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They Crashed the Economy in 2008. Now They’re Back and Bigger Than Ever.​

Wall Street expects to sell more than $335 billion in asset-backed debt this year. Remember that conference in ‘The Big Short’? It just drew a record 10,000.​



“… Wall Street is once again creating and selling securities backed by everything—the more creative the better—including corporate loans and consumer credit-card debt, lease payments on cars, airplanes and golf carts, and payments to data centers. Once dominated by bonds backed by home mortgages, deals now reach into nearly every cranny of the economy.

… New U.S. issuance of some of the most popular flavors of publicly traded structured credit hit record levels in 2024 and are expected to surpass those tallies this year, according to S&P Global. New asset-backed securities totaled $335 billion last year. Collateralized loan obligations, or baskets of corporate debt, rose to $201 billion, also an all-time high.

… Today, big investors want to buy these types of securities because they think they are relatively safe and yield more than government-backed bonds. Banks are mostly middlemen because regulations instituted after 2008 curtailed their lending. That has opened the way for giant fund-management companies like KKR, Apollo Global Management and Ares Management to muscle in and make loans with their own capital.

… The business came back, Goldwasser said, because a lot of securitized debt has performed well over time, and proved useful to smaller companies in search of cheaper financing. “It’s the great equalizer of finance,” she said.

… Sales of securitized debt have been surging since the Covid-19 pandemic, when the Fed lowered rates and investors were awash with cash and looking for investments, Flanagan said. “Everything is going to end up here,” he said.

That includes debt backed by money tied to artificial intelligence, solar energy and even payments from plastic-surgery patients. Bonds backed by leases on data centers and fiber-optic networks—which power companies’ AI operations—hit $4 billion in the first two months of this year, equivalent to one-third of total issuance in 2024, according to Finsight.

… Data-center bonds are backed by lease payments from companies that rent out computing capacity. It will cost about $3 trillion to build the centers needed in the next five years, according to BlackRock. That prospect had many at the conference giddy with excitement. …”
 
nycfan said:

They Crashed the Economy in 2008. Now They’re Back and Bigger Than Ever.​

Wall Street expects to sell more than $335 billion in asset-backed debt this year. Remember that conference in ‘The Big Short’? It just drew a record 10,000.​



“… Wall Street is once again creating and selling securities backed by everything—the more creative the better—including corporate loans and consumer credit-card debt, lease payments on cars, airplanes and golf carts, and payments to data centers. Once dominated by bonds backed by home mortgages, deals now reach into nearly every cranny of the economy.

… New U.S. issuance of some of the most popular flavors of publicly traded structured credit hit record levels in 2024 and are expected to surpass those tallies this year, according to S&P Global. New asset-backed securities totaled $335 billion last year. Collateralized loan obligations, or baskets of corporate debt, rose to $201 billion, also an all-time high.

… Today, big investors want to buy these types of securities because they think they are relatively safe and yield more than government-backed bonds. Banks are mostly middlemen because regulations instituted after 2008 curtailed their lending. That has opened the way for giant fund-management companies like KKR, Apollo Global Management and Ares Management to muscle in and make loans with their own capital.

… The business came back, Goldwasser said, because a lot of securitized debt has performed well over time, and proved useful to smaller companies in search of cheaper financing. “It’s the great equalizer of finance,” she said.

… Sales of securitized debt have been surging since the Covid-19 pandemic, when the Fed lowered rates and investors were awash with cash and looking for investments, Flanagan said. “Everything is going to end up here,” he said.

That includes debt backed by money tied to artificial intelligence, solar energy and even payments from plastic-surgery patients. Bonds backed by leases on data centers and fiber-optic networks—which power companies’ AI operations—hit $4 billion in the first two months of this year, equivalent to one-third of total issuance in 2024, according to Finsight.

… Data-center bonds are backed by lease payments from companies that rent out computing capacity. It will cost about $3 trillion to build the centers needed in the next five years, according to BlackRock. That prospect had many at the conference giddy with excitement. …”
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The chart does a good job differentiating between the obvious mortgage-backed bubble that preceded the Great Recession and now, but there are still problems with spreading iffy asset class risk across the economy depending on the concentration of assets in the growing asset-backed and collateralized loan obligations (which I think have a lot of hidden overlap because of the types of collateral attracting capital in the collateralize loan component looking a lot like the types of assets in the asset-backed component).

Still, right now it is nothing like the gargantuan sized risks underlying the mortgage securitization bubble catastrophe…
 
Clinton cleaned up the Poppy Bush mess. Obama cleaned up the GWB mess. Biden cleaned up the Trump mess. Hopefully a Democratic president will have the opportunity to clean up another Trump mess in 2028

Given the history of Dems of cleaning up the mess created by GQPers, it reminds me of the little guy cleaning up the parade mess on the Rocky and Bullwinkle show... maybe the Dems should replace the donkey with this guy as its icon ?

 
As a background note, a loan that is secured by an asset (a house or a car, for instance in consumer terms, or assets of a business) is “collateralized.” If a secured or “collateralized” loan is not repaid, a specific asset (or all the assets) owned by the debtor can be repossessed or sold by the lender to recover all or part of the debt owed.

But a Collateralized Loan Obligation (CLO) in its simplest form is a large pool (at least 200) of individual secured corporate loans (i.e. loans to companies usually for general corporate purposes) that are bundled into a group and interests in the payments on those loans is the return on investment. In theory, the way the price of an investment in a CLO (bundle of loans) is discounted should reflect the risk of some reasonable percentage of defaults in the bundle of loans still resulting in a return on the investment because all the other loans perform as expected.

Similarly, asset-backed securitization is a large pool of consumer or (mostly small or start-up) business loans secured by a particular asset (consumer auto loans, for example). In most of these cases, any individual loan in the class is too small to syndicate (sell a portion of the risk to other lender or investors), but when bundled together a large group of these small loans become a security that can be sold to investors to spread the risk on all of them in a bundle (priced based on a discount assuming some rate of default based on the quality of the loans and assets).

A potential issue right now is that a lot of new investors seem drawn to related tech-based asset classes of ABS and CLO securities — especially the component parts of crypto and especially AI development, from leases to cooling equipment to energy support to computing tech, as well as lenders making secured loans in the tech sector and energy supporting the tech sector. The problem could become that if what looks like diversified risk is really all tech sector risk by various names and there is a major downturn in that sector (say driven by a cheap new alternative to wildly expensive energy consuming AI), large financial investors across the economy are now sharing the risk. That can be good if the risk is diluted by the securitization but catastrophic if the risk is too large for the economy to absorb (see the Great Recession).

Anyway, securitization is a key to creating liquidity and is not inherently bad — well managed it actually does dilute risk to the economy of a sector downturn while maintaining healthy liquidity for consumers and business. But as we saw with the mortgage-backed securitization crisis in 2007-2008, if too much risk is concentrated in a particular segment, a severe blow to that segment can cause a cascade throughout the entire economy…
 
nycfan said:
As a background note, a loan that is secured by an asset (a house or a car, for instance in consumer terms, or assets of a business) is “collateralized.” If a secured or “collateralized” loan is not repaid, a specific asset (or all the assets) owned by the debtor can be repossessed or sold by the lender to recover all or part of the debt owed.

But a Collateralized Loan Obligation (CLO) in its simplest form is a large pool (at least 200) of individual secured corporate loans (i.e. loans to companies usually for general corporate purposes) that are bundled into a group and interests in the payments on those loans is the return on investment. In theory, the way the price of an investment in a CLO (bundle of loans) is discounted should reflect the risk of some reasonable percentage of defaults in the bundle of loans still resulting in a return on the investment because all the other loans perform as expected.

Similarly, asset-backed securitization is a large pool of consumer or (mostly small or start-up) business loans secured by a particular asset (consumer auto loans, for example). In most of these cases, any individual loan in the class is too small to syndicate (sell a portion of the risk to other lender or investors), but when bundled together a large group of these small loans become a security that can be sold to investors to spread the risk on all of them in a bundle (priced based on a discount assuming some rate of default based on the quality of the loans and assets).

A potential issue right now is that a lot of new investors seem drawn to related tech-based asset classes of ABS and CLO securities — especially the component parts of crypto and especially AI development, from leases to cooling equipment to energy support to computing tech, as well as lenders making secured loans in the tech sector and energy supporting the tech sector. The problem could become that if what looks like diversified risk is really all tech sector risk by various names and there is a major downturn in that sector (say driven by a cheap new alternative to wildly expensive energy consuming AI), large financial investors across the economy are now sharing the risk. That can be good if the risk is diluted by the securitization but catastrophic if the risk is too large for the economy to absorb (see the Great Recession).

Anyway, securitization is a key to creating liquidity and is not inherently bad — well managed it actually does dilute risk to the economy of a sector downturn while maintaining healthy liquidity for consumers and business. But as we saw with the mortgage-backed securitization crisis in 2007-2008, if too much risk is concentrated in a particular segment, a severe blow to that segment can cause a cascade throughout the entire economy…
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What is a tech-based ABS? You mean auto loans from Tesla? Netflix receivables?

Oh, I missed the part where you mentioned leases (those leases are for everything that follows, right? They aren't putting cooling equipment in an ABS). But who are the tech companies, which I guess was my main question.
 
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nycfan said:
As a background note, a loan that is secured by an asset (a house or a car, for instance in consumer terms, or assets of a business) is “collateralized.” If a secured or “collateralized” loan is not repaid, a specific asset (or all the assets) owned by the debtor can be repossessed or sold by the lender to recover all or part of the debt owed.

But a Collateralized Loan Obligation (CLO) in its simplest form is a large pool (at least 200) of individual secured corporate loans (i.e. loans to companies usually for general corporate purposes) that are bundled into a group and interests in the payments on those loans is the return on investment. In theory, the way the price of an investment in a CLO (bundle of loans) is discounted should reflect the risk of some reasonable percentage of defaults in the bundle of loans still resulting in a return on the investment because all the other loans perform as expected.

Similarly, asset-backed securitization is a large pool of consumer or (mostly small or start-up) business loans secured by a particular asset (consumer auto loans, for example). In most of these cases, any individual loan in the class is too small to syndicate (sell a portion of the risk to other lender or investors), but when bundled together a large group of these small loans become a security that can be sold to investors to spread the risk on all of them in a bundle (priced based on a discount assuming some rate of default based on the quality of the loans and assets).

A potential issue right now is that a lot of new investors seem drawn to related tech-based asset classes of ABS and CLO securities — especially the component parts of crypto and especially AI development, from leases to cooling equipment to energy support to computing tech, as well as lenders making secured loans in the tech sector and energy supporting the tech sector. The problem could become that if what looks like diversified risk is really all tech sector risk by various names and there is a major downturn in that sector (say driven by a cheap new alternative to wildly expensive energy consuming AI), large financial investors across the economy are now sharing the risk. That can be good if the risk is diluted by the securitization but catastrophic if the risk is too large for the economy to absorb (see the Great Recession).

Anyway, securitization is a key to creating liquidity and is not inherently bad — well managed it actually does dilute risk to the economy of a sector downturn while maintaining healthy liquidity for consumers and business. But as we saw with the mortgage-backed securitization crisis in 2007-2008, if too much risk is concentrated in a particular segment, a severe blow to that segment can cause a cascade throughout the entire economy…
Click to expand...
Headache I Cant GIF by Solomon Ray
 
superrific said:
What is a tech-based ABS? You mean auto loans from Tesla? Netflix receivables?

Oh, I missed the part where you mentioned leases (those leases are for everything that follows, right? They aren't putting cooling equipment in an ABS). But who are the tech companies, which I guess was my main question.
Click to expand...
Esoterics include fiber, telecom and tech equipment leases, blockchain tech and support equipment, software IP, cloud services and SaaS streams.
 
Is there a regional inventory and home price shift on the horizon, with home prices in the Sunbelt on the verge of a downward adjustment?

www.wsj.com

Are Home Values About to Fall? It Depends on the Location

The supply of houses for sale is recovering much faster in some parts of the country than in others.
www.wsj.com www.wsj.com

  • Home values are likely to fall in some parts of the country such as Florida and Texas, where there is an oversupply of newly built homes and prices look overvalued.
  • In other parts of the country, such as the Northeast and Midwest, there is a continued lack of supply.
  • The national supply of homes for sale is still below prepandemic levels, but it is increasing as more homeowners decide to sell.

"... Beneath the headline numbers, different states are recovering at sharply different paces. Inventory has shot above 2019 levels in a handful of areas. In Texas, the number of properties for sale is 20% higher than it was before the pandemic, data from Realtor.com shows. Florida and Colorado are also above 2019 levels.

...At the other end of the spectrum, supply is crunched in parts of the Northeast and Midwest. In 15 states including New Jersey and Pennsylvania, the number of homes currently on the market is still less than half what was normal before the pandemic.

Several things are causing a two-speed housing market. One is a glut of newly built homes. Last December, builders had 118,000 ready-to-occupy single-family homes sitting unsold, according to the National Association of Home Builders—the highest level since August 2009.

Based on permitting applications, most new construction has happened in the South, particularly in Florida and Texas. Florida expanded its housing stock by 15% since 2020, according to estimates by Brad O’Connor, chief economist at Florida Realtors. These newly built homes are hitting the market at a time when demand from buyers is exceptionally weak because mortgage rates remain high. As properties sit unsold, inventories are creeping up.

Meanwhile, in states like Illinois, strict zoning laws and expensive building costs have hampered new construction. And the inventory of existing homes for sale is gummed up. Jeff Baker, chief executive officer of Illinois Realtors, says that although many homeowners in the state want to move, there is so little supply and prices are so inflated that people have little choice but to stay put.

The lock-in effect of cheap mortgages is also slightly weaker in some regions than in others, which is influencing how fast homes are hitting the market. In the South, 21% of outstanding mortgages on average had a rate of 6% or higher at the third quarter of last year compared with 18% in the Northeast, based on an analysis by Chris Porter, a senior vice president at John Burns Research and Consulting. This is largely because more homes have sold in the South since interest rates rose, because of continued migration to the region. ..."
 
I really think that this entire thing is going to be a massive wealth transfer from the right to left. That is aside from the creation of American oligarchs.

People in the left and center get what is going on. They have an understanding of the significant risks. People on the right are in a cult and are not going to make solid financial decisions.

On various subreddits I have noticed those who still hold out hope that their stocks will be fine are MAGA types. (You can tell by looking at their comments on other subreddits.)

Once those people start to realize the shit storm we are in it will be too late. Stocks will crash hard at that point.
 
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