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Comment by Aperocky | Hacker News Reader

Ants lending business has doled out 1.8T on 36B of cash from Ant itself. That's 50 times the leverage they financed through ABS, Asset Backed Securities, or in this case more accurately described as Debt Backed Security. We knew all about these 'financial innovations' in 2008.

The new regulation limits the leverage cap from infinite to about 15, closer to bank's 10. This limits risk, and is considered a reasonable move.

A truly desperate move would be to allow these bubbles to go ahead and IPO. Which almost happened, everything will be fine and dandy for a while, until it's not. Whether it's due to Xi's insecurity or not, I'd say that China dodged a bullet here.

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Lending out vast sums against a small reserve is not necessarily bad, depending on how the deals are structured.

In the US, banks issue credit in the form of credit cards. But they don't hold on to it. They create special-purpose entities (SPE) which then buy credit card debt, funded by bonds sold to investors. The banks do not hold on to much of the credit card debt.

The yield of these bonds issued by the SPE is commensurate with the risk of default of the credit cards. In this case, the bank issues billions and billions of credit without the reserves to handle high defaults. But it's OK, because they sell off the debt, so it can no longer directly consume their reserves.

Any losses on that credit card debt affects the value of the collateral backing the bonds issued by the SPE, not the bank. So the investors of the SPE are on the hook, but not the bank.

These bonds backed by the SPE are not rated AAA. So the real question is regulating the leverage of the investors buying the SPE bonds. But that can be handled separately, and need not restrict Ant's ability to issue microloans and then sell them off to securitized pool trusts.

That sounds exactly like 2007 lol.

The ratings risk assumptions and who rates them. not valuing 'unlikely' tail risk because 'no way people won't pay their mortgages' or the 'no way a virus will have force over 30% of the population functionally un/underemployed with no assistance.'

And who owns the bonds? What happens when pensions, investors are hit?

And who sells the derivatives and CDO 'insurance' and the meta CDO of CDO bets on the debt? My guess would be lots of bank on bank, institution on institution incest.

And presumably they have to keep these assets on book at least for a bit in order to structure the tranches or whatever the credit card version of that is.

I love the film Margin Call, this scene is great:

"Well... sir... if those assets were to decrease by just 25 percent, and remain on our books... well... that loss would be greater than the current market capitalization of this company."

"the music appears to be about to stop and we are going to be holding the biggest bag of stinking shit ever assembled in the history of capitalism?"

"the music, so to speak, just slowing, if the music were to stop, as you put it, then this model would not be even close to that scenario. It would be considerably worse."

" and I'm afraid... standing here tonight... that I don't hear... a... thing... just silence.

Exactly, nothing is necessarily bad, but such a high risk is worth regulating

The US ran an enormous financial bailout after the pandemic started. This was when individuals got $1200. Substantially more of that money was spent ensuring corporate debt didn’t pop.

How have i never heard of this movie? Thanks for the tip.

It's not necessarily bad, but it can sometime be bad, and that's why there's a leverage cap to it.

The new regulation did not ban ABS, it only stipulated that Ant have to have X amount of collateral before selling them.

Yeah, this never should have been so close to going forward, and it's ALSO a bad thing that it was stopped for petty political reasons.

The rumor in China is that the new regulation is going to come out regardless - and Ma wanted to stop it from becoming reality - which make sense, large collateral will reduce profits of Ant, which primarily drive profit through consumer lending.

His last ditch effort backfired spectacularly.

But why so late. Why let him do ipo up to the point that us$70m interest Ws lost to the investor doing margin to subscribe to ipo. (Margin needed as one want to max chance get a fee share. Not margin trading just in case.)

it is not as rational as one thinks. Something is going very serious wrong here. The regulation might be in the pipeline but if so any alert in the ipo on due diligence.

These might be a PR spin to cover up using a rational argument for some other things.

You're assuming "good faith" in listing risks in the IPO document :-) Companies generally list risks from the fear of being sued by shareholders, not from goodness of their heart. And recall this listing was not in the sue-happy jurisdictions like US.

It’s better late than never.

I have to agree here. Though it sucks that it tanked BABA stock it was the right move long term.

Disclaimer: Long BABA

The devil is in the details. I am not sure it is an apple to apple comparison here. Ant seems to have far more data about users so that its credit score is crazy accurate.

The credit scores are accurate now, but what if a recession happens? Similar to subprime mortgage, if housing values keep going up there wouldn’t be any problem even if people defaulted. But the economy as a whole can change and your credit score based on when economy was well is suddenly useless.

ABS aren't new, they've existed since the 80's.

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