Comments
Transcript
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ROZwirn is definitely the "Credit master" , Fresh insights for every new interview !!
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BDTwo main drivers in my view of the rapid rise in the CLO market have not been mentioned here and that is the rise of CPM (Credit Portfolio Management) functions (Dan alluded to it but this is the formal name of the banks internal functions) in banks more actively managing a banks back book of loans to optimise other constraints such as capital, funding, banking relationships since the early 2000's but more aggressive since prudential regulations were overhauled post GFC and the Volcker rule which came into effect in 2014 with full compliance required in 2015. CPM functions actively manage the loan credit exposures on banks balance sheets particularly for large clients to optimise capital and funding by selling down exposures after collecting origination fees and potential cross sell opportunities. They even have an industry body where you can see who their members are and what they see their function as (http://iacpm.org/about/) This helps with relationships as you can keep writing more lending business for a particular sector or client that your institution is at or near credit limit on while still satisfying the customers appetite for borrowing. Since the GFC with the introduction of more capital, funding, liquidity rules has made optimisation of these functions more important. Pieces of loans can be sold off to asset managers or other investors similar to buying a bond but would not have standardised terms, loan documentation and active secondary market like bonds generally do. Under the Volcker rule bonds are within scope but loans are not as bonds are viewed as securities hence the Volcker rule applies for bonds but not for loans. This means that bank trading desks caught under Volcker (i.e. all US Banks and most banks with US operations which is pretty much all. Market makers had an exemption to hold a certain number of bonds on their books under the RENTD exemption (Reasonably Expected Near Term Demand: a calculation they would have to be able to demonstrate was a reasonable amount of inventory they should hold for client flow.) This didn't apply to loans so there was an incentive for banks to move their credit positions from tradable securities into loans. Over time the loans could be sold off individually or packaged into securities and sold (i.e. CLO's). I even know of one college friend who finished work on the credit trading desk as a credit analyst on a Friday before Volcker came into effect and moved into the private side loan business on the Monday analysing the same credits for loan trading. CLO's don't go as far as the CDO market did though in terms of liquidity risk mismatch and using synthetic underlying credits pre-GFC. When you buy a CLO to the best of my knowledge you are getting a portion of the loan and not a synthetic exposure through a vehicle like CDS. Also as CLO's are sold off bank balance sheets for regulatory purposes they don't run the liquidity mismatches the CDO SPV's were leading into the GFC that would issue Commercial Paper in their own names then buy longer dated bonds and run a liquidity mismatch though I may be wrong on this just have not seen it. Bonds are just really loans with standardised terms and a quoted and active secondary market so its not really a surprise the CLO market has gone down a few of the same paths of CDO's.
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PEThis is one of those interviews that reminds me of how much I don't know! Thanks guys!
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SDThe level of understanding needed varies a lot from video to video lately. It would be good if the interviewer was briefed to dumb down some of the terms used in a brief sentence or 2 for those with less knowledge before deep diving into a subject. A small thing that would make many videos much more accessible to all.
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SSWhen it comes to convertibles I tend to like Porsche, BMW, or Classic Mustang. Mazda is a good more affordable option as well.
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SS„How can you be so certain?“. I like RV, but RV has been certain that markets will crash , return to the mean, for as long as I have followed it.
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MTAlways love seeing Dan on RV, great interview.
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ARFinally, Ed gives a fair interview. I was worried his views would be too political, instead he was spot on with his questions, without any hint of personal views. Great job Ed!! Loved the in depth and poignant questioning.
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OACould one of the brilliant pros in this community explain to me and the other amateurs the arbitrage trade they’re discussing towards the beginning? Thank you!
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scDan Zwirn makes some great points and I agree a lot with his general outlook... the worst is yet to come
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FNHi guys Please make available transcripts. Also for the Steve Keen video.
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SSGreat interview.
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RCEd, that was a great conversation. I always have a question in mind pop up during the interview to have it answered 5 minutes later in your chain of questioning. I'm not sure if you are familiar with Jalen Rose, but you are giving the people what they want!
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spthat was a very pleasurable interview ;)
Chapters
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Risk Repricing in Unprecedented Times
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Long-Put Optionality and Convertible Bond Arbitrage
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New Issuances and Permanent Impairment in Damaged Sectors
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The Fed, and "Haves vs. Have-nots"
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Extend and Pretend: Moral Hazard in the Debt Markets
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How Do You Find Investing Opportunities in This Credit Market?
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Credit Risk in CLOs: "Rear-view Mirror Analysis"
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Systemic Implications of "Yield Hunger"