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