting into some of the
Speaker 2: financial stability questions around these, is that because of this,
Speaker 2: the yields or returns being paid on these deals to
Speaker 2: investors on the other side of the trade, the hedge funds,
Speaker 2: the insurers whatever, have sometimes been let's just say mediocre,
Speaker 2: and so there has been a temptation in recent years
Speaker 2: for hedge funds to basically juice the returns by using
Speaker 2: the deals the credit link notes as collateral in the
Speaker 2: repo market, so basically borrowing against them and then you
Speaker 2: get cheaper funding and then your return goes up. So
Speaker 2: I don't know, instead of this is totally hypothetical because
Speaker 2: I don't know the exact numbers, but instead of getting
Speaker 2: six percent, you get nine percent or whatever. Is that
Speaker 2: a worry because it seems kind of weird that we're
Speaker 2: offloading risk from the financial system, but then hedge funds
Speaker 2: are turning around and getting leverage on that risk by
Speaker 2: borrowing from another bank.
Speaker 5: It's hard to assess the amounts outstanding here, and it's
Speaker 5: hard to say whether this is a real or perceived risk.
Speaker 5: My experience, including my experience at FHFA, I think, with
Speaker 5: our conversations I had had with our other federal partners,
Speaker 5: call it whether or not the risk is real or perceived.
Speaker 5: The concern is real, like I said, we can't tell
Speaker 5: you exactly how much that actually happens. I saw a
Speaker 5: bit of that in my past professional life, even before FHFA,
Speaker 5: in the early days of the pandemic. In March of
Speaker 5: twenty twenty, you know, for a brief time when bank
Speaker 5: supplied leverage for GSC CRT ZRT for credit risk transfer
Speaker 5: for GC credit risk transfer.
Speaker 3: Keep up with the whole episode. Sorry, there's the whole episode. Sorry.
Speaker 5: So I'd seen some of that in the early days
Speaker 5: of the pandemic for a brief time with a bank
Speaker 5: supplied leverage for GSC CRT, given that you know, at
Speaker 5: that time the world was basically hit by a meteor
Speaker 5: or the equivalent thereof. You know, you know, this piece
Speaker 5: of it, you know, was was was hardly systemic. I
Speaker 5: would say this, you know, I happen to know that
Speaker 5: many of the dedicated traditional asset managers in this space
Speaker 5: are really buy and hold investors. You don't really rely
Speaker 5: on that type of leverage to boost sort of short
Speaker 5: term returns. I think this gets Joe to your question
Speaker 5: a little bit. Who are these people on the other side,
Speaker 5: and and and many of these you know, more veteran
Speaker 5: investors really are just relying on on the current coupon
Speaker 5: in the current interest that these deals throw off. Certainly,
Speaker 5: what I know in the reinsurance markets right, reinsurance markets
Speaker 5: are buy and hold investors counterparties, I should say, they're
Speaker 5: not really affected by the vagaries of the secondary market.
Speaker 5: But even to the extent, say that there is bank
Speaker 5: supplied leverage to these transactions. I think trace you mentioned
Speaker 5: at the outset, you know, you had an estimate of
Speaker 5: about twenty five billion or so of these deals getting
Speaker 5: done in twenty twenty three. Even if that number doubles
Speaker 5: this year, I don't know that it will, but let's
Speaker 5: just say that that it does if some of that
Speaker 5: risk transferred has some bank leverage on it. Is that systemic?
Speaker 5: You know, forty fifty twenty twenty three, twenty five billion
Speaker 5: of risk transferred. You know that that could increase this year,
Speaker 5: But is that systemic? You know, for the global banking
Speaker 5: system doesn't seem to be.
Speaker 3: So well, So, speaking of systemic risk, and I mentioned
Speaker 3: in the introduction that if we and Tracy mentioned it too,
Speaker 3: you know, if we've been talking about this in two
Speaker 3: thousand and eight, we would talking about credit default chops,
Speaker 3: et cetera. There are other mechanisms for any financial entity
Speaker 3: to take some credit risk off their book. And so
Speaker 3: for a while, they're buying CDs, and unfortunately a bunch
Speaker 3: of them were all buying it from one company, AIG,
Speaker 3: and then we all know what happened with AIG, et cetera.
Speaker 3: But structuring like what happened to this mark to that
Speaker 3: market and why. From the sort of at the most
Speaker 3: sort of conceptual, abstract level, how do you describe the
Speaker 3: sort of market structure differences between these synthetic risk transfers
Speaker 3: or credit risk transfers and credit default swaps.
Speaker 5: Joe, That's a great question, because I actually happen to
Speaker 5: think that much of the current SRTCRT market is actually
Speaker 5: informed by the experience of two thousand and eight. We
Speaker 5: all saw two thousand and eight. We said, don't let
Speaker 5: that happen. Yeah, right, And much of the i'll call
Speaker 5: it polemic around this harks back to two thousand and
Speaker 5: eight in the financial crisis, and when people hear buzzwords
Speaker 5: like synthetic yeah and derivatives know, their stomach start churning.
Speaker 5: But this is different in in in every possible way.
Speaker 5: This is really about hedging actual credit risk that arises
Speaker 5: out of actual normal course of lending activities, not uncapped
Speaker 5: leveraged speculation that was the hallmark of many synthetic securitizations
Speaker 5: pre two thousand and eight. This is about true distribution
Speaker 5: of credit risk rather than concentration of credit risk at
Speaker 5: a number of highly level counterparts counterparties. I wasn't going
Speaker 5: to mention it, but you mentioned aig FP, right, there
Speaker 5: was the poster child for all of this, and you know,
Speaker 5: we take the aig experience and say this is completely
Speaker 5: different because of this hedging versus speculation point. I would
Speaker 5: also I'd also say this, most of these deals are
Speaker 5: fully funded, like we talked about, so no counter party risk.
Speaker 5: The investor money, the investor puts up cash day one
Speaker 5: fully collateralizes the bank for the life of the transaction.
Speaker 5: So it's not like the bank exchanges the underlying credit
Speaker 5: risk of the portfolio for the counterparty risk of the investor. Now,
Speaker 5: to the extent that these are transacted with the reinsurance market,
Speaker 5: you know, rather than with the capital markets, these reinsurance
Speaker 5: counterparties are exactly the opposite of ai g f P.
Speaker 5: There are highly diversified, highly regulated, highly rated, multiline companies
Speaker 5: where the credit exposure that they take on through these
Speaker 5: deals is actually a diversifier and not correlated to their
Speaker 5: sort of underlying core property and casualty business. Right, AI
Speaker 5: g f P was in the business of selling credit
Speaker 5: protection and that's it. And I think a big part
Speaker 5: of this is also alignment of interest. There is actual
Speaker 5: skin in the game from the issuers, right. So so
Speaker 5: we just talked about some you know, illustrative capital structure.
Speaker 5: You know, the issuer of these transactions, banks or the
Speaker 5: gcs have skin in the game and almost every tranch
Speaker 5: of this of this of these transactions, right. And I
Speaker 5: think that's also a key differentiation in terms of linement
Speaker 5: of interest and risk retention.
Speaker 2: So we kind of came full circle just then back
Speaker 2: to two thousand and eight and the experience there. Given
Speaker 2: that and given your storied career in working with banks
Speaker 2: and advising banks, I have to ask you, what's the
Speaker 2: dumbest thing you've ever seen bank management do?
Speaker 3: And name the individual so I can look them up
Speaker 3: on LinkedIn.
Speaker 4: Just don't do that.
Speaker 5: Maybe we could save this for some off the record conversations.
Speaker 5: I have seen many things in my career, both you know,
Speaker 5: sort of pre two thousand and eight through two thousand
Speaker 5: and eight, and since I don't want to name any individuals,
Speaker 5: of course, of course, but but but but this is
Speaker 5: what I would say.
Speaker 3: Uh.
Speaker 5: And and I really came to even appreciate this more
Speaker 5: during my time in government. Uh And this tracy to
Speaker 5: your point going full circle. Banks face many constraints. They
Speaker 5: have many stakeholders, right, both internally and externally, whether it's
Speaker 5: you know, banks have employees, whether they have shareholders, whether
Speaker 5: they have depositors. There aren't just like normal consumers. Uh uh.
Speaker 5: And then externally they have regulators and this and then
Speaker 5: again this isn't just like you know regulator supervisors, right,
Speaker 5: this is also you know things like the fd I
Speaker 5: C Right, we're actually protecting depositors. Banks face many constraints.
Speaker 5: They have a lot of stakeholders they have to answer to,
Speaker 5: and I think that's just an incredibly difficult job this
Speaker 5: day and age. And I think that these types of
Speaker 5: transactions again just like one tool in their toolkit to
Speaker 5: help manage these these different stakeholders. I've seen I've seen
Speaker 5: bank leaderships and other financial institutions sort of get in
Speaker 5: trouble when they lose sight of all these different stakeholders
Speaker 5: they have to manage.
Speaker 2: Very diplomatic answer, that's a very diplomatic answer. We'll have
Speaker 2: to get the real answer, I guess I'll yeah, So
Speaker 2: apologies to the listeners, but Micky, that was a fantastic conversation.
Speaker 2: I feel like I understand these deals a lot better now.
Speaker 2: So thank you so much for coming on all thoughts
Speaker 2: and explaining them to us.
Speaker 5: Tracy, Joe, thank you very much. Appreciate the invitation.
Speaker 3: Yeah, that was very fan.
Speaker 4: That was great, Joe.
Speaker 2: I enjoyed that conversation so much. It just it feels
Speaker 2: good to have a sort of acronym Leyden discussion. I'm
Speaker 2: trying to think of all the one that we hit,
Speaker 2: like CRT, SRT, RWA, RRBC, SME, CDs, CLN, there is
Speaker 2: probably more.
Speaker 3: You know, it was an acronym laden conversation, but he
Speaker 3: was very clear, and I think the two things that
Speaker 3: I really you know, two of the big things that
Speaker 3: I think about, Like is he mentioned we sort of mentioned,
Speaker 3: you know, people's like alarm bells go off and they
Speaker 3: hear things like synthetic ris transfer and all that stuff.
Speaker 3: But the two things that like, this structure, the sort
Speaker 3: of cat bond fully funded. We're going to put the
Speaker 3: money in a pot up front, which we expect to
Speaker 3: take back minus any losses. Inherently I think seems less risky,
Speaker 3: although you mentioned there are ways to transform that risk,
Speaker 3: but it seems less risky than like one where you're
Speaker 3: depending on the credit strength of your car counterparty like
Speaker 3: an AIGFP. And then also there's other big theme that
Speaker 3: we've seen in the post grade financial crisis era of
Speaker 3: like distributed risk. Yes to non regulated institutions like hedge
Speaker 3: f or so forth, which are designed in some level
Speaker 3: to take risk, and if they lose money, that's okay
Speaker 3: because that's part of why they exist and why they
Speaker 3: make money.
Speaker 2: That's exactly what I was going to say, is this
Speaker 2: outcome is kind of what financial regulators would have been
Speaker 2: envisioning PLUS two thousand and eight, where they want to
Speaker 2: shift a lot of the risk of unexpected losses from
Speaker 2: bank loans onto non bank entities who you know, you
Speaker 2: don't have to It's bad if a hedge fund goes under,
Speaker 2: obviously or you.
Speaker 3: Know, but it's less bad than if a banker.
Speaker 2: Yeah, I was going to throw out another acronym, a
Speaker 2: BDC a business development company goes under. But yes, it's
Speaker 2: less bad than if a regulated bank goes under. There's
Speaker 2: less systemic implications. Hopefully that was the thought process, and
Speaker 2: I should just say we didn't actually get to it
Speaker 2: because of time constraints, but the timing of these things
Speaker 2: in the US, at least you can trace that back
Speaker 2: to regulators as well. So last year, I think it
Speaker 2: was September twenty twenty three, the FED basically issued guidance
Speaker 2: on these deals, so sort of gave its blessing to
Speaker 2: these things and said like, okay, if there's a genuine
Speaker 2: risk transfer here, we're okay with the resulting capital relief
Speaker 2: that comes out of it. And again, I think there
Speaker 2: are questions about specific deals and how they're structured.
Speaker 3: And what's in the notes and all, and then the.
Speaker 2: Repo leverage, and there is some irony where if you
Speaker 2: have these deals and you're trying to shift risk out
Speaker 2: of the banking system, and then it comes right back
Speaker 2: into the banking system because the investor is borrowing against
Speaker 2: the deal, Like that doesn't seem to be an ideal outcome.
Speaker 2: But as Mickey was saying, we're probably not at the
Speaker 2: point yet where it's something that people are doing at
Speaker 2: like a massive scale.
Speaker 3: It's nowhere near massive, but it is your point, right, Like,
Speaker 3: if I'm an entity and I buy one of these bonds,
Speaker 3: there's at least some chance that I'm going to try
Speaker 3: to borrow against that bonds to juce my returns. And
Speaker 3: if I'm borrowing from a bank. This is fineancial markets.
Speaker 3: I mean, this is just what financial markets do. They
Speaker 3: find a way to press it. And so I think,
Speaker 3: you know, it sounds like something to watch, not like, oh,
Speaker 3: this is a big red flag and there's like a
Speaker 3: lurking time. But I'm underneath the banking system. But you know,
Speaker 3: like I said, the market is not that big. But
Speaker 3: if I have this bond and it's designed to protect
Speaker 3: the banks from risk, but then I'm borrowing against that
Speaker 3: bond from a bank, you could see how risk should emerge.
Speaker 2: Yeah, that seems not like what was intended. But anyway,
Speaker 2: this was a fun, Yeah it was. This is a
Speaker 2: fun like nibble at structured credit. Yeah. In the interests
Speaker 2: of continuing to gorge ourselves on this, I really want
Speaker 2: to do an episode on the original like JPM Yes Trades,
Speaker 2: Like let's just go back, let's do a financial history
Speaker 2: down for that kind Okay, all right, Well in the meantime,
Speaker 2: shall we leave it there?
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the All Thoughts podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3: And I'm Jill Wisenthal. You can follow me at The
Speaker 3: Stalwart follow our producers Carmen rodrig Is at Carman Ermann
Speaker 3: Dashel Bennett at Dashbot and kill Brooks at Kilbrooks. And
Speaker 3: thank you to our producer Moses Ondam. And for more
Speaker 3: odd Lags content, go to Bloomberg dot com slash odd Lots.
Speaker 3: We have transcripts, a blog, and a newsletter and you
Speaker 3: can talk about all of these topics twenty four to
Speaker 3: seven in the discord discord dot gg slash odd Lots.
Speaker 3: Go there and hang out.
Speaker 2: And if you enjoy odd Lots, if you like it
Speaker 2: when we dive deep into the structured finance market, then
Speaker 2: please leave us a positive review on your favorite podcast platform.
Speaker 2: And remember, if you are a Bloomberg subscriber, you can
Speaker 2: listen to all of our episodes absolutely ad free. All
Speaker 2: you need to do is connect your Bloomberg account with
Speaker 2: Apple Podcasts. In order to do that, just find the
Speaker 2: Bloomberg channel on Apple Podcasts and follow the instructions there.
Speaker 2: Thanks for listening in