WEBVTT - How the Bond Market Broke in March

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<v Speaker 1>Pushkin from Pushkin Industries. This is Deep Background, the show

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<v Speaker 1>where we explore the stories behind the stories in the news.

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<v Speaker 1>I'm Noah Feldman. Earlier this week I had a terrific

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<v Speaker 1>conversation with BoA's Weinstein, the founder and chief investment officer

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<v Speaker 1>at SABA Capital Management. We got such great feedback for

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<v Speaker 1>the conversation that we decided to give you a bonus.

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<v Speaker 1>A further conversation that Boas and I had about what

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<v Speaker 1>happened in March when the bond markets appeared to break.

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<v Speaker 1>For context, what you should keep in mind is that

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<v Speaker 1>high yield debt, so called junk bonds, were long thought

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<v Speaker 1>to be too risky to be held by ordinary investors,

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<v Speaker 1>but in recent years, as a result of such vehicles

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<v Speaker 1>as exchange traded funds ETFs and mutual funds, more and

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<v Speaker 1>more of the market in high yield junk bonds has

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<v Speaker 1>come to be held by consumers. Ultimately, that raises serious

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<v Speaker 1>questions about safety and about whether what Boas calls the

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<v Speaker 1>alchemy of packaging actually works. This part of the conversation

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<v Speaker 1>goes really deep behind the story, and I hope that

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<v Speaker 1>you'll learn as much from it as I did. The

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<v Speaker 1>dynamics and the market structure changed over the last decade

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<v Speaker 1>dramatically in a way that I think caused it more

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<v Speaker 1>or less in March to break. And I don't think

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<v Speaker 1>that story because bonds are followed far less than the inequities.

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<v Speaker 1>The bond market breaking for a few days really, to

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<v Speaker 1>me was one of the most shocking things I've seen

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<v Speaker 1>in my career. So let's dive into this moment where

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<v Speaker 1>the bond market breaks, and I want to take us

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<v Speaker 1>back to the background. So take us back to when

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<v Speaker 1>you first started in your business in the nineties. What

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<v Speaker 1>did the bond market look like that? So I joined

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<v Speaker 1>Will Street after graduating college in ninety five. I was

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<v Speaker 1>very influenced by the book Liar's Poker, actually told by

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<v Speaker 1>Michael Lewis also Pushkin podcast Maker, among many other distinctions. Yeah,

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<v Speaker 1>you know, in that story, aside from all the humor,

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<v Speaker 1>is the point that the participants in the bond market

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<v Speaker 1>that worked at these banks at the times Solomon Brothers

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<v Speaker 1>or Now City Group or Goldman Sachs, they were, in

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<v Speaker 1>their own minds and with the balance sheet given to

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<v Speaker 1>them by the bank, enormous risk takers and could house

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<v Speaker 1>a risk if it came to them, they could act

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<v Speaker 1>as a shock absorber. They didn't view themselves as a

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<v Speaker 1>shock absorber if there were too many sellers. They viewed

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<v Speaker 1>themselves as the world's greatest experts in junk bonds. At

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<v Speaker 1>that time, there were very few hedge funds, and most

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<v Speaker 1>of the great credit hedge funds came out of banks,

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<v Speaker 1>whether they were Drexel, Burnham, Lambert or the ones after.

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<v Speaker 1>And so if you had a big sell off, really

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<v Speaker 1>at any point in time, from the nineteen eighties through

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<v Speaker 1>two thousand and eight, every bank had a trading desk

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<v Speaker 1>that was there to buy bonds without necessarily needing to

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<v Speaker 1>sell them the same day or same week. They could

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<v Speaker 1>buy them and house them if they felt like they

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<v Speaker 1>were good investments. So the market makers were investors. And

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<v Speaker 1>just to clarify that for the civilian, if I'm understanding,

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<v Speaker 1>you're correctly. What you're saying is if a moment came

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<v Speaker 1>where people who held bonds thought, oh boy, it's time

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<v Speaker 1>for me to get rid of these bonds. They're too

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<v Speaker 1>risky for me and they're more likely to default, and

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<v Speaker 1>I'm willing to sell them at a low price. The

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<v Speaker 1>big investment banks, through their trading desks were like, great,

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<v Speaker 1>we'll buy them from you at a low price, and

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<v Speaker 1>then we'll just hang on to them till they are

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<v Speaker 1>more valuable, and then we'll turn around and we'll make

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<v Speaker 1>money on it, and we can afford to buy them

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<v Speaker 1>from you low and hold on to them until the

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<v Speaker 1>time comes to sell them higher. And that effectively wasn't

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<v Speaker 1>their goal, of course, is to make money, But effectively

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<v Speaker 1>that meant that if there was a sudden moment where

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<v Speaker 1>most people who held this debt said, oh my god,

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<v Speaker 1>let me sell it, there was someone there to buy it. Yes,

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<v Speaker 1>So they provided balance to when there was a supply

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<v Speaker 1>demand and balance. They were the demand. And in the

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<v Speaker 1>last ten years before the global financial crisis, every bank

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<v Speaker 1>basically had various groups that were not facing customers, that

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<v Speaker 1>were literally many hedge funds inside of the bank, known

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<v Speaker 1>as proprietary trading desks, who felt even more able to

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<v Speaker 1>take on that risk because their mandate was to invest

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<v Speaker 1>and not to trade with clients. And so you had

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<v Speaker 1>enormous risk taking capacity at the banks, and that's something

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<v Speaker 1>that's measurable. Every week the Federal Reserve reports what the

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<v Speaker 1>aggregate number of bonds held by the investment banks was

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<v Speaker 1>at times it was greater than one out of ten

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<v Speaker 1>bonds was held by these counterparties. And then there came

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<v Speaker 1>two thousand and seven, two thousand and eight, and everything changed.

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<v Speaker 1>What happened to all of that death that was being

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<v Speaker 1>held by the proprietary trading desks in the crisis. So

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<v Speaker 1>of course they lost a lot of money in two

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<v Speaker 1>thousand and eight, and by two thousand and nine, even

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<v Speaker 1>though they had recovered a lot, and the banks actually

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<v Speaker 1>posted their best years in history in this sort of trading.

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<v Speaker 1>The Vulgar rule basically more or less banished that kind

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<v Speaker 1>of risk taking, not just by the proprietary traders, but

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<v Speaker 1>importantly by the market makers. And so if client wanted

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<v Speaker 1>to sell and the amount was not trivial, the bank

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<v Speaker 1>was basically, for all intense purposes not there to buy

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<v Speaker 1>it if it didn't have a ready buyer or it

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<v Speaker 1>couldn't find one in short order. And so that really

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<v Speaker 1>changed one side of the market structure, which was we

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<v Speaker 1>took away the shock absorber, and we took away the

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<v Speaker 1>risk taking capacity by the banks. Even though you know,

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<v Speaker 1>when you think about it, a bank buying the bonds

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<v Speaker 1>of let's say Boeing a company that's having its own

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<v Speaker 1>share of troubles right now if it loses money from

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<v Speaker 1>doing so, is it that different than the bank losing

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<v Speaker 1>money for making a loan to Boeing. In both cases,

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<v Speaker 1>they're supporting Boeing in the loan case as a primary

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<v Speaker 1>lender and in the bond case as let's say, a

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<v Speaker 1>secondary investor in an actual existing market. But aside from

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<v Speaker 1>ought it to be that way. The vocal rule though

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<v Speaker 1>critiqued at the time by self serving banks, but they

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<v Speaker 1>might have had a point. We're saying, look, when clients

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<v Speaker 1>come to sell and the liquidity is very different than

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<v Speaker 1>it is in normal times, who's going to be there

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<v Speaker 1>to buy? And so that's one side of the equation.

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<v Speaker 1>Can I push on that a little bit? So the

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<v Speaker 1>vocal rule basically, I mean, I'm oversimplifying it drastically, but

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<v Speaker 1>it basically said we the government do not want big

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<v Speaker 1>banks to be sitting on a lot of risky investments

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<v Speaker 1>because it's nice when they make money, but when they

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<v Speaker 1>don't make money and they're suddenly losing it, everything can

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<v Speaker 1>go south very very quickly and bring the financial system

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<v Speaker 1>with it. If it was an effect of that, maybe

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<v Speaker 1>even an intended effect of that that the banks couldn't

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<v Speaker 1>buy up lots of risky bonds. I mean that sounds

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<v Speaker 1>sort of like a good thing rather than a bad thing.

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<v Speaker 1>Are you describing an unintended consequence, which is that they

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<v Speaker 1>also couldn't be a buffer? Yeah? You know, maybe the

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<v Speaker 1>answer is something in the middle which would have restrained

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<v Speaker 1>the amount of risk they could take and therefore money

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<v Speaker 1>they could lose, but would allow them to some degree

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<v Speaker 1>to be there when you know there's ten sellers for

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<v Speaker 1>every buyer. You know that unintended consequence is something that

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<v Speaker 1>when you threw out the baby with the bathwater, you

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<v Speaker 1>know you lost something there and you don't see it

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<v Speaker 1>in normal times, but you saw it in March. So

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<v Speaker 1>fast forward now with me to March. You don't have

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<v Speaker 1>this big buffer. The banks are not capable of buying

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<v Speaker 1>a lot of bonds when suddenly the prices go down.

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<v Speaker 1>Suddenly everyone is panicking because we have a pandemic on

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<v Speaker 1>our hands. What happened? How did the market break? Well,

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<v Speaker 1>it's important to know two other things in this story, Okay.

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<v Speaker 1>One of them is, over the past twelve years since

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<v Speaker 1>the global financial crisis, the quantity of debt, the capital

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<v Speaker 1>stock of bonds and loans issued by US corporations went

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<v Speaker 1>up by about three hundred percent, So the amount of

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<v Speaker 1>stuff out there held by people grew tremendously. Of course,

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<v Speaker 1>the banks are not holding hardly any of it anymore.

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<v Speaker 1>And the other thing is the question of who held it.

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<v Speaker 1>So let me just for a second go back to

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<v Speaker 1>nineteen ninety five. I opened up my first account. I'd

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<v Speaker 1>started it at Merrill Lynch after college, and I opened

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<v Speaker 1>up a brokerage account, and I finally think I know

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<v Speaker 1>a little thing or two about bonds. I've been doing

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<v Speaker 1>it for a few years in my college summers. That

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<v Speaker 1>gave me some confidence that maybe was misplaced. And so

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<v Speaker 1>I wanted to buy a junk bond. And I remember

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<v Speaker 1>my Merrill Lynch stockbroker telling me, even though I'm in

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<v Speaker 1>the business, and I'm in this exact business, that this

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<v Speaker 1>type of investment is unsuitable for me. I'm not a

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<v Speaker 1>dentist who doesn't know very much about bonds compared to

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<v Speaker 1>other things. I'm working at a bank in fixed income.

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<v Speaker 1>Yet I'm unable to buy a junk bond because it's

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<v Speaker 1>considered too risky, too complicated, unsuitable for retail. Now, if

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<v Speaker 1>you fast forward to March, you have a market three

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<v Speaker 1>times the size, and the retail investor grew to being

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<v Speaker 1>the largest investor in the market. Approximately half of all

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<v Speaker 1>of those bonds and loans are held by retail investors,

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<v Speaker 1>one way or the other, through myriad of products that

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<v Speaker 1>are themselves interesting and in some cases responsible for some

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<v Speaker 1>of the challenges we saw last month. I don't want

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<v Speaker 1>to miss out on the punchline story of how the

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<v Speaker 1>market broke, but I do want to follow your comment

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<v Speaker 1>about how it came to pass that an investment in

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<v Speaker 1>a high yield bond, in a junk bond that you

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<v Speaker 1>couldn't make as an ordinary retail investor nearly twenty years

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<v Speaker 1>ago now is overwhelmingly where corporate debt is held. So

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<v Speaker 1>say something about these vehicles, because what you're saying is

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<v Speaker 1>that all of us basically own a whole bunch of

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<v Speaker 1>corporate debt without fully realizing that. So ETFs are the

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<v Speaker 1>most exchange traded funds are the most famous example, the

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<v Speaker 1>most salient example. So describe how those work and how

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<v Speaker 1>they enable people for better or worse. And it sounds

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<v Speaker 1>like maybe for worse to hold these risky investments that

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<v Speaker 1>in the olden days people thought were too risky, even

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<v Speaker 1>for you. Yes, So prior to two thousand and eight,

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<v Speaker 1>there were almost no ETFs that held junk rated bonds

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<v Speaker 1>or loans. But what we saw after it was incredible

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<v Speaker 1>demand for yields. Global interest rates were cut. We see

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<v Speaker 1>negative interest rates in Japan, in Switzerland, in lots of

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<v Speaker 1>places around the world, and there was not enough yields

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<v Speaker 1>and people needed that to get fixed income, to meet

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<v Speaker 1>their mortgage payments, whatever it may be. And so there

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<v Speaker 1>was great demand at a time when stock seemed like

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<v Speaker 1>an uncertain investment. The eye popping yields after two thousand

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<v Speaker 1>and eight, the average junk bond yielded more than fifteen percent,

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<v Speaker 1>and so that led to horizon products that we're also

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<v Speaker 1>seeing a tremendous growth themselves, and so exchange traded funds

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<v Speaker 1>stand out as the most obvious example. But you know,

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<v Speaker 1>most people are familiar with mutual funds. The story would

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<v Speaker 1>be the same, and that those funds are special and

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<v Speaker 1>that they're open ended. They allow investors to exit every

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<v Speaker 1>business day of the week, and they allow them to

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<v Speaker 1>exit almost in almost every instance at what's called net

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<v Speaker 1>asset value. And so the exchange traded fund goes. So

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<v Speaker 1>it's a share on the New York Stock Exchange that

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<v Speaker 1>holds a big pool of assets, let's say junk bonds. Okay,

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<v Speaker 1>And because investors have a hard time accessing that market,

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<v Speaker 1>you can't just buy a junk bond. It's not on

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<v Speaker 1>the New York Stock Exchange. It requires you know, lots

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<v Speaker 1>of special knowledge about how to execute in in what's

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<v Speaker 1>called an over the counter market. So ETFs were seen

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<v Speaker 1>really as an incredible opportunity. You can give investors one

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<v Speaker 1>stop shopping where they get access to hundreds of bonds

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<v Speaker 1>at the same time, whether they were carefully selected by

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<v Speaker 1>a manager actively managing them, or they represented an index

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<v Speaker 1>like the Dow Jones or the S ANDP. The growth

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<v Speaker 1>in that space was enormous, and at the same time

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<v Speaker 1>it was also growing tremendously for equities. The problem is

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<v Speaker 1>that equities are highly liquid investments in ETFs that are

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<v Speaker 1>promising investors they can get out the same day and

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<v Speaker 1>are liquid in that big are trading with a difference

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<v Speaker 1>between the price where you could buy or sell being

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<v Speaker 1>just a penny. Are holding things that are highly a

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<v Speaker 1>liquid that at times have a difference between where you

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<v Speaker 1>could buy and sell at a dollar And so it

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<v Speaker 1>raises this question, was this financial alchemy? Did somehow the

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<v Speaker 1>ETF and the mutual fund being a daily liquidity product,

0:12:05.636 --> 0:12:08.516
<v Speaker 1>did it solve this iliquidity problem? Did it allow investors

0:12:08.516 --> 0:12:11.236
<v Speaker 1>to get in and out seamlessly whereas they were unable

0:12:11.276 --> 0:12:16.396
<v Speaker 1>to before? And of course, from the standpoint of financial engineering,

0:12:16.516 --> 0:12:19.196
<v Speaker 1>what you want is alchemy, right, you want it to work.

0:12:19.276 --> 0:12:22.996
<v Speaker 1>You want to say, well, here is this ordinarily somewhat

0:12:22.996 --> 0:12:26.596
<v Speaker 1>illiquid asset, corporate debt or sometimes illiquid asset, but we

0:12:26.636 --> 0:12:28.556
<v Speaker 1>want ordinary people to be able to get access to

0:12:28.596 --> 0:12:32.036
<v Speaker 1>this high risk debt because they then then get high yields.

0:12:32.116 --> 0:12:34.676
<v Speaker 1>So if we bundle it in this way, then we

0:12:34.716 --> 0:12:38.916
<v Speaker 1>can solve the problem somewhat magically. And it sounds like

0:12:38.916 --> 0:12:41.756
<v Speaker 1>what you're saying is the magic didn't fully work and

0:12:41.916 --> 0:12:44.596
<v Speaker 1>that it really didn't fully work in March when the

0:12:44.636 --> 0:12:46.956
<v Speaker 1>market broke. So maybe that brings us to the crucial

0:12:46.956 --> 0:12:50.916
<v Speaker 1>moment in March what happened. Yes, so the magic doesn't

0:12:50.916 --> 0:12:55.396
<v Speaker 1>work if there aren't enough buyers for every seller. So

0:12:55.436 --> 0:12:57.556
<v Speaker 1>if there is a seller of this ETF and there's

0:12:57.556 --> 0:12:59.956
<v Speaker 1>a buyer at TTF, no animals were harmed in the

0:12:59.956 --> 0:13:02.436
<v Speaker 1>filming of this movie, No bonds need to be traded.

0:13:02.716 --> 0:13:05.156
<v Speaker 1>People can trade the shares of ETF back and forth,

0:13:05.196 --> 0:13:07.796
<v Speaker 1>back and forth without any bonds being traded, and it's

0:13:07.876 --> 0:13:10.276
<v Speaker 1>very important to understand that. But at the moment where

0:13:10.316 --> 0:13:12.396
<v Speaker 1>there's ten sellers for every buyer, and maybe it was

0:13:12.436 --> 0:13:15.916
<v Speaker 1>one hundred, which is what happens with retail investors. Retail

0:13:15.956 --> 0:13:19.396
<v Speaker 1>investors are so procyclical in their behavior. They sell when

0:13:19.436 --> 0:13:21.836
<v Speaker 1>the market is falling as a group, and they buy

0:13:21.836 --> 0:13:24.196
<v Speaker 1>when the market is rising. And when they all headed

0:13:24.236 --> 0:13:27.476
<v Speaker 1>for the exit in March, there weren't enough new buyers

0:13:27.476 --> 0:13:30.276
<v Speaker 1>willing to buy, so then what happens. So what happened

0:13:30.356 --> 0:13:32.836
<v Speaker 1>was there's a mechanism in the ETF meant to make

0:13:32.876 --> 0:13:36.676
<v Speaker 1>this alchemy work, which is, if ever there's too many sellers,

0:13:36.956 --> 0:13:39.996
<v Speaker 1>you can just redeem your shares back to the market maker,

0:13:40.076 --> 0:13:43.876
<v Speaker 1>back to the institution that's overseeing this box, this pool,

0:13:44.116 --> 0:13:46.076
<v Speaker 1>and they'll go and sell the bonds and they'll give

0:13:46.076 --> 0:13:48.596
<v Speaker 1>you back your net asset value. So if ever they

0:13:48.636 --> 0:13:50.996
<v Speaker 1>are not enough buyers, they can go and sell bonds

0:13:51.316 --> 0:13:53.836
<v Speaker 1>and take the cash from those sales and give you

0:13:53.836 --> 0:13:56.836
<v Speaker 1>back your money. But the problem is that the bond

0:13:56.836 --> 0:13:59.636
<v Speaker 1>market had frozen. It froze for the reasons we've already discussed,

0:13:59.956 --> 0:14:03.476
<v Speaker 1>and there was just there were no legitimately closed bids

0:14:03.596 --> 0:14:06.676
<v Speaker 1>for taking that risk near where the price of those

0:14:06.676 --> 0:14:09.476
<v Speaker 1>shares were, and so we saw a degradation in the

0:14:09.516 --> 0:14:14.556
<v Speaker 1>price of ETFs way beyond what the underlying bonds would suggest.

0:14:14.596 --> 0:14:16.916
<v Speaker 1>And so if you invested a dollar and the pool

0:14:16.956 --> 0:14:18.756
<v Speaker 1>was worth a dollar, just to put numbers on it,

0:14:18.956 --> 0:14:22.276
<v Speaker 1>in the biggest ETFs, we saw an extra loss on

0:14:22.316 --> 0:14:25.156
<v Speaker 1>top of the normal loss of five percent on some

0:14:25.236 --> 0:14:27.756
<v Speaker 1>days in March, and in some smaller ETFs we saw

0:14:27.836 --> 0:14:31.076
<v Speaker 1>losses of twenty to twenty five percent on top of

0:14:31.116 --> 0:14:33.956
<v Speaker 1>what you lost for the COVID related markets off. And

0:14:33.996 --> 0:14:36.956
<v Speaker 1>so what happened was basically the market makers step back

0:14:37.076 --> 0:14:40.356
<v Speaker 1>and said, we're not going to buy these ETFs for

0:14:40.436 --> 0:14:42.556
<v Speaker 1>what they're worth, because we can't get what they're worth,

0:14:42.596 --> 0:14:45.596
<v Speaker 1>because that's really the mismatches. We have to give your

0:14:45.596 --> 0:14:47.676
<v Speaker 1>money today, and it will take us weeks and months,

0:14:47.676 --> 0:14:49.596
<v Speaker 1>and who knows where we'll get out of those bonds.

0:14:49.636 --> 0:14:52.556
<v Speaker 1>And so ETFs basically broke in March, and I think

0:14:52.596 --> 0:14:55.996
<v Speaker 1>that's what's led the FED to take the extraordinary step

0:14:56.436 --> 0:15:00.596
<v Speaker 1>of buying high yield ETFs and agreeing to it's you know,

0:15:00.636 --> 0:15:02.916
<v Speaker 1>even just saying they would do it restored some confidence,

0:15:03.076 --> 0:15:05.516
<v Speaker 1>but it was done really to just to keep the

0:15:05.556 --> 0:15:09.636
<v Speaker 1>market from breaking further. When that breaking was happening, was

0:15:09.676 --> 0:15:12.676
<v Speaker 1>there a contractual violation there? I mean, mom and Pop

0:15:12.796 --> 0:15:15.996
<v Speaker 1>believed that they could redeem their ETF and the market

0:15:16.036 --> 0:15:19.116
<v Speaker 1>maker was refusing to do it. So who bore that loss?

0:15:19.196 --> 0:15:21.316
<v Speaker 1>I mean, did mom and pop bear that loss? Or

0:15:21.396 --> 0:15:23.996
<v Speaker 1>did the market maker have to redeem and just do

0:15:24.076 --> 0:15:26.836
<v Speaker 1>it at a big haircut? So in the initial trades,

0:15:26.876 --> 0:15:29.596
<v Speaker 1>the market maker felt like, okay, i'll buy them at

0:15:29.596 --> 0:15:32.276
<v Speaker 1>any V and that asked value, I'll buy them slightly lower,

0:15:32.396 --> 0:15:34.476
<v Speaker 1>But at some point they just kept buying them. And

0:15:34.596 --> 0:15:37.516
<v Speaker 1>when something is for sale, without the market maker being

0:15:37.556 --> 0:15:39.876
<v Speaker 1>able to offload the risk, they'll take a step back.

0:15:40.116 --> 0:15:42.916
<v Speaker 1>What's supposed to happen is arbit treasures are supposed to

0:15:42.916 --> 0:15:45.436
<v Speaker 1>step in and say, i'll buy a dollar for ninety

0:15:45.476 --> 0:15:48.276
<v Speaker 1>five cents, I'll take on these portfolio bonds. I'll sell

0:15:48.316 --> 0:15:51.796
<v Speaker 1>them myself. But again, in a broken bond market, people

0:15:51.836 --> 0:15:54.076
<v Speaker 1>didn't have confidence of that, and that's where things really

0:15:54.476 --> 0:15:58.276
<v Speaker 1>went off the rails. What's the regulatory solution to that?

0:15:58.316 --> 0:16:01.436
<v Speaker 1>I mean, you could imagine two directions. One is the

0:16:01.476 --> 0:16:04.876
<v Speaker 1>insurance model that the government will give some insurance, which

0:16:04.876 --> 0:16:07.516
<v Speaker 1>is de facto what actually happened, But that seems to

0:16:07.516 --> 0:16:10.756
<v Speaker 1>create terrible incentives because then people will take on all

0:16:10.836 --> 0:16:13.836
<v Speaker 1>kinds of risk they shouldn't take because the government's effectively

0:16:13.876 --> 0:16:17.156
<v Speaker 1>guaranteeing their investment. The other option would be to say, well,

0:16:17.236 --> 0:16:21.876
<v Speaker 1>g maybe these ETFs can't be over the counter retail

0:16:22.076 --> 0:16:26.316
<v Speaker 1>products sold to mom and pop if they're not actually

0:16:26.916 --> 0:16:29.996
<v Speaker 1>capable of sustaining asset value at a moment when people

0:16:30.076 --> 0:16:32.516
<v Speaker 1>run for the run for the hills. So in that theory,

0:16:32.836 --> 0:16:34.316
<v Speaker 1>you know, maybe we should go back to the days

0:16:34.356 --> 0:16:37.276
<v Speaker 1>when you couldn't buy junk bonds because it's actually too

0:16:37.316 --> 0:16:41.436
<v Speaker 1>risky for mom and pop. You know, as much as

0:16:41.436 --> 0:16:43.556
<v Speaker 1>people don't want to talk about going backwards, I think

0:16:43.596 --> 0:16:46.236
<v Speaker 1>we did go too far in the other direction. And

0:16:46.436 --> 0:16:49.716
<v Speaker 1>it really was the perfect storm of retail being too

0:16:49.796 --> 0:16:52.236
<v Speaker 1>big a player in the credit market. And I only

0:16:52.276 --> 0:16:54.356
<v Speaker 1>mentioned we only mentioned two products. I mean, there are

0:16:54.556 --> 0:17:00.156
<v Speaker 1>products like collateralized loan obligations, closed end funds, business development

0:17:00.156 --> 0:17:03.156
<v Speaker 1>companies that all faced a similar fate. Even if they

0:17:03.196 --> 0:17:05.636
<v Speaker 1>didn't all have to sell on day one, they all

0:17:05.636 --> 0:17:08.876
<v Speaker 1>had issues like margin calls and things that all fed

0:17:08.876 --> 0:17:11.236
<v Speaker 1>into this. And so you know, the answer is probably

0:17:11.276 --> 0:17:14.916
<v Speaker 1>somewhere where there is a regulatory limit on the amount

0:17:15.076 --> 0:17:18.596
<v Speaker 1>of high yield credit risk that should be in daily

0:17:18.596 --> 0:17:22.156
<v Speaker 1>liquidity funds, because it really is illusory, this idea that

0:17:22.236 --> 0:17:23.996
<v Speaker 1>this thing that is so tricky to get in and

0:17:23.996 --> 0:17:26.756
<v Speaker 1>out of gets packaged into a daily liquidity vehicle. It's

0:17:26.756 --> 0:17:29.476
<v Speaker 1>really in some ways unsuitable. And it doesn't matter if

0:17:29.516 --> 0:17:31.996
<v Speaker 1>it's not very big, but when it becomes the biggest player,

0:17:32.476 --> 0:17:36.716
<v Speaker 1>it's incredibly important. One crucial question that emerges from this

0:17:36.756 --> 0:17:39.116
<v Speaker 1>part of the conversation that I had with Boas is

0:17:39.116 --> 0:17:43.636
<v Speaker 1>the regulatory question of whether, going forward, it's still safe

0:17:43.956 --> 0:17:48.156
<v Speaker 1>for ordinary investors to hold mutual funds ETFs or other

0:17:48.236 --> 0:17:52.356
<v Speaker 1>vehicles that expose them to substantial risk from high yield

0:17:52.436 --> 0:17:55.996
<v Speaker 1>corporate bonds from junk bonds. The losses that took place

0:17:55.996 --> 0:17:58.276
<v Speaker 1>in the market were not only a product of everyone

0:17:58.316 --> 0:18:01.276
<v Speaker 1>wanting to sell at the same time. They also revealed,

0:18:01.316 --> 0:18:05.356
<v Speaker 1>as Boas suggests, an underlying decline in the value of

0:18:05.436 --> 0:18:08.276
<v Speaker 1>the assets held by the ETFs or their mutual funds

0:18:08.596 --> 0:18:12.596
<v Speaker 1>below what their aggregate value should have been, even in

0:18:12.716 --> 0:18:16.476
<v Speaker 1>a falling market. That's a puzzle, and it's a puzzle

0:18:16.516 --> 0:18:18.076
<v Speaker 1>that's going to have to be solved not just at

0:18:18.076 --> 0:18:22.476
<v Speaker 1>the conceptual level, but at the practical, real world regulatory level.

0:18:23.676 --> 0:18:26.956
<v Speaker 1>I hope you enjoyed this special bonus conversation, and until

0:18:26.956 --> 0:18:29.636
<v Speaker 1>I speak to you next time, be careful, be safe,

0:18:29.796 --> 0:18:32.996
<v Speaker 1>and be well. Deep background is brought to you by

0:18:33.076 --> 0:18:37.036
<v Speaker 1>Pushkin Industries. Our producer is Lydia Jane Cott, with research

0:18:37.076 --> 0:18:40.316
<v Speaker 1>help from zooe Win and mastering by Jason Gambrel and

0:18:40.396 --> 0:18:44.876
<v Speaker 1>Martin Gonzalez. Our showrunner is Sophie mckibbon. Our theme music

0:18:44.956 --> 0:18:48.396
<v Speaker 1>is composed by Luis Garratt. Special thanks to the Pushkin Brass,

0:18:48.636 --> 0:18:52.916
<v Speaker 1>Malcolm Gladwell, Jacob Weisberg, and Mia Lovell. I'm Noah Feldman.

0:18:53.316 --> 0:18:56.276
<v Speaker 1>I also write a regular column for Bloomberg Opinion, which

0:18:56.276 --> 0:19:00.036
<v Speaker 1>you can find at Bloomberg dot com slash Feldman. To

0:19:00.076 --> 0:19:03.636
<v Speaker 1>discover Bloomberg's original slate of podcasts, go to Bloomberg dot

0:19:03.636 --> 0:19:07.916
<v Speaker 1>com slash podcasts. And one last thing. I just wrote

0:19:07.916 --> 0:19:11.316
<v Speaker 1>a book called The Winter, a Tragedy. I would be

0:19:11.356 --> 0:19:13.476
<v Speaker 1>delighted if you checked it out. You can always let

0:19:13.476 --> 0:19:15.676
<v Speaker 1>me know what you think on Twitter about this episode,

0:19:15.836 --> 0:19:19.436
<v Speaker 1>or the book, or anything else. My handle is Noah R. Feltman.

0:19:19.956 --> 0:19:21.396
<v Speaker 1>This is deep background