Ever hear the expression, "Misery loves company?" For those among you that live in the Southeastern part of the US, you know this. You don't just get precipitation, you get buckets of rain. Sadly, I see an analogy to the US economy. It is raining on us with the virus and it will pour, when the news of the CLOs hits the clouds.
Back before the recession of 2008, there were many writers, including myself, who asked the question, "Who can afford to buy these houses for $400,000?" The thought continued, "How can I get a job that qualifies for such a mortgage?" There were other people who realized the same thing except that they happened to be in financing. They had play money to bet against the housing phenomena. They made billions when the flaws became known. I didn't lose a home. How did you do?
Houston, we got a problem...
We all know now about the dangers to the economy that were caused by the coronavirus. The hope is in a vaccine. In the meantime, the prayers are for the flu to pass and the economy to return to normal. You can count me with those thoughts. However, here at Evolution, we got a new writer. He called the down day that occurred last Friday on Wednesday of that week. He sees a new problem that will take time to unfold. It is like the articles that I wrote in 2006 about the rising cost of housing. It took two years, but the crash happened. We call him, "The Economic Evangelist." He has deep insights. This is the message that he sent to Houston.
CLOs...
You should all know by now what the letters, CDOs mean? They were the root source to the banking crisis behind the great recession of 2008. People were getting mortgages based on NINJA Loans (no income, no job and no assets). Today, banking is quietly changing clients. They have left the individual and housing. They have turned to business. Neither the Republicans nor the Democrats offer any knowledge on the issue or subject. This is still another reason why I say that both of our political parties are corrupt. You can see this with the latest headlines, "Black Lives Matter." The two parties never offered any suggestions on police brutality or procedures. Now, they both offer plans. Can you see my point, my view?.
Well, Dear Reader, our new writer sees a new danger brewing. Before we continue, a quick recap on how banks operate. The corruption covers many aspects. CDOs refer to collateral debt obligations. These were the NINJA Loans. Banks got the rating services to give them their AAA rating - their best level. Then, they sold these loans as safe vehicles that offer a yield. The banks give the rating services a job. The service gives their employer a favorable response and perhaps, more work. Did you know that 13,000 AAA rated CDOs defaulted during the crisis? That is all you really need to know to continue. Dodd-Frank was passed to force banks into safer actions with taxpayers deposits. The idea of "stress" tests added to the peace of mind for everyone except the greedy nature of the banking industry. The industry knows the Fed has their backs. They can keep all the profits and socialize all the losses. This is what they are now doing.
Off the books
Ever have a job off the books, meaning no taxes? Fix the neighbor's car on Saturday morning. He pays you directly. No big deal. LBJ was so corrupt that he kept the cost of the Viet Nam war off the books. Politicians still do it. Our nation has trillions in unknown debt. It will surface some day and it has to be repaid. Enough on that. Anyway, banks circumvented Dodd-Frank. They keep certain risky loans off their books in bundles that they farm out. They also hide these so-called assets like Enron hid off the books companies with shell names. The banking industry is following the Enron playbook. They classify these assets in structures called, "Variable Interest Entities."
A report in the Atlantic by Frank Partnoy, says, "Wells Fargo has more than $1 trillion of VIE assets off the books.
So, what are these VIE assets, you ask? They are loans to shaky companies like J.C. Penny, Men's Wearhouse, etc. The 2008 crisis had shaky loans to home buyers and now, corporations that own malls, restaurants and retail are the users of these loans. They are called, Collateral Loan Obligations.
Do the math
The housing recession of 2008 had $640 billion of bad mortgages in CDOs. Today, CLOs have $880 billion in shaky loans. Business debt alone stands at 78% of GDP. The Fed is the guilty source of all this borrowing due to extra low interest rates. It gets worse. Two economist from the Federal Reserve have reported that US depository institutions and their holding companies own more than $110 billion of CLOs issued out of the Cayman Islands. This is so wrong. The Fed constantly seeks to expand its power and it constantly abuses its power. You heard that Wirecard cannot find $2 billion? The Financial Stability Board, a monitor of global systems, reported that $10 billion of CLOs are unaccounted for. This is why we call him the, "Economic Evangelist."
What he suggests...
Banks should be regulated like utilities. They provide a functions for business and citizens. They should not be allowed to venture beyond this format and of course, End the Fed!
