Wall Street’s Latest Love Affair with Risky Repackaged Debt
nytimes.com
nytimes.com
While the article mentions the 2008 financial crisis, it does not mention that CLOs existed prior to the crisis and performed well during that time, much better than other securitized products.
> The CLO asset class has performed strongly, according to a recent report from S&P (“Twenty Years Strong: A Look Back At U.S. CLO Ratings Performance From 1994 Through 2013”), with few negative rating actions on senior notes due to underlying collateral deterioration, few defaults, and minimal loss rates since the agency started rating the asset class in the mid-1990s... Looking at the default statistics, of the over 6,100 ratings issued by S&P on over 1,100 U.S. CLO transactions, only 25 tranches have defaulted and had their rating lowered to D as a result. Based on this, S&P calculated a 0.41% default rate, or just over four tranches for every 1,000 it has rated.
The reason is that the collateral is higher in the capital structure than debt so defaults are much less likely and recoveries in case of default are higher.
I don't like how pop-financial articles talk about risk and debt. Companies aren't "risky" like a crappy car is risky. It's not that they cut corners and put lives at risk. Leverage and debt are normally conscious decisions made by the company. There is some optimal debt level that they strive for. The higher the debt, the higher the cost, but the greater return you can make. So like anything it's a trade off. I also resent the fact that any company with a non-investment grade debt rating is written off as unworthy of credit.
[0] http://www.leveragedloan.com/sp-report-clos-show-strong-hist...
Trading CLO's has been expanding. One could argue far beyond a point where there is enough safe companies to lend to. That must mean the risk for CLO's is growing (Deja vu again)
Continues low interest rates make people look for better returns on their investments and people selling products to fill that need. They may forget to make sure their clients understand that there are no save investments in the market at current Fed rates. (Can we say deja vu)
CLO's now cover leveraged loans, meaning loans with no collateral other than future profit. Like people taking out mortgages on for-rent properties. (Deja vu, deja vu)
When they combine a number of risky assets into a single asset, they factor in an assumption that a number of these will fail. Others will not and given the payoff of those, the net investment pays off.
I don't know much about finance and how they do these calculations, so I'm going to say something dumb here, and maybe someone can tell me if they are being this dumb (or dishonest) when the calculate these things. Forgive the "explain it like I am 5" description.
There is a naive way of combining these probabilities which high school students probably know. However, this assumes the outcomes in question are not correlated. For example if you flip two coins, the probability of each coming up heads is .5 and they are not correlated, so the probability of getting two heads on two coin tosses is .25.
Of course, if the events are correlated, then that formula doesn't work any more. For example, if there is a new Quantum Coin Toss Manipulator (because we all know it would have to be quantum) that makes all coins flips near it come up the same, then the probability of getting 2 heads when you do two coin tosses is no longer .25 but instead it is .5. And, if you do 100 coin tosses, the probability is still .5 of getting all heads.
Back to the CDOs or CLOs. The chance of individual components failing is clearly not completely independent. Economic conditions such as a big recession presumably will have similar effects on the different components. So the naive formula does not apply.
Hopefully they are not being that naive or dishonest, but it seems like it would be pretty tricky to estimate the correlation and correspondingly difficult to estimate the true risk. Is it that case that they are just not good at estimating the correlation in the risks of these different assets?
For more detail: https://en.m.wikipedia.org/wiki/Modern_portfolio_theory
The CDOs in the 2008 crisis were designed for uncorrelated risks, but in a real estate bubble driven by too-lax lending standards, the risks were all too correlated.
Before the downturn this was stated by the New York Times, numerous finance blogs, and this golden quote:
"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."
Chuck Prince, July 10th, 2007 (then Citigroup CEO)
This trope is tired and very annoying each time I see it come up.
I'm an expert in Programming Computers (at least, that's my job, so I assume I'm an expert). So I laugh at WashPo or New York Times, or Bloomberg whenever they make simple computer-related errors in their article.
But guess what? I'm not paying Wash Po for my computer news. I'm paying ACM or IEEE actually for computer news. But ACM / IEEE have no news on financial markets. (Bloomberg is an expert newspaper in the realm of finance).
ACM / IEEE don't have many articles on politics. Washington Post is far better at describing the daily political issues in the capital.
Al Jazeera gets American news incredibly wrong sometimes. But I'll trust Al Jazeera on middle-eastern news over almost any American-based paper (aside from Wash. Po, which has a solid foreign politics / world politics section).
Throw in a few "Conservative" newspapers for the conservative slant on issues, and you can get a decent balance of news from a variety of sources.
I don't expect general Newspapers to be an expert in my field. I read newspapers to learn about things OUTSIDE of my realm of expertise. Believe it or not, newspapers have "specialties", and they're quite good if you read them based on what they're actually an expert in.
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Honestly, I don't read too much NY Times, so I dunno what they're an expert in. Financial news is definitely a Bloomberg thing IMO.
But individuals still only have expertise in a narrow field. I'm not going to be reading Herb Sutter's blog for Java-programming news, or "The Old New Thing" (Windows-blog) for even Linux-ARM news. I read Herb Sutter for C++, Old New Thing for Windows-specific stuff.
To get more information from a wider variety of sources, you end up reading Newspapers. You learn to trust the editor, a non-expert but someone who tries to promise quality of their writers follows a certain code. Even within a newspaper, different editors handle different sections (the OpEd section of WashPo is less factual than other sections)
As long as you understand the trust model of various sites or newspapers, things are good. Some amateurs on "Seeking Alpha" or "Medium" are pretty darn good with their analysis, you just gotta learn their names and follow them specifically.
I think though the institutional problem behind why this happens is compensation and bonus structures.
It is even more foundational in the sense that one guys that manages to land a deal is literally valued $100m to a company which seems like a good cost-to-company argument for a $10m bonus, netting in $90m. Simplistically, at least.
Well .. yes? If you can figure out a product and sell it to people, why not? You could make an argument that the customers don't understand the risks of the product, but these aren't being sold to the unsophisticated public but to other people in the finance industry who ought to know better.
But even if it was all documented, we are not talking about millions of pages of paper. A typical documentation for one of these structures is 200-500 pages, of which a lot is mostly irrelevant. An investor taking a significant position in one of these structures ought to read the relevant parts. But even highly paid professionals can be lazy too.
If you ask me, they are the greedy party.
Part of the impetus for the 2007 crash was that investment companies like AIG were making complicated and obscure financial instruments that hid lots of risk, while also being the agency everybody looked to to grade the risk of financial instruments. They rated their own mortgage debt products as low-risk based on fraudulent analysis.
They look something like this...think of it as a set of rules for what the manager does with your money:
1) We invest you stocks/bonds rated <N> and above
2) We exit positions under <XYZ> circumstances
3) We enter positions under <ABC> circumstances
4) Past performance by following rules 1-3 is N%
No one failed to read these in the past, instead they focused on the potential profit, which blinded them to the potential downside. This is an investing 101 lesson, that continues to be taught to money managers each time their profit chasing occludes their risk management.
If you, a regular working class citizen, were burned by this(perhaps in your 401k), then it's worth reading the prospectus your fund manager sent you. When you see the list of funds included in your fund, you should have received a prospectus for each of those as well. Look for which funds make up the majority of your funds holdings, and read those prospectuses. If you find(and are uncomfortable with) one of those funds being a triple-leveraged ETF backed by 30-year mortgages, then you should talk to your fund manager about that.
Some token measures like deferred bonuses or long vesting stock options have been done, but ultimately this just pushed out the horizon a bit. So you have to take care no to be part of a cockup in 5 years instead of 1 year.
They are often not particularly skilled either, as those who can see through the game are on the other side of the trade. Working at a pension fund is not a sexy or exciting proposition by any measure, so talent tends to go elsewhere.
It's the same situation as bright researchers going to finance where they get paid multiples of what they'd earn in their own field.
Once you sign your soul to the devil, it is very difficult to get out. I'm speaking from experience.
Https://www.reuters.com/article/us-intervalfunds-loans/new-interval-funds-offer-alternative-investments-to-retail-investors-idUSKBN1IC290
https://www.bloomberg.com/opinion/articles/2018-07-10/clos-h...
https://ftalphaville.ft.com/2018/11/20/1542706123000/Who-s-b...
Is that who were suggesting?
The banks are going after stuff again because the protections were removed, not necessarily because they've found a new way around them.
From https://www.investopedia.com/terms/l/leverage.asp
I don't think that leverage is necessarily an issue, and it isn't black hat either. It's a normal part of any economy. The problem is scale. After the last two economic issues that we had to deal with, I have a sense that far too much of our economy runs on leveraging, in order to keep growth going. This isn't just happening with these C.L.O.'s, but with credit card debt, mortgage debt, medical & student loan debt, etc. on the personal level, and a whole slew of debt options for businesses. This is all necessary for the capital owning class to maintain their wealth, which is fed by a sea of debt: without economic activity to pay for goods, many things will lose value rapidly.
I've seen these leveraging games blow up twice in my life. I get to listen to people who claim to know economics tell me that it isn't going to happen this time, that it's different, but you are right. We didn't alter our economy in some fundamental way. We didn't create reward structures for building an economic system that would prevent this issue from happening so often, nor did we create a punitive structure for those who benefit and thus try to make it happen. Instead, we allowed those who benefit from these processes keep far too much of their ill-gotten wealth.
It's going to happen again, and my guess is that once again the middle class and poor will be punished for it. If a billionaire loses 90% of their wealth, it wasn't real anyways. When a middle class person loses 90% of their paycheck, or your more common millionaire loses 50% of their wealth, they can be completely devastated. I know, because I already saw it happen twice in my life.
The actual black-hat hack is and was regulatory capture. Sure, with good regulation perhaps the economy runs a bit slower, but all of our growth is based on an engine that burns through billions of barrels of oil a year (yet another debt/leverage to pay off) so perhaps that's for the best.
EDIT: Corrected tons of oil to barrels of oil.
That said, the GP wasn't about excessive leverage. It's about legalized scams, what is a very different problem, with much harder solutions.
There is an important difference. The people working in financial markets have lobby power to change laws and create more weaknesses.
So, it will be more like if black hat hackers paid part of the salary of the IT-Ops that have to patch the software. Half of the server will run on unpatched Windows 95 and there will be long discussions on why updating is not a good idea because of made-up-reasons.
But this...
"They buy a little of the debt of risky companies at a discount, and then buy a much larger amount of insurance on that debt [...]. These wiseguys then do everything they can to force the company into a bankruptcy filing. [...] Since the insurance payment exceeds by far the overall cost of the discounted debt, the hedge fund profits handsomely."
Isn't this insurance fraud? It looks for me like this: I am buying a crappy car, I am somehow able to insure it for a large amount of money (exceeding car value), then I am putting this car on fire and grab insurer money.
https://en.wikipedia.org/wiki/Credit_default_swap#Difference...
Real life is a little bit different though. How many option sellers are you going to find if the company is easy to drive to bankruptcy?
Well, right now, "somebody" is selling long dated OTM put options on some ETF's that are filled with +95% junk rated bonds and/or CLO's, with some of the strikes having +100k OI for pennies on the dollar (ex. HYG60P12202019), which in normal times might be easy money from selling… I'm sure the big boys have better ways of getting exposure as well.
if company defaults: auction debt
payout = (face value - auction value)
* contract amountAbsolutely they are. The heroes of The Big Short weren't doing anything particularly unusual or special. They were just using credit instruments to bet that they'd be more foreclosures than the market was predicting. There'll be equivalent hedgies doing the same with corporate debt now.
> Isn't this insurance fraud?
No because it's not actually insurance as others have said. They're using similar credit instruments to bet against corporates that the Big Short folk used to bet against mortgages.
Is what they're doing ethical? Probably not though you have to be careful. If you look at the Windstream example linked in the article, I'd argue that the hedgie is using ethically questionable methods to expose, and take advantage of, ethically questionable corporate practice. Not entirely clear who the villain is with that one. Probably both parties.
In many cases the amount of credit derivatives way exceeds the amount of bonds covered. (It can happen in stocks too, but I think less common)
The Commodity Futures Trading Commission labeled a similar case as "possible market manipulation", so there definitely is something very fishy going on this type of markets. I'm talking about the "manufactured credit default" of US house-builder Hovnanian. From here [1]:
> A “manufactured default” of a US housebuilder that caused uproar in the credit derivatives market has been called off, after Blackstone-backed hedge fund GSO and Solus Asset Management settled a legal dispute over the trade.
> GSO had agreed to refinance some of housebuilder Hovnanian’s debt at a favourable rate, on the ususual condition that the company miss a payment on some of its bonds. GSO had hoped to profit from credit default swaps that would pay out if Hovnanian defaults.
The Hovnanian deal eventually fell through in later 2018, but only last week did the industry's regulatory body (the International Swaps and Derivatives Association) propose some measures to combat this type of actions.
[1] https://www.ft.com/content/c184dd72-6457-11e8-90c2-9563a0613...
Solus was free to offer Hovnanian funding with more favorable terms and the agreement to not default. And if GSO and Solus want to go back and forth offering better and better terms then in the end you have a viable company that's leveraged CDS to get additional funding at good terms.
I think a much sketchier case is what Aurelius did to Windstream. There you have no benefit being created on the back of CDS engineering, you just have a hedge fund who drove a viable business into bankruptcy against the wishes of the primary bondholders.
Conceptually, the CDS market is useful. If I do a bunch of business with a company and them going bankrupt would cause me financial problems then I can use CDS to hedge against that possibility. I don't know how you can prevent this kind of engineering though. I think it's easier to prevent what Aurelius did to Windstream. But the GSO/Hovnanian deal seems much harder to regulate.
Maybe instead we just decide that it was actually a good thing and going forward people should be aware that it's a possible outcome? The risk of default isn't just the risk that the company on its own defaults, but also the risk that the company defaults and can't find outside funding. If people are expecting that eventuality then the CDS market should settle in a spot that prices in the possibility of CDS buyers or sellers offering refinancing.
In an already inefficient market, it's also very hard to price the possibility/structure of these games as it's not like the company can publicly shop around deals for this. In the case of the HOV deal, issuing new bonds to game CDS deliverables was unprecedented and IMO just total nonsense.
But it doesn't mean it is not fraud.
In this instance, the "insurance" is actually a credit default swap (CDS). CDS contracts do not exclude "coverage" in cases where the "insured" provokes the company into default. There's no need for deception to make the scheme work, meaning it's not fraud.
The CDS contracts are put together by an industry association called ISDA, with a lot of input from very sophisticated market participants and their very expensive lawyers. It was most likely a conscious decision to make the contract work that way. Anybody who got burned by this directly either knew it was possible or should have known it.
Once upon a time, seeing entities willing to write loans to small business was worth celebrating. Amusing that once we find out it’s Wall Street stepping in to facilitate this at a scale the government cannot, it is dangerous gambling.
You probably think of a locally owned dry cleaner or coffee shop when you hear the term "small business." I know that's what I think of when I hear the term. But in the context of lending, the definition of "small business" (usually lumped together with mid-sized businesses under the umbrella term "SMBs") is usually something like <$50MM in annual revenue, or <100 to <500 employees, depending on who you're talking to. They can be quite large compared to what most people think of when they hear "small business," but they're small when compared to large enterprises.
This categorization speaks less to the size of the businesses themselves, and more to the scales that these banks operate on. After all, $50MM annual revenue or 500 employees seems pretty darn big to me!
It is the highest tier of investor "suitability" recognized by the SEC. It's their job to understand these products and they have armies of people for it. It can take weeks to "market" these transactions and plenty of opportunities to sit down with bankers and CLO managers to get smart on the space. There is also a ton of supporting technology and research, all of which is available for free on S&P, Moody's, Fitch, Kroll and Morninstar's websites.
If you cannot sell this stuff to a QIB, who can you sell it to?
I laughed. You and me, NYT reader who is rich enough to have a 401k.
> The existential question remains: Why do investors fail to learn the harsh lessons about risk, even though the consequences of them still remain so fresh?
I hate to be that guy, but at what point can I blame the Fed for near-zero interest rates that have motivated traders to seek higher gains? I appreciate that people are being more vigilant about reporting on this, but I’m starting to think blaming it on the traders is the easy way out. It seems especially easy when we can draw obvious comparisons to 2007-8 (CDO => CLO, that’s just one letter changed it must be the same thing!). And it sounds like even if these traders weren’t trying to force overleveraged companies into bankruptcy, those companies must be in a precarious enough position that it could happen on its own. Am I mistaken?
> motivated traders to seek higher gains
A trader who doesn't seek higher gains is a shark that stops swimming and dies. There's no need to blame interest rates for this.
Personally I suspect that it is overly risk boosting and encourages economically perverse behavior but it apparently hasn't proven disastrous yet in the locales that have tried it.
Sure, other problems will exist, more around the lack of easy credit.
> Small negative rates are probably required to suck some money out of the speculative economy.
Please explain, as this comment comes off as purely speculative.
Pension plans (including the Japanese one mentioned) have return targets that need to be met in order to make sustainable payments. Their targets remain the same regardless of where rates are but are much harder to hit when rates are low and encourages managers to invest in riskier investments.
This looks a lot like the public paying protection money (in the form of interest) to investors, to keep them from causing another market crash.
CDS is primarily relevant to bonds that trade on the open market. CLOs are packaging private loans made by banks, not bonds. To treat them as relevant to each other demonstrates the author has no clue what they are talking about.
https://williamcohan.com/about/
who shall i believe? you or him?
One backdoor risk is exacerbated by a tactic of some all-too-clever hedge fund managers. They buy a little of the debt of risky companies at a discount, and then buy a much larger amount of insurance on that debt — so-called “credit default swaps” — to theoretically hedge their risk. These wiseguys then do everything they can to force the company into a bankruptcy filing, which contractually triggers the insurance payoff on the debt. Since the insurance payment exceeds by far the overall cost of the discounted debt, the hedge fund profits handsomely.
Without a sense for whether the order of magnitude is similar, it's hard to draw conclusions on the level of systematic risk.
https://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Subpr...
I suppose businesses are structurally different from home buyers in a number of ways: for example when a business goes bankrupt (correct me if I'm wrong) creditors are paid out to the extent they can be. Whereas when a home owner goes bankrupt I believe they can get out of their obligations entirely.
Eric Weinstein argues [1] that what we are experiencing is a long-term stagnation of western economy, and arguably any economy that is not catching up. This is in his estimation the cause of many of our issues.
- the loans aren't made by the banks and then shifted, they are more often sold to investors without the bank assuming any of the loan themselves (it's called loan syndication). The bank simply acts as the role of arranger.
- the Japanese investor base is mostly in the most senior part of the capital structure
- for similar credit ratings CLOs have far lower default rates than for equivalent corporates. It's something like 2-3% in the B and BB rated tranches through the crisis
- the average piece of CLO equity returned something like mid-single % digit returns if held through the whole of the financial crisis
- the paragraph on credit default swaps is a distraction. No CLOs use credit default swaps, and certainly no one sells credit default swaps which reference CLO tranches. This happened prior to the financial crisis through synthetic-CLOs but these don't exist anymore. Sometimes investors in CLOs use credit default swaps against an index of credits (like XOVER for instance), but this doesn't really work as a CLO hedge
The facts are that many lessons have been learned since the crisis and people aren't doing the same things they did back then.
What can be said is that there is a race to the bottom in terms of loan covenants diminishing, but this is driven by larger demand for loans than supply resulting in borrowers achieving looser document terms. The drivers of this are often the law firms that work on behalf of the borrowers who promise being able to achieve looser and looser language with a view to winning the business. Unfortunately the lenders have a weak hand in this situation as they are many chasing few assets and find it difficult as individual institutions against a syndicating bank and borrower who have full information and can play lenders off against each other.
If they lose half their wealth they don't buy a new boat this year.
There’s no doubt that the structure of this product is similar to products which caused the financial collapse, but are all the other systemic issues present? I don’t think the author addresses that.
Simplistically:
liquidity risk = broken leg (painful and needs immediate treatment, but recovery over time likely)
solvency risk = horrible cancer
2. CLOs are made up of bank loans, which are generally the most senior obligation of a company, and are the least risky. Bonds, preferred equity and common equity get hit before the loans are impaired. During the period from 1998 through 2016, defaulting loans recovered 66% of their value while bonds recovered 40%. [0]
3. CLOs generally made it through 2008/2009 without any major issues. The structures held up as designed, but prices fell along with other structured products since there were few buyers and many sellers.
If you were able to hold, you did reasonably well. Over the 20 year period from 1994 through 2013, there were 6141 CLO tranches, of which 0.41% defaulted (no AAA or AA defaults) and had a 0.04% loss rate. [1]
4. What has changed since 2008 is that loans are becoming a larger portion of the total value of the business (loan-to-value). This means that if the business goes bad, there's less of a cushion for the loan and recovery rates will be lower.
I don't know how much lower, but some of the junior tranches in a CLO could be impaired in a severe downturn. It's hard to really know, but I _think_ things would need to be worse than 2008 (or the same level of crisis, for a longer period) for AAA tranches in general to be permanently impaired.
5. Accounting plays a role here. If you are required to mark-to-market, then the market clearing price is what the asset is worth, regardless of fundamentals. If there's a panic, you may be a forced seller if you don't have sufficient reserves to get through the disruption and your mark-to-market loss becomes a permanent loss. This applies to any asset class, not just structured products.
6. I don't understand why the article brings up CDS gaming. It's a real issue, and one that is being worked on, but it's not even a rounding error compared to the size of the corporate debt universe. [2]
quote from the FT article:
"Isda’s method of “fixing” CDS has always been akin to “patching” software after hackers exposed weak points. When one window closes, traders simply find a new one."
[0] "JPMorgan Default Monitor 4Q16"
[1] “Twenty Years Strong: A Look Back At U.S. CLO Ratings Performance From 1994 Through 2013”
[2] https://www.ft.com/content/efab718a-40c9-11e9-b896-fe36ec32a...
Roughly speaking, corporate loans are way more transparent and there are fewer of them in a pool, so it's easier to assess the risk.
Debt from multiple issuers is pooled and sold by pieces to investors with different risk profiles. The more risky layers will be the first touched if there are problems, but pay better in the best case. High risk (variation in expected returns), high (expected) return.
The idea is the "good" part of product (the AAA layer) is very safe... according to the model. But it may not be so safe after all if things don't go as expected.
https://www.youtube.com/watch?v=xbiDrzTd8fE
The article is saying that people are buying CLOs - packaged corporate debt which is going to default, mixed and dressed up as very safe debt, then sold on to some poor sucker (including you in your pension).
TLDR: History repeats itself, first as tragedy, then as farce.
Stagnant wages in the 90s gave rise to credit cards and personal debt-as-a-feature capitalism, which was immediately blown out of the water by 2008. people lost their homes because the credit system keeping them afloat basically collapsed. businesses started shedding employees and shuttering doors, while banks across the world began a series of spectacular failures.
Not just banks and auto makers, but capitalism itself looked to be slowly collapsing under its own weight of the hubris of mankind. Its really stunning to look back at some of the absolutely bombastic thing we said and did in the service of not people who were displaced and destitute after this collapse, but in the service of trying to keep capitalism going for ten more years. At some point we started bribing people to participate in the market that just made them homeless with "cash for clunkers." This was an asinine program designed to "boost the economy" by paying people to destroy their already running vehicles under the guise that they caused too much pollution.
This didnt work. It could never work, and so we switched tactics toward simply bailing banks and auto manufacturers by cutting trillion dollar checks and printing more cash. Nobody who caused the financial collapse was ever arrested, save perhaps Bernie Madoff for his high treason of swindling the plutocracy. At the last few months of the term of George W Bush, a round of "stimulus checks" were cut and sent back to americans. The idea here was that americans would buy new televisions and sneakers. The reality for many, including me, was that money went to savings or closing out credit card accounts we didnt need.
And here we are, once again, at the brink of another 10 year cycle. Things seem fine but theres hand-wringing from the usual suspects about systems of credit and debt so complex they cannot possibly exist outside a PhD thesis.
When there's a recession, if you're wealthy and have diversified assets you can buy everything at a discount rate during a stock crash and sell when the recession recovers. Meanwhile, the poor and middle class often find themselves unemployed, their savings accounts massively depleted and in a constant crush for cash.
If you're wealthy AND you have the ability to create risk in the market, then even better. You can actually help trigger more "stock discounting" events, and dominate any emerging technology company with your bootstrapped companies while everyone is dying for credit.
Nassim Taleb's suggestion is to simply deny institutions the option of growing large enough that their demise would threaten the system. Once an entity gets too large to fail it should be split so that the remaining pieces can fail individually without dragging entire system with it. This would get rid of the moral hazard "heads I win, tails someone else loses".
Exactly why it makes sense to limit corporation size. Honestly, I think things would be much better off with a progressive tax on the number of employees and contractors a corporation has.
Anything up to 10000 is 0%, and after that, the brackets go up to 80% (for 1 million or over).
If we are specifically talking about the financial institutions, then good luck getting in on some of the biggest deals over banks without the same constraints.
That's not to say the pain felt was greater or even the same as those with less, but it is simply not true that somehow the wealthy remain unscathed from financial crisis. It doesn't even make sense at face value considering they have a large percentage of their wealth in the market and likely have a higher risk tolerance. In fact financial crisis reduces wealth inequality precisely because it affects the wealthy capital owner more
https://www.stlouisfed.org/publications/regional-economist/j...
> The top 1% had an average income of $1.26 million in 2014, a 19.1% decrease compared to $1.56 million in 2007, according to an analysis of tax data from researchers at the University of California, Berkeley, and the Paris School of Economics. It’s even worse news for the top 0.01%, whose average income fell to 27.4% from 2007 to a mere $29 million in 2014.
http://money.com/money/4264052/great-recession-impact-rich-1...
Saying "you should google ..." is not a source. If you want to provide a source for your claim about some group, back it up. You're not making meaningful contribution to the discussion.
Yes, the very wealthy have a variety of sources of income (e.g. stocks) and those dropped greatly in value. Unemployment peaked at maybe 10% during the crisis. So some percentage of people lost jobs while the wealthiest who have most their wealth in capital that dropped 30%.
Ironically, having tax exempt investments hurts when your portfolio drops in value as you won't be able to write those off.
mean while, all their existing investments plummets. Unless you see them pull out of their investments prior to the crisis, there's very little evidence to support this claim that a financial crisis is good for the wealthy.
If the wealthy has any choice, they would overwhelmingly choose not to have a financial crisis.
That's not a huge problem if you can cut expenses and live off the dividend income and your other assets for a few years.
There's a big difference between "no longer richest person in the world" and "lost everything".
When the market bounces back four years later, I'm now 1.5x wealthier than I was before the crash (thanks to all the cheap investments), and all I had to do was move some money around.
Edit: I’m not going to search through this book to find sources that fit some criteria you’re looking for. Get off HN comments, read a book, and learn some financial history lessons.
Edit: I've now read a few reviews and summaries of Devil Take The Hindmost. Its subtitle is "A History Of Financial Speculation," and it appears that its subject matter is not focused on ultra-wealthy persons with diversified portfolios being ruined by market corrections, but specifically speculators and frauds. At a glance, it doesn't look particularly relevant to this conversation.
I'd prefer an example that isn't somebody who wound up in prison.
They can declare bankruptcy and be free from all debt whereas your average college student cant escape.
Should we expect to see students jumping off of buildings soon ?
Yes, but the implication of OP is that these ultra-wealthy are crashing the system so they can then buy up everything around them. Where is the data to support this? The rich suffer during a recession too; no one is claiming they end up on the streets.
I believe we're thinking of different definitions of the word "suffer." The qualitative difference to which I refer is that for one class of people, the "suffering" is restricted to numbers on ledgers going down, and for another class of people, said suffering can literally involve ending up on the streets.
Furthermore, someone else in these very comments is claiming the ultra-wealthy can wind up on the streets as a result of market forces.
Have you checked the Oxfam reports? When you take a look at the last years, there is very clear trend. If it continues like this probably in few decades the richest one percent will own as much as the rest 99%.
Funny, I would say the same about your comment
"Randal Quarles, who oversees Wall Street supervision and regulation at the Federal Reserve ...takes comfort from the fact that Wall Street banks are offloading risky loans to investors."
If those "investors" are pension funds or even 401ks, isn't this just a clever way of looting them disguised as a market phenomenon?
Also:
"That’s not the way the markets are supposed to work."
Forgive me, but, lol.
So, no, you sell at a stable rate to buy at a discount rate.
Investing is easy in hindsight, but the only “stable” asset is cash, and waiting for the entry point can be costly.
Exit: to be clear, I’m a huge diversification advocate. But each crisis (and each bull market) is different and rebalancing is not always helpful.