3 ms·

> I have a checking account and a home mortgage with Wells Fargo; I decided to see how heavily invested my bank is in CLOs. I had to dig deep into the footnotes

> I have a checking account and a home mortgage with Wells Fargo; I decided to see how heavily invested my bank is in CLOs. I had to dig deep into the footnotes of the bank’s most recent annual report, all the way to page 144... The total is $29.7 billion. It is a massive number. And it is inside the bank. To put $29.7B that into context -- Table 4 of the most recent 10K says that Wells has ~1.7 trillion dollars of earning assets. Tables 1 & 2 indicate they hold around 180B of shareholder capital buffer.

thephyber 6y ago
Your appraisal seems fair... of the data you are working with. But how many other financial instruments they own are tied up in CLOs on the books of other banks? The whole point of The Big Short and Margin Call was that the banks aren't resilient, independent silos. When one bank shakes or falls, it can impact the neighboring bank which causes a domino effect. They all invest in slices of the things that the other banks invest in, they all do it with lots of leverage, and they all think they've hedged against the downside risk, but that still didn't prevent the 2008 collapse.
- clairity 6y ago
  that's literally herding behavior, which is the loss of independence among market participants, so that risks start to align, rather than cancel each other out. it's disgusting that we haven't learned anything from 2008.
  - thephyber 6y ago
    To be fair, I think every financial instrument works this way (the transitive property of assets which own assets) all the time. Having regulations which restrict which companies are allowed to trade specific classes of instruments/services (eg. Glass Steagall) helps mitigate this, but doesn't even approach eliminating it.
    - clairity 6y ago
      it does work that way far too often, and that's exactly the problem. financiers are no smarter than other kinds of market participants, and that's what this shows. markets require relative participant independence for pricing and allocation to function properly, otherwise we get bubbles. and now, we get constant bailouts (of capital, not labor), so on top of that, there's no downside risk to provide any counterbalance. it's corrupt.
chishaku 6y ago
That's not the correct context. What does that $29.7 billion represent in counterparty or systematic risk?
- missedthecue 6y ago
  Do you know what a CLO is...?
  - chishaku 6y ago
    Do CLO portfolios of major banks pose any systemic risk, yes or no?
    - missedthecue 6y ago
      Systemic? No.
      - chishaku 6y ago
        Do you know what a CLO is...? Or maybe you were born in 2009? FSB: "Available data indicates that banks have the largest direct exposures to leveraged loans and CLOs. These exposures are concentrated among a limited number oflarge global banks and have a significant cross-border dimension. ... A number of non-bank investors are also exposed to leveraged loan and CLO markets. These include investment funds, insurance companies, pension funds, broker-dealers and holding companies. ... A comprehensive assessment of the system-wide implications of the exposures of financial institutions to leveraged loans and CLOs is challenging. ... These exposures are generally concentrated among a limited number of banks. These banks’ exposures to leveraged loans and CLOs, on a fully drawn basis, are significant relative to their capital adequacy ratios. "Similar to other markets, the leveraged loan and CLO markets include direct and indirect forms of interconnectedness, both within and across borders. Direct interconnectedness arises from links in the intermediation chain, from origination and distribution of leveraged loans to securitisation by CLO manager. ... Through these direct links, shocks to the leveraged loan and CLO markets could transmit risks to financial intermediaries not directly exposed to such markets. ... Indirect interconnectedness can arise in the form of common exposures of banks and non-banks to leveraged loans and CLOs, and could provide an avenue for contagion among financial institutions." https://www.fsb.org/wp-content/uploads/P191219.pdf https://www.fsb.org/wp-content/uploads/P191219.pdf Fed: "Similarly, vulnerabilities stemming from leveraged lending were increasing through mid-February 2020, as demand remained strong while credit standards stayed weak. Issuance came to a halt at the end of February, as investors became more cautious and attentive to volatility in financial markets... Defaults on leveraged loans ticked up in February and March and are likely to continue to increase, with the specific contour highly dependent on the path of overall economic activity. Such developments would weaken the balance sheets of lenders, including CLOs that hold leveraged loans, and amplify the economic effects of COVID-19." https://www.federalreserve.gov/publications/files/financial-stability-report-20200515.pdf https://www.federalreserve.gov/publications/files/financial-...

thephyber 6y ago

Your appraisal seems fair... of the data you are working with. But how many other financial instruments they own are tied up in CLOs on the books of other banks? The whole point of The Big Short and Margin Call was that the banks aren't resilient, independent silos. When one bank shakes or falls, it can impact the neighboring bank which causes a domino effect. They all invest in slices of the things that the other banks invest in, they all do it with lots of leverage, and they all think they've hedged against the downside risk, but that still didn't prevent the 2008 collapse.

clairity 6y ago
that's literally herding behavior, which is the loss of independence among market participants, so that risks start to align, rather than cancel each other out. it's disgusting that we haven't learned anything from 2008.
- thephyber 6y ago
  To be fair, I think every financial instrument works this way (the transitive property of assets which own assets) all the time. Having regulations which restrict which companies are allowed to trade specific classes of instruments/services (eg. Glass Steagall) helps mitigate this, but doesn't even approach eliminating it.
  - clairity 6y ago
    it does work that way far too often, and that's exactly the problem. financiers are no smarter than other kinds of market participants, and that's what this shows. markets require relative participant independence for pricing and allocation to function properly, otherwise we get bubbles. and now, we get constant bailouts (of capital, not labor), so on top of that, there's no downside risk to provide any counterbalance. it's corrupt.

chishaku 6y ago

That's not the correct context. What does that $29.7 billion represent in counterparty or systematic risk?

missedthecue 6y ago
Do you know what a CLO is...?
- chishaku 6y ago
  Do CLO portfolios of major banks pose any systemic risk, yes or no?
  - missedthecue 6y ago
    Systemic? No.
    - chishaku 6y ago
      Do you know what a CLO is...? Or maybe you were born in 2009? FSB: "Available data indicates that banks have the largest direct exposures to leveraged loans and CLOs. These exposures are concentrated among a limited number oflarge global banks and have a significant cross-border dimension. ... A number of non-bank investors are also exposed to leveraged loan and CLO markets. These include investment funds, insurance companies, pension funds, broker-dealers and holding companies. ... A comprehensive assessment of the system-wide implications of the exposures of financial institutions to leveraged loans and CLOs is challenging. ... These exposures are generally concentrated among a limited number of banks. These banks’ exposures to leveraged loans and CLOs, on a fully drawn basis, are significant relative to their capital adequacy ratios. "Similar to other markets, the leveraged loan and CLO markets include direct and indirect forms of interconnectedness, both within and across borders. Direct interconnectedness arises from links in the intermediation chain, from origination and distribution of leveraged loans to securitisation by CLO manager. ... Through these direct links, shocks to the leveraged loan and CLO markets could transmit risks to financial intermediaries not directly exposed to such markets. ... Indirect interconnectedness can arise in the form of common exposures of banks and non-banks to leveraged loans and CLOs, and could provide an avenue for contagion among financial institutions." https://www.fsb.org/wp-content/uploads/P191219.pdf https://www.fsb.org/wp-content/uploads/P191219.pdf Fed: "Similarly, vulnerabilities stemming from leveraged lending were increasing through mid-February 2020, as demand remained strong while credit standards stayed weak. Issuance came to a halt at the end of February, as investors became more cautious and attentive to volatility in financial markets... Defaults on leveraged loans ticked up in February and March and are likely to continue to increase, with the specific contour highly dependent on the path of overall economic activity. Such developments would weaken the balance sheets of lenders, including CLOs that hold leveraged loans, and amplify the economic effects of COVID-19." https://www.federalreserve.gov/publications/files/financial-stability-report-20200515.pdf https://www.federalreserve.gov/publications/files/financial-...