Answers emerge from the murky business of CLOs.
By Wolf Richter for WOLF STREET.
There has been quite some hoopla surrounding Collateralized Loan obligations (CLOs) because the underlying leveraged loans – junk-rated loans often used by private equity firms to fund leveraged buyouts (LBO) and other high-risk endeavors such as special dividends – are now starting to come apart. There are approximately $700 billion in US-issued CLOs outstanding.
US banks hold $99 billion of these CLOs, according to S&P Global Market Intelligence. The rest are held by various institutional investors, such as insurance companies, pension funds, mutual funds, hedge funds, private equity firms, and the like. They’re also held by entities overseas, including certain banks in Japan that have gorged on these US CLOs. But that’s their problem.
One third of the CLOs in the US banking system are held by just one bank: JPMorgan Chase; and 80% of the CLOs in the US banking system are held by just three banks. But at each of these three gigantic banks, CLOs account for only 1.2% to 1.3% of total assets (total asset amounts per Federal Reserve Q1 2020):
- JPMorgan Chase: $34.0 billion in CLOs = 1.3% of its $2.69 trillion in assets.
- Wells Fargo: $24.6 billion in CLOs = 1.2% of its $1.76 trillion in assets.
- Citigroup: $21.4 billion in CLOs = 1.3% of its $1.63 trillion in assets.
In 11th position down the list is the second largest bank in the US, Bank of America, with just $807 million in CLOs, accounting for barely over 0% of its $2.03 trillion in assets.
In other words, the largest four banks in the US hold $81 billion of the $99 billion of CLOs in the US banking system – but given the gargantuan size of their assets, this percentage-wise small CLO exposure is the least of their problems.
They’re far more exposed to the classic banking risks during a crisis: Residential and commercial real estate loans, consumer loans, energy loans, and the like. And that’s where their major loan losses will come from – and are already coming from.
The next $8.2 billion of CLOs in the US banking system are held by two US banks. Turns out, the relatively small group, Stifel Financial, is heavily exposed:
- Stifel Financial: $4.3 billion in CLOs = 16.6% of its $25.9 billion in assets.
- Bank of New York Mellon: $4.1 billion in CLOs = 1.1% of its $387 billion in assets.
The next $8.1 billion in CLOs are spread over four large banks. The exposure of the smallest bank among them, BankUnited, is relatively three times as large as that of the other banks, but is still only 3.3%:
- TD Group US Holdings: $3.1 billion = 1.0% of its $320 billion in assets.
- State Street Corp. $2.7 billion = 1.1% of its $242 billion in assets.
- MUFG Americas Holdings: $1.3 billion = 1.0% of its $133 billion in assets.
- BankUnited: $1.1 billion in CLOs = 3.3% of $32.8 billion in assets.
The remaining $2 billion in CLOs in the US banking system are small fry spread over other banks. And Stifel Financial is the only major US bank seriously exposed to CLOs.
But what parts of those CLOs are banks holding?
Risks and losses — and therefore yields — with CLOs depend on the tranches. Banks generally hold senior tranches. The yields of senior tranches are low, but their risks are also considered low, because in case of a default of an underlying loan, based on the waterfall payout structure of the CLO, the equity tranches (usually 10% of the CLO) eat the first losses, then the junior tranches eat the remaining losses. And when losses continue, the mezzanine tranches get to eat those losses.
Investors in those tranches are compensated with higher yields for the risks of having to take the first loss. And they shouldn’t complain when they get their faces ripped off.
The senior tranches, which tend to be over half of the CLO, will be impacted after the lower tranches are wiped out.
The loans underlying the CLOs are secured by collateral, which can be sold in case of default. So when a loan defaults, the loss to investors is normally not 100%. Investors may be able to recover 40% through the sale of collateral. And the remaining loss then hits holders of the tranches of the CLO in the sequence of the waterfall.
Who goes after the low-yielding senior tranches? A report by the Federal Reserve found that 95.4% of the identified CLOs held by deposit-taking banks ($57 billion) and 60.4% of identified CLOs held by Bank Holding Companies ($20.6 billion) were senior tranches.
Investors are on the hook.
On the other hand, mezzanine, junior, and equity tranches accounted for over two-thirds of the CLOs held by investment funds, which include hedge funds and private equity funds, and they accounted for one-third of the CLO holdings of mutual funds.
This is where the vast majority of the risks are, and where the biggest dollar amounts are, and where the vast majority of the losses will be eaten.
“To summarize, our new data suggest that institutional investors have sizable exposures to risky CLO tranches,” said the Fed’s report.
“These risky holdings appear to be larger than what market participants believe,” it said (underscore added). “For example, analysis by Fitch Ratings shown in Table 3 suggests that pension funds only held AAA-rated notes” — when in reality, they gorged on riskier tranches to get the higher yield.
So when these CLOs implode, they may cause minor ripples among a few large banks, amounting to less than a rounding error amid much larger loan losses; they may cause bigger ripples perhaps at Stifel; but they may cause some real heartache where the vast majority of the CLOs are held, and where most of the mezzanine, junior, and equity tranches are held: among mutual funds, hedge funds, PE firms, pension funds, and the like. And the Fed’s report points out, the heartache may come as a surprise to “market participants.”
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Not really a major surprise but…
Everything tends to be interconnected these days, so some institutional investor holding the dreg tranches of imploding CLO’s might also be a heretofore “stable borrower” from some bank holding no CLO dregs…but if the institutional investor goes down, the non-CLO bank gets hit anyway…because of indirect cascade effects.
In general, I think the interlinkages get worse because of ZIRP,
First, because ZIRP for 2 decades has herded almost all institutional investors onto the leverage train…because spreads under ZIRP are minute without leverage.
And banks tend to be the ultimate leverage providers.
Second, ZIRP tends to correlate otherwise uncorrelated asset classes…because they all become correlated to ZIRP’ed interest rates. Without uncorrelated assets, risk reduction becomes impossible via diversification. So Fed policy introduces huge new undiversifiable risk into the system.
I agree…correlated assets and leverage ultimately get back to the banks who extend the leverage and/or counter-parties to those who do.
So while the notionals Wolf looks at regarding in the reports of CLO exposure are relatively small, this is the stuff that is not on the balance sheet, and does not include any off balance sheet exposure that may be connected to these cashflow gymastics games
I personally prefer the ffiec FR Y-15 Snapshots Reports like “20181231_20190723_FRY15 Snapshot All.csv” because they cover things like: RISKM411 (OTC DERIVATES EXPOSURE), RISKM405 (ASSETS UNDER CUSTODY), RISKM370 (INTRA FINANCIAL LIABAILTIS), (RISKM367 INTRA FINANCIAL ASSETS), and can enable one to start piecing together some of things we don’t get nice charts for.
JPM has $2.69T in “assets” yet with $45T in OTC DE $23T AUC (as of 12/31/2018), makes you wonder how much of their exposure is on other peoples assets…
“makes you wonder how much of their exposure is on other peoples assets…”
My guess is all of it. They’re not stupid enough to risk their own assets in this scam.
Yeah, just stupid enough to risk more than their assets and the assets under management combined… lol
Do you think the Fed has enough sense to model this contagion risk? It’s not that complicated to get a rough estimate.
Once you have a list of each financial institutions assets, you do “what if” analysis on various assets in the system. If one institution fails because it’s CLO’s blow up, you then write off loans other entities have made to that institution, and so on.
Perhaps the Fed just shortcuts the analysis with simplistic assumptions. For example, to cut off contagion, the Fed assumes it can buy the exploding assets (i.e., bail out the holders). Essentially, this is money printing.
But if this type of bail-out and money printing is contained in the Fed models, shouldn’t it be built into everybody’s inflation expectations?
Given the unsound behavior of central banks, which is accelerating, institutions buying the highest-yielding crap may be the smart ones. They can hold the Fed hostage with the threat of contagion risk. Heads they win, tails they win.
Mr. Powell has addressed this issue on CLOs, in a recent interview.
Per him, the CLOs are 1/10th of 1% in the major US banks, hence very limited liability.
Outstanding CLOs have doubled from 2013:
https://www.federalreserve.gov/econres/notes/feds-notes/collateralized-loan-obligations-in-the-financial-accounts-of-the-united-states-20190920.htm
Check out the cross-border flows.
We will know when the “Buffet Tide” goes out on who is naked.It is a well worn practice in “Back Office” operations to get rid of crap such as CLO
turd bundles by wrapping them up with a few blossoms and then dump them off to Pension Funds. For sure by design the CLO Turd Blossom bundles are shuffled off to the dark corners that catch no attention. This will be future fodder for analysis by WR. I hope it’s at least entertaining to watch.
I’ll bet CalPERS holds a lot.
Wolf,
Is the correct reading here that investment funds, which include hedge funds and private equity funds could potentially get hurt if CLO on the lowest levels collapse? They are the most exposed to these?
I’m curious to understand what the side effect of that would be, meaning, are there equivalent CDS that are going to implode if the lowest tranches of the CLO gets wiped out. Thereby creating some kind of AIG effect which in turn takes out confidence in the entire financial system?
Because if the answer to that is no. I’m not sure why anyone would care about these funds getting killed. I think the other way to look at it is that these funds should not be bailed out due to their poor decision making in terms of monetary allocation.
But if I had to guess, there is probably a great deal of opaqueness around the situation, and perhaps there are counterparties that are not fully obvious which could bring down the whole financial system. Then again, I expect that should this happen, the Fed will probably ride to the rescue again.
CDS’s are like an insurance so counterparty risk is highet. CLO’s have some underlying assets to recover. I think to better assess the potential impact (counterparty risk-wise) of CLO blow-up is to do a similar analysis of non-bank holders as the one Wolf did above for banks: CLO quality and % of assets.
Yes, nobody cares* if a couple of hedge funds blow up in the process as long as they are not systematically important or if the impact is too large to cause firesales of other assets.
*except the FED
Which leads us to the stress tests. Banks and hedge funds holding the same risky paper means they are joined at the hip. This is why Fed wants to open the discount window to Hedge funds? Extend QE authority to the charters? (You can QE yourselves?) I am still curious who is on the hook for the 10x leverage when SPV borrows from Fed to buy corporate junk? On opaqueness, some time back big US banks took DBs (unregistered) derivative book, and later failed their stress tests. Subsequently it was all cleared up, if a reputable entity buys disowned property, is that entity made corrupt, or is the title made clear?
MCH,
Yes, to your first line.
And yes, I’m curious too about the side effects. Hedge funds are already mucking up the CLO scenery in other ways where they’re betting against and agitating against the restructuring of the underlying loans. This is already a very complicated mess.
This sounds like it’ll be some kind of weird October surprise when the blow up will come from a totally unexpected source like what happened when AIG was suddenly outed to be in a ready to collapse state. Except this time, it’ll be something even crazier, (totally making up the next part) like Google loaded up on the worst of these tranches and is about to go bankrupt.
The only problem this time is that the Fed and treasury has expended a tremendous amount of financial firepower already.
We all know that CLOs are massively mis-priced amd ghe ECB, BIS, FED, Global Ginancial Stability Board all have said it and published detailed analysis on it. But so is every asset out there in the world of Everything-Bubble. What IS different about the CLO Mis-Pricing what that all the regulators, the FED and the Stability Board miss: Fraud. Investors are being shown insanely wrong stress tests for the tranches on two levels in oder to make them believe that what is now a roughly 25% credit loss tail risk in the BSL leveraged Loan market can be absorbed by a 10% Equity Tranche. For one investors are shown recovery rates increase as default rates rise and on top of it no default cycle scenarios but constant default rates (insane!!! You are using averages to stress tail risk!!! And that with default and recovery rates positively correlated). The second way they bullshit amd hoodwink investors in the stress tests is with re-investment assumptions that are simply ludicrous and in many instances amount to up to 40% of a B2 loan portfolio being set to AAA I.e. with zero defaults during the re-investment period. And to top it all off investors are being told these tranches have the same price convexity as bonds. in fact they call the tranches bonds! What investors are not being told is that tranches are effectively a derivative and have huge price convexity determinier ny the underlying loan portfolio, thickness of the tranche etc. The Fed and regulators would just have to take a look at the preposterous marketing materials of CLO Managers, Investment banks and the managers of portfolios of CLO tranches. This is pure risk deception on a big scale which in turn caused the Leveraged Loan Bubble with its quality and deterioration. The rating agencies sure play their part and ESMA in a recent study gave a devastating judgement on the CLO Rating methodologies. They as much say that those ratings are worthless
Very important issue you expose. Thank you. I see it as 2008, The Big Short, etc Deja Vu all over again. How can so many so smart investors and and funds be so blind and stupid. I think their greed makes them wilfully blind to the risks in the junk they buy.
>(insane!!! You are using averages to stress tail risk!!! And that with default and recovery rates positively correlated)
I love it! Yup, that’s why I sell at generalized extreme value distribution assumptions and buy at normal distribution prices… and so many sellers with normal distribution assumptions… and most of this garbage is uncollateralized lol
-121 bps carry now Wolf on 5y HY maturity portfolio :P
They better flush these turds to Jerome soon or its gonna get expensive on these books lol
@GotCollateral
I remind you that Jerome’s downside risk falls on Joe Lunchbucket who knows nothing of the gilded toilet paper produced in the dark caverns in New York.
Yeah? And? lol
WB,
I’m sure you have a lot of good points in your post, but could you spread them out and simplify them a bit for the benefit of us civilians?
When things get too jargon heavy and assume too much knowledge on the part of the audience, a lot of very good points get lost.
I’m guilty of this sometimes myself (jargon as shorthand, trading explanation for speed) but Wolf pulls in a *wide* array of readers (preppers, Marxists, libertarians, zero growth ecologists, institutional investor insiders, etc.) and unless things get spelled out a bit, very good/useful points can get lost.
“…could you spread them out and simplify them a bit for the benefit of us civilians?”
Can I second this request? I LOVE WS and especially appreciate the informative and no-snark comments – so thanks all!
That said, yeah, I’m frequently lost in the baffle-gab. Any help in “unpacking” some of the more esoteric and technical concepts greatly appreciated.
Mis-pricing is NOT just in CLOs but in the whole Credit & Equity mkts when the indexes are disconnected with the real economy.
Price discovery has been suppressed by Fed since ’09! Also remember there is suspension of ‘mkt to mkt’ accounting standard since March of ’09!
Only when the FED allows ‘true’ free mkt to function, we will know the truth, until then it is extend and pretend and the party goes on Wall St!
Hey a Wolf,
How are your shorts coming along? Made any money yet? Just wondering how you can you still think the Federal Reserve Bank will ever let the “Market” decline. Hasn’t the rebound from the March lows proven to you that the game is completely rigged. Playing in this rigged market is as bad as the rigged market itself.
Reality,
In terms of the SPY short, nothing much has happened yet. I’m up about 2% at the moment.
When an unstoppable wave of insolvency hits an immovable wall of liquidity, which one will win out, Reality?
Wolf very good analysis. A couple of things… to add to your analysis nobody has any idea what the banks hold off the books. Nobody knew in 2008 either with CDOs and two, the top layers that the banks own might be called secure in reality much of it is because of the rating agencies, which given the appropriate economic context could also mean “dog shit” to quote a certain Deutsche Bank employee .
There is a point made usually that the banks are much better prepared ie they are capitalized better as opposed to 2008. It misses the point really because in 2008 the problem wasn’t that the banks had no capital but that they where toxic counter parties which led to liquidity not being extended to them as a result of mark to market value of these assets. Yes, the CLO size even if one assumes a figure and takes that into account as off the book holdings of the banks, is much smaller compared to the size the banks are now, but the problems is that CLOs though, similar to CDOs are nothing like it. Meaning the character of the underlying asset is different and exposure to it is different too, It is not just the problem that they own top tranche CLOs of XYZ but that they have also extended loans to the same company, and it’s CMBS too. A bank can be exposed to the corporate debt bubble beyond CLOs and into all sorts of ways, because unlike mortgages the sky is the limit.
Stay safe and bring your own umbrella.
Sir.PiratePapirus,
Banks have big problems and are facing big losses. But you need to take CLOs off your problem lists for banks (except Stifel).
JPM has $3 trillion in assets — commercial and residential real estate loans, auto loans, credit card loans, subprime loans of all kinds, commercial and industrial loans, loans to shadow banks and hedge funds, loans to billionaires secured by shares of their companies, all kinds of trades, and what not.
That’s where the risks are — in its $3 trillion portfolio that is chock-full with loans and trades and deals. Just 1.3% of that portfolio are senior tranches of CLOs. Minuscule. JPM is taking bigger losses on its energy loans RIGHT NOW than it ever will on its CLOs.
The big Wall street banks hold many off balance sheet CLO’s.
Therefore, the picture may not be as described by S&P Global Intelligence.
The universe of US issued CLOs is limited: $700 billion. We kind of know where they are.
It’s investors in various funds, including mutual funds, that need to be worried about junior tranches and equity tranches of CLOs hidden in the bowels of their fund.
It’s funny we talk about a number like 700 billion as being limited. A decade ago, it would’ve been nearly unthinkable. I’m waiting now for the time we switch from T to Q; just as we recently switched from B to T when we talk about the amount of dollars needed to fix a problem
That’s true. There was a time in my life when “Trillion dollars” never came up unless you talked about GDP. Now we throw that amount around on a daily basis for all kinds of stuff.
I smell an SPV for CLOs!
@Lance Manly: That was exactly my thought. If it’s bigger players facing the losses, almost a sure bet that rich Uncle Feddie under Powell, addicted to its own ctrl-p money-printing prowess, gonna keep hitting that print key, like those cocaine-addicted rats in that famous 70s addiction experiment. (Actually, series of experiments.)
Wolf – do CLO managers buy and sell loans within the CLO after they’ve been marketed to investors? If so, what would prevent a manager from moving deteriorating loans into a single CLO and replace the bad with good. In other words, is it possible to load up a CLO with riskier loans after it has been marketed to investors without the investors being aware of the switch?
“do CLO managers buy and sell loans within the CLO after they’ve been marketed to investors”
I think it varies…a lot.
Despite the huge growth in leveraged “junk” loans, CLOs (which I sort of view as mutant mutual funds with manipulated cashflows by definition) are still very bespoke in terms of legal documentation.
With some Ltd exceptions, CLOs are marketed to institutional investors (different ones for different risk tranches) and frequently the CLO’s “rules” reflect negotiations between CLO assemblers and those varying prospective buyer classes.
After 20 years existence or so, the CLO mkt is still pretty obscure and opaque IMHO, and that leaves room for a lot of dubious game playing by insiders.
For instance, I still cast a jaded eye at just how “separate” junk loan originators (major banks) really are from the CLO assembler/managers.
The banks want the high fees and safest tranches of these highly risky loans but they don’t want the toxic tranches/default/downgrade risk…so that’s the stork that brings baby CLO managers into the world…CLOs are how originating banks offload crap loan risk.
But the bank/CLO manager relationship can be pretty incestuous from the start and it isn’t clear to me that they don’t operate in cahoots sometimes, to the detriment of one or more tranche buying institutional investors.
And the 2000+ pages of CLO documentation are where the legal land mines get laid.
Institutional investors put up with it because they are yield starved due to ZIRP essentially destroying returns across the fixed income universe for 20 years (almost everything in FI gets priced, directly or indirectly, at a spread to Fed debased Treasury rates).
It can all rather be a clusterf*ck in the dark, pimped/promoted by Fed policies to destroy USD interest rates, in the service of a terminally incompetent US government.
I think it comes down to the ratings agencies/shadow ratings.
If you’re selling a tranche of a CLO, you’re promising a ballpark risk level and return to investors. You create a portfolio of loans to fit that. As loans get downgraded, you have to either sell them, or kick them out of that “safer” tranche down the ladder to the riskier tranches (i.e. BB / equity) with higher coupons and higher risk tolerance and replace them with better loans in order to maintain your ratios and covenants for the tranche. A “safer” tranche promises to its investors that it can only hold X amount of CCC+ or riskier paper.
So if Moody’s came in and started aggressively downgrading lots of loans, CLOs will be shuffling decks constantly and a lot of them will be forced sellers of downgraded paper. It creates a cascade.
Banks are happy to be at the top of the pyramid, but don’t (or can’t) hold the riskier tranches. Much like the 09 crisis, the catalysts for any type of implosion in CLOs will likely be credit rating downgrades (aside from companies being unable to make interest payments, which one hopes would happen real-time with credit rating downgrades). But we are still in “kick the can/amend/forebear” mode; I don’t think we’ve really seen the downgrades/defaults that we thought we would yet.
Thanks Wolf. I usually learn something from the way you layout actual facts and numbers in your articles. I am so tired of other so-called news sources glossing over important information. For example your article on the Fed SPVs was illuminating. Other reports I read after yours neglected to even mention that foreign company bonds were purchased.
Not just foreign companies but also bonds of some foreign banks!
At least 2 of the 15 bank rep at Fed are International Banks !
Hey, what’s that in the scheme of things, sunny129? The Swiss central bank even generates new CHF digits from magic land and buys Apple stock with them, specifically in order to make pre-existing CHF digits weaker and keep their citizens enslaved. We live in a world that we aren’t wired to understand on an intuitive basis.
Good point, Cas 127.
My question to the esteemed smart folks on this board is how to profit from this as a speculator in the cheap seats (not even available during Covid)? The Big Short guy made gazillions, to my amateur mind this seems somewhat similar but there would have to be already available means to short this crap.
The market pros tend not to create too many products that really allow civilians to profit from implosions (the limited, fairly warped “inverse” ETF mkt is a good example of this…despite thousands of ETFs there are zero that really target the most overvalued stocks/sectors for shorting…despite easy metric targeting and quite possibly the most overvalued market in history).
1) Market insiders tend to reserve the absolute best plays for themselves…they aren’t going to market to civilians that which they are almost certain to profit from themselves. Right now, that is shorting opportunities.
2) Most market insiders directly or indirectly profit the most/longest from marketing upside opportunities (ie, raising capital, equity or debt, for large corporations, solid or financially ruinous).
Marketing downside tools to civilians tends to screw that pooch by poisoning the well…even the master hypocrites of NYC find it hard to say buy/sell publicly at the exact same moment.
If an invt bank constructs an inverse ETF targeting the highest PE stocks (pretty obvious but apparently non-existent tool) it is kind of hard to go to those high PE companies CFOs for other business.
So, what is a short-oriented civilian to do?
The broad index inverse ETF’s might be the best/only bet.
But they are very unfocused (diversification works against shorters in most instances) and structurally dubious (using constantly rolled futures to short, almost always causing constant erosion in the value of the short position…making inverse ETFs a much, much better short term than long term tool…but who is a market timing genius?)
To elaborate on timing, the broad indices have probably been overvalued for 5 years (and ZIRP addled for well over 15), but it took a once in a century pandemic to even begin to break their long-rotted back.
Unfortunately, as has been said before, the mkts can stay insane longer than a shorter can stay solvent.
Especially if the fiat-issuing government sees that valuation insanity as being in its interest.
Americans don’t understand that they are playing Monopoly (currency edition) with a sociopathic political class.
Inverse leveraged ETfs worked fine for me during GFC, ( made profits and lost zilch!) when ‘timing’ and the ‘trend’ were right and free mkt capitalism was working. NOT any more.
Still I use them along with hedging them long leveraged ETFs in small quantities as a part of uncorrelated assets. The best tool is option trading, with a little hedge on both direction. They did splendid when the Mkts tanked in March! Again TREND and TIMING are critical. A lot tougher when FED is the market!
Been in the mkt since ’82)
But trend/timing are very, very, very hard to do in practice.
To the extent that next to zero professional, full time, fully staffed, lavishly funded institutional investment teams are able to do it for two years in a row (one yr being a function of chance).
Steve,
In my opinion, formed from observing the past, the way to profit is not going short. If the banks truly have unloaded all this crap on everybody else, then being long the banks can be a way to go. Just keep in mind they may have other problems as well, but you can see from the past, they always get bailed out.
For most individuals, learning OPTION TRADING as risk management tools gives the power to harvest the SHORTING, compared to big boys.
Option is NOT for every one. I started in early 2000s, made plenty of mistakes and learning curve was steep but I kept at it. One has to be very disciplined re losses – no wishful thinking or hope. Read the experience of other option traders. I am fairly experienced and comfortable now. BEAR mkts NEVER bother me. In fact I tend to better in Bear than Bull mkts!
So does options trading increase your returns, or is it just insurance to minimize big draw-downs?
What about the usual suspects, Deutsche Bank, HSBC and Santander ? Or aren’t they included in this statistics due to not being US banks ?
Their US entities don’t hold CLOs. Their banks in their own countries might hold CLOs, and they would not be reflected here.
For CLOs to make sense, a bank has to have a large amount of deposits that it wants to invests in liquid assets. So the deposit-rich banks (JPM, Wells Fargo, Citi, etc.) invest the most in CLOs.
Wolf,
What about the Japanese banks? You have mentioned many times that Japanese banks have an insatiable appetitie for CLOs because of negative interest rates.
What percentage of their assets is tied up in these things? What happens to them when the CLOs collapse?
The BOJ has created so much inflated money supply already, what are the odds of the BOJ being able to re-inflate these banks when/if they collapse?
Gandalf,
Yes, this is a problem for some Japanese banks, and Japanese regulators have been warning about those CLOs on their books.
I don’t read the industry or bank data for Japanese banks, in part because I can’t read Japanese, and that’s where the good stuff is. But what has been reported in the US media is that banks in Japan hold about $140 billion or so of US CLOs.
One fairly small bank alone, Norinchukin Bank (farming and fishing) holds about $70 billion of CLOs. Regulators are apparently all over this bank. It too seems to hold mostly top-rated tranches. But regulators are concerned.
Mitsubishi UFJ Financial holds about $20 billion of CLOs. Japan Post Bank holds about $16 billion. These two are huge banks, and their CLOs aren’t going to put them under. But the same cannot be said for Norinchukin Bank.
Wolf,
Your article is detailed and insightful as usual. Would you do an article on FASB 56? I don’t think I understand the implications of that. Thanks
I don’t do FASB :-]
https://www.rollingstone.com/politics/politics-features/secret-government-spending-779959/
Basically government can present one set of accounts to the public and keep another true version hidden.
But the government has to borrow, and the debt cannot stay hidden. These are Treasury securities with publicly tracked cusip numbers.
When you don’t know or understand what you own then sell it. Reality is institutional or profession investors count on dumping to retail at just the right time. The markets are one huge grifting operation.
Everything in modern finance is connected.
When the dust from this economy settles, everyone will have agreed that all kinds of abstract instruments are worth less than before.
Then they’ll start over.