Comment by hedora | Hacker News Reader

Comment by hedora | Hacker News Reader

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> secured loans which will be less risky than the underlying loans

So, it's sort of like bundled mortgage securities, where you take some bad loans and mix them together to get a "less risky" loan, since the chance of them all defaulting at once is less than the chance of all but one defaulting.

Presumably, since banks (by definition, an intermediary) are involved, those are then recursively repackaged until they have an A+ rating, or some such nonsense, right? Also, I'm guessing there's no rule that says you can't intermingle these things across separate "independent" securities, even if the two securities end up containing fractions of the same underlying bad loans?

Clearly, like with housing, there's no chance of correlated defaults in a bucket of bad business loans that's structured this way!

In case you didn't quite catch the sarcasm, replace "housing loans" with "unregulated securities" and note that my description switches from describing the 2008 financial crisis to describing the Great Depression, or replace it with "bucket shops" (which would sell you buckets of intermingled stocks) and it would describe every US financial crisis of the 1800s.

> where you take some bad loans and mix them together to get a "less risky" loan, since the chance of them all defaulting at once is less than the chance of all but one defaulting

Yes. This is mathematically sound.

> those are then recursively repackaged until they have an A+ rating, or some such nonsense, right?

AAA-rated CLOs performed with the credit one would expect from that rating.

The problem, in 2008, wasn't that the AAA-rated stuff was crap. It was that it was ambiguous and illiquid.

> I'm guessing there's no rule that says you can't intermingle these things across separate "independent" securities, even if the two securities end up containing fractions of the same underlying bad loans

Defining independence in financial assets like this is futile.

> there's no chance of correlated defaults in a bucket of bad business loans that's structured this way

Software companies being ravaged by AI fears.

> replace "housing loans" with "unregulated securities" and note that my description switches from describing the 2008 financial crisis to describing the Great Depression

It also describes a lot of successful finance that doesn't reach the mainstream because it's phenomenally boring.

Generally speaking, the SEC exists to regulate communications about the underlying realities driving security values.

Any mechanism involving “the bank invested (lent) my deposits to organizations that avoid SEC scrutiny, and used an instrument that spreads culpability for fraud across many unrelated and unwitting organizations” will eventually lead to investment bubbles and fraud.

If I knew (and chose to have) 5% of my savings in private debt funds, where the holdings were public and had reporting duties, that’d be fine.

Instead, that money is being lent behind closed doors. If the loans pay out, then the ultra wealthy make money. If they default, they’ll be bailed out to prevent contagion. (And they still make money, since the lent money went somewhere before the loan default.)

This has happened at least a dozen times in the US, including in living memory.

Also, my example is not sound. Here is a counter example with a basket of investments with different risk profiles: I hold A directly. I hold A’, which is a leveraged fund that only holds A. I also hold B which is a business whose only customer is A. I hold C, which has a contract with A and is securing the loan with future revenue from the contract. Finally, I hold D which is A’s primary customer and a majority shareholder of C.

Note that my example describes actual privately held companies that are probably the ones providing the private debt in the article.

I don't think that's a true etymology of "bucket shop," which per my recollection of Livermore was just an off-track-betting parlor for ticker symbols, but where nobody actually bought the shares (bundled or otherwise). Strictly a retail swindle, having nothing directly to do with the risk/maturity bundling work you are criticizing above.

We had them in the US before the SEC, which regulated them out of existence.

It’s likely the term is a pejorative referring to the Liverpool setup you describe.

Sorry, I meant Jesse Livermore's "Confessions of a Stock Market Operator," worth a read to anyone interested in the history of this stuff.

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