Odd Lots - Here’s What’s Happening With Those Korean Structured Notes That Bet Against Market Volatility

Episode Date: April 9, 2020

Earlier this year on Odd Lots, we did an episode about Korean structured investment products that were sold to retail investors, whose performance was tied to various market indices around the world. Crucially, those payouts were premised on there not being a major crash in those world markets. Obviously, we’ve seen quite the crash. So, for this week’s episode, we’ve gone back to Benn Eifert, the CIO of QVR Advisors, to check out the state of them now. And we also talk, more broadly, about the extreme volatility we’ve seen around the world, and what drove that, and whether or not we’ve seen the worst.See omnystudio.com/listener for privacy information.

Thanks for listening to Oddlots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast, Oddlots on Amazon music. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisendall. And I'm Tracy Allaway. Tracy, so you know what a sort of depressing phenomenon has been lately? You're going to have to narrow that down, Joe. Yeah. Right. That's a very broad category. A very micro-depressing phenomenon is that a lot of our recent episodes that we've done, which we sort of discussed in a very theoretical sense, have unfortunately started to become relevant extremely quickly.

Yeah, you're absolutely right. One of the ones that springs to mind is the one we did with Claudia Somme back in, I think it was January or February, about actually giving people money as a form of economic stimulus in order to stay off recession. And now we're sort of seeing that actually happen in the U.S., although obviously there are issues in a wider debate about the way that's currently being done. Yeah, absolutely. Another one, and I would say this episode that we're going to do even more than any other, on Twitter several times a week, people ask for updates of it.

So there's one in particular where I'm always getting tweets. It's like, hey, what's going on with what you talked about that one episode? I'm curious if you sort of have been getting the same one. Yeah, I absolutely have. I know exactly what episode you were talking about, and it was a really good one. It's Korean structured products. And not only have I been getting the same tweets with the same questions and people asking for a general update and what's going on with the structured products as well as the overall options. market. But over in Asia, we've also been doing a few stories on it as well. And it turns out

there's quite a lot that's been happening with these. Right. So for those who don't remember, in January, we recorded an episode about these Korean structured products popular with retail investors that were sort of premised on a, there essentially the payout was premised on a massive stock market crash not happening. And as everybody knows, we've gotten this. market crash. And so everybody has been saying, what's going on with those crude structured products when you're going to do a follow-up? So today we're going to do a follow-up. Great. I can't wait. Okay. So we are our guest back in January is the same guest we have today to do part two is Ben Eifert. He's the CIO and founder of QVR advisors. Ben, how are you doing?

So Tracy, hey, I'm doing well. Thanks. It's great to be back. I'll preface this by saying that I think anyone listening to this episode should go back and listen to the first interview that we did with you back in the middle of January so that we don't have to do a complete refresher of the Korean structured products. But just sort of give us the short version of the instruments that we were discussing and how their payout was linked to essentially. stability in the market. Sure. So the very brief recap is, you know, there are large global structured product businesses targeted primarily at retail and high net worth investors around the world, but very large in Korea in particular, also Japan to a somewhat lesser extent now. And the most popular types of products in the recent market environment that we've had for the last decade or so

where interest rates are very low are essentially what are, called reverse convertible, auto callable notes, which is a lot of words. But the idea is effectively, you know, the retail investor is looking to generate a coupon, so a fixed income out of the equity market. And the way that you do that in this environment is you sell some kind of optionality, right? And so these notes typically, the way they work is that the investor might get, let's say, a 5% or a 7% annual coupon, unless or until, one or more of, you know, at least one of the underlying equity indices that the note is linked to is down by, let's say, 30% or 40% at some point during the life of the note. And in that eventuality,

at the point where that happens, the note is triggered into a knockout state and the investor loses that, say, 30 or 40% of their investment. So the investor puts in $100, they're going to get $107 back unless the market's down. But if the market's, but if the market, market at some point is down, let's say 40% in, let's call it the Euro stocks or the NICA or the S&P, then the investor is actually just going to take a 40% loss at that point. And that'll be crystallized. And then they'll have other features. Often they'll be callable on a year out. So for example, if the underlying equity market is up 15%, they'll just get their coupon and then the note will be terminated early and probably reissued and maybe they'll do the same trade again.

And so usually these notes are linked, especially these days, you know, more recently with low, you know, low interest rates and low levels of equity volatility. You know, they embed all sorts of exciting optionality, like as I alluded to being linked not just to one equity index, but like the worst performing of a basket of four or five equity indices, for example. So we're talking about those knockout levels, those barrier levels, whatever you want to call them. And with the market sell-off that we've just seen, it would seem that some of those have hit the point at which investors will be experiencing losses to their principle. Walk us through what you've seen in the market. Give us some color how many of the structured products, you know, roughly are really hitting those knockout levels at the moment. Yeah. So there's, you know, there's a large stock of these types of products globally that, you know, turns over, over some.

period of time. The, and you know, banks do a good job of aggregating and publishing, you know, models of what the overall space looks like. So we've seen, you know, a quick and quite large drawdown in equity markets globally. Now we're a bit off of the, you know, off of the lows, but the lows were, let's call it, you know, 30 plus percent down from, from the highs in equity markets. So you did see, you know, globally quite a lot, a large stock of these notes, you know, approaching those barriers where the trigger termination of the notes. You did see, you know, some, you know, non-trivial percentage of the outstanding stock of notes, you know, terminate mostly not actually with respect to the S&P levels and the barriers, more, more on the Eurostocks

and some Asian indices. If you recall, so the S&P has been down. quite a lot, but also the S&P in the, you know, call it 35% from the highs at, you know, a few, about a couple weeks ago, but remember the S&P had rallied very aggressively up to the highs from, you know, late 2019. And the, and these notes aren't linked like to the high point in the equity market. They're linked to the point at which they were issued, right? And so the S&P is still a little bit off of, it's off of, you know, the levels of where some of the S&P barriers are. But yeah, we've seen. call it some low double digits percentage, probably of the note stock actually knockout. And then a large part of the note stock obviously on a probabilistic basis become much closer

to a knockout point. And as a result, of course, the investors who own those notes, if they were to look at their statements, you know, would see a large mark-to-market loss. And, of course, the risk managers, you know, who managed structured product portfolios and hedged them at banks face the issue that. many of those notes either have terminated, therefore losing their hedging, losing their long volatility characteristics from the bank's perspective or our nearing termination, which, you know, probabilistically reduces the, you know, the volatility component there. So, you know, large drought

out in that market. So let's talk about the sort of risk management from the bank's perspective. And again, people should go back and listen to the original episode because we got a lot in the weed about how the hedging consideration of the banks changes, but as the note gets closer to the knockout or the barrier. But talk to us about sort of like what we've seen. So we've seen volatility absolutely exploding the last few weeks. It's come down a little bit lately, but it's still very elevated. The S&P, even if it hasn't crashed as much as some indices, is still down quite a bit. How much of a problem does this pose for the banks? that have to hedge their exposure so they can either, so that they're not on the hook,

and what have they been doing to manage their risk? Yeah, absolutely. So I'll give their just really fast risk recap of the nature of this risk and then put it in the context of everything else that's going on. These notes have a barrier option characteristic to them. If you kind of know derivative speak, essentially the retail investors are selling what are called down and in, knock-in puts. In other words, they're a put option that really only, that's binary in the sense that it only matters if you actually hit the barrier. And then it just triggers a binary event,

right? And so the, you know, when banks issue these products, typically the first proxy hedge of the risk is going to be that they sell some fairly deep out of the money, call it 30% out of the money, two or three-year puts on the underlying indices. And that'll be kind of just the first-order proxy hedge for the type of risk that they have. Now, as the markets start to go down, the combined hedged portfolio that a structured products book has will actually start to get somewhat longer volatility from the bank's perspective. And the reason for that is, you know, barrier options are tricky. They have, in some sense, they have a much more pronounced profile of volatility exposure to the downside than any vanilla option does. And so the vanilla options

that the banks sell, in some sense, the convexity that the banks have is that they get longer volatility for some, say call it the first 10 or 15 percent of the move on the way down, but then as the market keeps falling and keeps falling down towards those barriers, then the net position that the banks have suddenly gets shorter very fast and then collapses when, as you hit the notes, as you hit those trigger values, the reason being, you know, the notes themselves actually just terminate, right? And so all volatility exposure associated with the notes are gone, but the hedge was a vanilla option, which still exists and still has, you know, short volatility exposure from the bank's perspective. And so we're very much in that environment where the banks

have, you know, have started to see, you know, their hedges, you know, the vaguer exposure, the volatility on exposure on their hedges now kind of falling as the market goes down much slower than their long exposure is falling. And, you know, the rally alleviated that somewhat. But you do have to put that in the broader context of everything else that's happening in the world in equity derivatives portfolios and banks. You know, and there's, you know, I have some insight here. Again, every bank, of course, is different and has different client flows and so forth. But, This, the key thing to understand is that this crisis has developed and the equity market experienced a large drawdown at an extremely fast pace, right?

So the credit crisis, of course, was, you know, a materially deeper market crisis across a variety of markets, you know, in hindsight relative to what we've seen so far. But it also was a relatively slow building crisis that took a while to manifest. where there were, you know, many large legs down in asset values over a sustained period of time, right? Whereas here we saw just a truly epic sell-off over the course of, you know, three, four weeks. And so in the broader risk portfolios of banks, you know, contrary to maybe what some folks might expect, derivatives portfolios of banks have generally done very well in this environment. And, you know, they have not been exposed to large losses across their,

across their business lines. And the reason for that is really the, you know, the banking industry and investment banks are very different in a 2019, 2020, Dodd-Frank world than they were back in 2008. In 2008, you know, bank, bank prop desks and bank flow book, flow trading books were some of the largest risk takers in the world. They held some of the largest tail risk in the world across, you know, and they were, you know, they were the world's largest hedge funds. And they were holding, you know, carry trades and they were holding aggressive risk taking positions that lost the massive amounts of money. What we, you know, what we did with Dodd-Frank and steadily implemented, you know, over the years and especially combined with Basel 3, we dramatically de-risk the

banks. We enforced extremely tight stress test. requirements on the banks with proper careful stress testing analytics. And we identified sources of tail risk in bank derivatives portfolios and told them to get rid of it. And banks have been very aggressive over the last five years developing what we call, what the banks called, you know, euphemistically, alternative risk transfer programs where they very explicitly had dedicated salespeople to go out and, you know, nice slide decks going out to hedge funds and going out to asset managers and proposing trades that those hedge funds and asset managers would do that was associated with potentially some positive carry.

So the idea was banks shouldn't be holding this stuff. And banks were very well hedged facing a lot of hedge funds and asset managers that have lost a tremendous amount of money during this crisis. So really those big, you know, the big losses in derivatives portfolios were on the buy side, not the sell side this time. partly as a result of how fast everything happened. You know, on that initial shock, the banks were actually pretty well covered, even though the auto-call portfolios were getting pretty risky.

So banks having de-risked from post-financial crisis rules are relatively well insulated from the volatility in the market sell-off that we've seen. But as you point out, a lot of that tail risk has been pushed onto the buyside, onto hedge funds, other types of investors. Talk to us more about the alternative risk transfer trades. How do those actually work? And what are you observing now? Are we seeing some blowups in those? Sure. So I'll give you a couple of examples. So, and these, you know, these get a bit, a bit wonky as is just the nature of the business, but I'll do my best. So, so for example, historically there have been some large sophisticated organizations that have liked to sell capped

variants as a carry trade. So a variance swap is a pure volatility position which pays off the difference between implied variance and realized variance over the maturity of the trade. And variance being the square of volatility. And anytime you have squared terms, in the P&L of something, it gets very exciting. So the reason that they, now what a capped variant swap is, a cap variant swap is one where you, if you are said carry trader, you sell that variant swap, but you sell it subject to a cap of two and a half times the actual level that you trade, where the most realized volatility that can possibly count

in the payoff of the trade is two and a half times the initial level you sold, which is still quite high, but it gives. you a finite stop loss where there is a maximum dollar amount. You can lose on that trade and you know what that number is. Right. You know, so this was, if you're going to be selling variance, this is at least somewhat of a prudent step, right? And the type of organizations that were, you know, engaged in this, you know, were extremely large, sophisticated pension funds that, you know, I'm not going to get into details. But the size of those flows were quite large. Now, when banks facilitate that business, right? Banks are buying capped variance swaps from these clients. And there's not really,

there's not a liquid inter-dealer market for capped variance swaps, because every, you know, the caps on the variance swaps are like options on variants and every one of them are at a different level, right? Because it's two and a half times the initial, you know, level where the market is trading variants. So these are, you know, somewhat funny products. So when a bank actually buys capped variance from a client and then it goes to lay off the risk. What it's going to do is it's going to sell uncapped variance in the interdealer market or to another hedge fund. And what the bank is left with when it does that trade is a long position in capped variance and a short position in uncapped variance, which itself is just the bank being short, a massively crashy piece of tail

risk, right, which is just this cap. So effectively, it's a call option on variance struck at, you two and a half times the initial level of variance. And that is exactly the kind of position that, you know, in 2007, the bank would have just done that and said, hey, we're just going to, you know, keep those and we're going to get paid a lot of money in carry to keep those because, and we like getting rich and getting bonuses. And that's cool. In, you know, these days, the banks cannot hang on to that kind of thing because you run a

proper stress test and you immediately see that if the market goes down 50% and is very volatile, that you're going to lose an ungodly amount of money. And so one of the earlier risk transfer trains within this alternative risk transfer universe was the banks going out to hedge funds and asset managers and trying to find people to take exactly that position. So they would trade short-term one-month capped variance versus uncapped variance where the hedge fund sells the uncapped and buys the capped. And that trade and pockets the difference between those two variants. levels, which might be, you know, five years ago when this started, it might have been

of all point. So it might have been, you know, uncapped variance at 16 and buying capped variance at 15. You know, by last year, this was, you know, very popular among hedge fund carriers traders. And it might have only been 0.4 of all points, for example. And this is the kind of trade that, again, you just make money every month as long as volatility does not rise by more than two and a half times within the course of one month. And if you look back historically, as long as you don't include 1987, what you say is, oh, well, look, boss, even in the credit crisis, these trades didn't lose money because volatility increased a lot and it increased, you know, 10 times over the course of, you know, several months.

But during no month did it rise more than two and a half times? Look, it only, you know, during Lehman, it only rose 2.4 times, right? So this is what they call backtest over optimization, right? Because, you know, it could have certainly just risen four times on Lehman instead of 2.4 times. It just didn't. And this time, of course, it rose by a factor of, you know, closer to eight. And so if, so if you were to do this trade, again, that the P&L is proportional to the square of the increase in volatility, right? So in March, if you had sold the February, February, you know, cap-uncapped trade as a, you know, hedge fund engaging in alternative risk transfer, you collected, you know, point four points and you ended up losing, let's call it, 250.

And the, you know, that, so those positions alone were enough to, you know, wipe out a whole portfolio managers and hedge funds. And they're, you know, that's one example. And I went into a decent amount of detail just because I wanted to make that clear, but there are, there are, you know, a dozen things like that or 20 things like that, some longer dated and more related to different kinds of, you know, esoteric implied risk factors, some that are more, but a lot of them related to gap risk to kind of the sudden appearance of very high levels of realized volatility. And that's what, you know, that's what many, many folks were, you know, happily engaged in because it produced, you know, just a very consistent return stream that, you know, made a lot of people

very rich for many years. So it's really just this extraordinary suddenness of the crash. It's not just that we had a crash. It's not just that we had extraordinary volatility, but it's the speed of the volatility in such a short period of time that's been, that's obliterated in so many positions. I'm curious, sort of, this might be a silly question, but, you know, when we were talking about all these products, whether it's just the product sold to the retail, the retail client, maybe in Korea, or some of these more esoteric products that are sold by the dealers to the hedge funds or in the inter-dealer market. What is the, how do you track these? Because it doesn't seem like there's some obvious, like, quote, you just look up and see where they're pricing. So when you're

trying to get a sense of where the overall market is, or even like a sense of where the state of Korean structured note markets or how many of them have been knocked in. How do you like sort of get your hand around the size of this universe of the state of this universe? Sure. So let's start with the Korean auto call market, for example. So this is the kind of thing where, you know, many of the large banks are, you know, heavily involved in this business.

They, most of them have very detailed research reports that they put out that aggregate, you know, everything that they know from a lot of the state is public. because these things go up for, you know, the products themselves go up for, you know, for RFQ, you know, out of, you know, private banks and so forth, right? And so the dealers then, you know, ingest all that data, they model the risk components of all these different products and they'll publish that type of information. That's the kind of thing that, you know, is really that is the source of the data. It's not the kind of thing that you can, like, go out and, you know, build your own database in some direct kind of way because, you know, that you're talking about, you know, many, many thousands of outstanding notes with all different characteristics and so forth. On the on the ART side, again, it's very much, so the way you know where new prices are trading

and in that stuff, of course, is that you're, you know, you're a participant in these markets, possibly probably not, you know, in our case, not, you know, literally trading those products. But, you know, we are covered, you know, large, large institutional derivatives, you know, managers and traders are covered by the large investment bank, sales forces, and speak with the traders and track all of these things very closely, right? So what are the, you know, where are things pricing currently? What are the, how much has been trading, you know, where, what type of accounts? Because it's the kind of thing that, you know, again, it's not something that I think there's only a certain subset of people who would actually be selling this stuff.

But as a derivatives investor, you need to know where the risks are in the marketplace. And you have to understand who has these kind of positions and what the daisy chain effects could be. I have a sort of broader question, but a lot of what we're talking about here is this notion of risk having migrated from the banking system to the by side. Is that vindication for regulators? Did they basically get this one right? should they be satisfied with the outcome that we've seen over the past few weeks, which is banks doing reasonably well on their derivatives portfolios, but some hedge funds and maybe some other investors getting hit on variant swaps and other

volatility products. Was this the desired goal? It's a great question, Tracy. I think very much, there are very much two sides to that, and the regulators will tell you exactly this. And you can read exactly this into their actions over the last three, four weeks, right? So on the one hand, from a systemic risk perspective within the banking system and resilience of the banking system to market shocks that might come from different unpredictable angles, this was a big win, right? Exactly. As you said, in 2008, we were talking about what the next bank to go bankrupt was. there are people who talk about that sort of thing that, you know, read zero hedge. But in general, actually, as we talked about, the banks are doing, you know, pretty reasonably, at least at this point. And that largely as a result of, you know, being very well hedged facing the buy side. The, and not, and also not importantly, not holding, you know, large inventory, not trading aggressively. But the flip side of that is that the, you know, extent of the market dislocations that we have seen, you know, is certainly the catalyst has been, you know, the very large and very real fundamental

economic shock of the sudden stop, you know, across the global economy induced by coronavirus, right? And that's really very real. But the severity of some of the market dislocations, the extent of, you know, some of the daily moves in the equity market and in, you know, high yield and investment grade credit ETFs moving 7% a day, this is not fundamental, right? This was this was the manifestation of markets under highly stressed circumstances where banks have stepped back from risk taking, right, and don't hold inventories and are not facilitating and intermediating markets. And that's the flip, they'd be sort of the other side of the coin, right, where we've made the banking system a lot safer from market shocks by derisking, by taking tail risk out and by

keeping inventories and risk taking out of the banking system. But at the same time, that's dramatically exacerbated, the dislocations that we see. And so when you look at the many, many actions that the Fed has been taking very aggressively, and not just the Fed, you know, global central banks, over the last three weeks to a month, you know, there's traditional monetary policy lowering interest rates and so forth, but that's not really been the interesting stuff, right? The interesting stuff has been, you know, very aggressive expansion of buying of different kinds of investment-grade debt to try to stabilize broken markets, but then also, you know, incremental, steady rolling back of many of the types of capital restrictions and general, you know,

so for example, you know, cutting banks need to hold capital and, you know, and see car stress ratios, doing, you know, a variety of things that look basically like rolling back many features of Dodd-Frank on a temporary basis. And the reason that they're doing that is to get banks, to make sure that banks keep lending to small businesses to get banks involved taking risks and holding more inventory and stabilizing market conditions and fixing some of the crazy disruptions that we see. And I think the recognition that you're seeing or the, you know, what you have to read between the lines is that, you know, the regulators are realizing that many of the things that, you

that some people on the by side have been pointing out over the last several years that inhibiting the level of bank risk taken to the extent that we did can really cause large liquidity problems under stress. And I think we've seen that and I think regulators are acknowledging that. So the question really over the next, over the short term and then the medium term is going to be, you know, how do they find, where do we end up? How do they find that happy medium, right? where the regulatory framework is maintaining the right controls around systemic risk, but also allowing banks to intermediate financial markets in a meaningful way and take risk. So we obviously saw this extraordinary explosion and volatility.

It's come down quite a bit. The VIX had gone above 80 as of this most recent Friday. By the way, I guess this is the point of the show where I remind people what date we're recording the song just in case the world has changed since. Are you going to do the hour or two, Joe? Yeah, it is right now it is 9 a.m. East Coast time on April 5th. So bear that in mind when you listen to this because who knows what the world will look like by the time you're actually listening to this.

But at the time we're recording this, the VIX is below 50. And as you mentioned, the Fed has done multiple things, both in terms of the stepping into market standpoint and regulatory tweaks and so forth, without necessarily. necessarily predicting the future of what the market holds. Between all these washouts and moves, is there much, you know, is it reasonable to think that like we've seen the worst, not necessarily of index levels or the economic crisis, but that the washout from a sort of pure volatility, illiquidity standpoint, we saw the worst of it. Or what kind of potential triggers could there still be out there?

Yeah, no, it's a great question. I think that within the, especially equity, volatility, and probably interest rates volatility markets on the public market side, I think that's probably a fair guess, is that the craziest of the moves is past us. The reason being all of the highly over-leveraged, speculative, risky positioning in short-tail risk on the hedge fund side, those folks blew up, and that positioning has been largely cleaned up. There's still, you know, some of it in deeper pockets, but generally speaking, generally speaking, the worst of, you know, people who were short, a ton of variance or short a ton of VIX calls,

they've been liquidated, and so that the acceleration factor of that is gone. Also, on the fixed income side, you know, the Fed and Global Central Banks, again, are being very aggressive in terms of trying to restore basic functionality of those markets. You've already seen the liquidation of many of like the leveraged mutual funds in the media space and MBS space and so forth. So I think that the most disorderly market behavior on the public side is probably over. The, you know, to your point, very hard to say about, you know, index levels and so forth. You know, this is going to be a very, this is a very, this is a very,

real, very large, fundamental economic shock, and it's likely to take quite a while to work through the system, and it would be easy to see scenarios where, you know, asset price levels are significantly lower even. But I think that the place where we've probably only begun to see, you know, little inklings of the beginning is more on the private market side, right? So just think about private, you know, things that aren't market-to-market and, you know, don't get unwound in a messy way on the first big leg down, right? So private credit, over leveraged private equity assets that are held probably had very inflated valuations and that are very sensitive to, you know, the performance of small cap businesses that, you know, are seeing their, you know, their revenues fall dramatically and their basic ability to run their businesses, you know, potentially gone under quarantine, right? And I think that, you know, and it's not, this is not my wheelhouse very, very directly.

And so I'm not going to make a bunch of specific predictions of any sort. But I think that if you were to look at places where the worst is probably not over, and you'll see a lot of bodies start to float to the surface, I think that's probably over the next three to six months. That's probably the place to look. All right. Ben Eifert really appreciate you rejoining us. As I mentioned, there were a lot of people constantly asking for a sequel to your January episode in light of everything we've seen in us.

So I think they'll be very excited to have listened to your perspective. Now that much of what we talked about then is really playing out. Hey, guys. Thanks for having you. It was wonderful. Thanks, Ben. That was great. Great, as always. Tracy, I love talking to Ben because I feel like there's almost no one who does as good of a job taking some pretty arcane difficult to wrap your head around concepts. and coming pretty close to putting them in English that even I can understand. Yeah, I definitely think sometimes you need to listen to these episodes a couple of times,

but you definitely learn something from them. And to me, there are sort of two broad themes that stand out. One is that we do get these feedback loops in the market because of the way hedging and things like that work, where you can see moves to the downside. or sometimes to the upside really exacerbated because of all these things that are sort of happening in the background between dealers and investors. And the second big theme is what Ben was talking about when it comes to de-risking the banks. Risk never disappears, as we know, it always moves somewhere else. In this particular case, it's moved over to the buy side, to the hedge funds, some other investors.

And I guess the question is whether or not that was the right thing to do. As Ben pointed out, there are some downsides, again, getting much bigger market moves than you might otherwise expect when banks still had the risk appetite or the ability to come in and sort of cushion the market. But on the other hand, you have financial stability. So it's a really interesting question. And sorry, I'm going to keep going. But the other thing to think about right now is we have seen so.

Some talk from the U.S. about rolling back parts of Dodd-Frank, things like the Volcker rule as they're trying to get banks to be more helpful to the wider economy. And I guess the question is whether we're now going to go too far when it comes to undoing all this post-financial crisis regulation. Yeah, I mean, it'll be really interesting to see where they land ultimately. But I think, like, but I think, you know, I feel very anxious about saying anything like, oh, Dodd-Fraindicated or the banks prove to be safe. It's like, I kind of want to wait a few months before I start saying like, oh, it all worked because everything is just so tense right now. But if you think about like, okay, what is the core purpose of a bank, as most people

know, at a place to sort of hold your money. It's good on some level that where we've seen the. blowups so far. It seems to me it's good that on some level where we've seen the blowups so far have not been that. Now, there's also the other factor, which is that this crisis really started as a sort of real economy shock or an exogenous shock. And it will be interesting. And I sort of Ben alluded to it at the end, what happens to sort of, you know, at some point, people just can't keep paying their bill. I mean, we've already seen that. I mean, we saw it with April 1st and rent and mortgage checks do because of the extraordinary sort of human toll

layoffs that we saw in March, what keeps happening to sort of assets that were presumed to be extremely safe as this drags on as the health crisis continues, as the real economic crisis continues, at some point it just sort of keeps eating deeper and deeper into assets that people thought were safe. And it's been alluded to in which I get and, um, You know, our recent interview with Tom Barrick discussed this and so forth. What happens in the world of sort of private credit, private equity, other assets that are just sort of premised on the idea that you can take a lot, take on a lot of debt or any debt to own a very stable piece of the economy when the economy comes to a halt feels like

a story that we have not yet seen the washout that we have seen in perhaps. in public, in sort of a publicly traded instruments. Absolutely. We should be careful about saying that the banks are completely in the clear. And as you point out on the safe asset side, at the same time, we have this question over what happens to those assets in what's really an unprecedented economic downturn in many ways. We are seeing the regulators start to ease back on those capital constraints.

So banks are now allowed, for instance, not to hold as much money against things like U.S. Treasuries. The regulators are doing that to try to improve liquidity in the market. But again, the question is, if something were to happen in the U.S. Treasury market, would that then backfire? And banks might actually suffer some losses. So big questions for the economy and the financial system. Yeah. Well, I think we have many more episodes. We're going to have episodes for years.

on this. So I think we're just getting started. Yeah, absolutely. All right. Well, this has been one of those episodes, I guess. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. And you should definitely follow our guest on Twitter, Ben Eifer. Really puts a high value, high information stream. me's Ben with two ends P. Ifert, Ben Eifert. And you should follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Be sure to follow the Bloomberg head of podcasts, Francesca Levy, under the handle at Francesca Today. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.