WSJ What’s News - Watch Out: Wall Street Is Finding New Ways to Repackage and Sell Debt

Episode Date: October 23, 2024

P.M. Edition for Oct. 23. Matt Wirz, who writes about credit for The Wall Street Journal talks about why Wall Street is excited about NAVs, SRTs and CDOs. And U.S. home sales hit another nearly 30-year low. Journal housing reporter Nicole Friedman explains why new buyers are staying on the housing market sidelines. Plus, with deadlocked polls and the memory of 2016, White House reporter Tarini Parti says Democrats are becoming more anxious ahead of Election Day. Tracie Hunte hosts. Sign up for the WSJ's free What's News newsletter. Learn more about your ad choices. Visit megaphone.fm/adchoices

People are the lifeblood of every organization, but they're also the greatest source of risk. That's why Mimecast has pioneered the connected human risk management platform to help your business protect collaboration, educate employees, and detect insider risk. Learn more at mimecast.com. U.S. home sales are on track for their worst year in nearly 30 years, again. And Wall Street is coming up with more ways to slice, dice, and repackage debt. A lot of what's being done is in the private market.

And so we don't really see those deals. Regulators don't see them. Reporters don't see them. Even analysts don't necessarily see them. Plus, a terrorist attack hits a major Turkish defense facility. It's Wednesday, October 23rd. I'm Tracy Hunt for the Wall Street Journal. This is the PM edition of What's News, the top headlines

and business stories that move the world today. The National Association of Realtors Today said the sales of existing homes in the U.S. are on track for the worst year since 1995, for the second year in a row. Persistently high home prices and elevated mortgage rates are keeping potential home buyers on the sidelines. Sales of previously owned homes in the first nine months of the year were lower than the same period last year.

Our housing reporter, Nicole Friedman, says that a mortgage rate drop may not be enough for those looking to buy. A drop in mortgage rates would make it more affordable for buyers who are planning to use a mortgage. It would lower their monthly payment. So that would make a difference in affordability. But at the same time, home prices are rising and the inventory of homes for sale, even though it's been going up, it's still lower than the pre-COVID normal levels. And so that's expected to keep pushing home prices higher.

And so higher prices could offset some of the benefit from low mortgage rates. So unless rates go down really much more from where they are today, we might not see a return to the types of affordability conditions that we saw back in 2020 and 2021 when affordability was very good because mortgage rates were very low. U.S. stocks opened in the red and never looked back during another busy day for earnings. The Dow and the S&P 500 closed down about 1 percent, while the Nasdaq was down 1.6 percent.

And let's have a look at those earnings reports. Tesla reported today a surprise increase in net profit for the third quarter. It's the first since the electric car maker's earnings began to slide earlier this year. Net income was $2.2 billion for the July to September period, up 17% over the same quarter last year, and lifted by higher revenue and an uptick in new vehicle deliveries. Boeing has warned that its operations will continue to burn cash through next year, pushing back the timetable for when the manufacturer can stem its financial bleeding. The somber outlook came the same day the jet maker reported a more than six billion dollar

quarterly loss. Its machinist union is voting today on a deal that could end or extend a strike that has halted nearly all its production. Chief executive Kelly Ortberg said it would take time to get production restarted even if the union votes to end the strike and it is unclear how quickly Boeing will be able to reach its goal of producing 38 737 jets a month. Starbucks, the world's largest coffee chain, missed expectations on earnings and sales for its fourth quarter and suspended its financial guidance for its next fiscal year. If the three months ended September 29th, U.S. same-store sales for Starbucks fell 6% from the previous year. Heard on the street global editor Spencer Jacob says the company's new CEO,

Brian Nicol, is calling for a complete overhaul. He wants a simpler menu. He's not in favor of discounting. Most importantly, his slogan is back to Starbucks So you can't really go back to Starbucks being the way it was like this before smartphones were a thing But you can certainly make it seem more like that and that that's really the big question is if you do that Are you gonna slow things down to the extent that the? Transaction cost per each person rises a lot higher. It probably will. And so they're going to have to kind of bite the bullet probably on that, just based on what we know so far

about his plans. But people like what they hear. And because there's a lot of faith in him, the stock is still more than 20% higher than the day he was appointed back in August. Coming up, how Wall Street is finding new ways to slice and dice loans and why Democrats are stressed over the election. That's after the break.

People are the lifeblood of every organization, but they're also the greatest source of risk. That's why Mimecast has pioneered the connected human risk management platform to help your business protect collaboration, educate employees, and detect insider risk. Learn more at Mimecast.com. Goldman Sachs this month sold 475 million dollars of public asset backed securitization or ABS. These are bonds backed by loans the bank makes to fund managers that tied them over until cash from investors comes in. The first of its kind deal is a lucrative byproduct of the bank's push into loans to investment firms.

It's another example of Wall Street finding increasingly esoteric ways to repackage debt. Joining us now to explain all this is Wall Street Journal reporter Matt Wurtz. So Matt, can you explain some of these financial instruments and what their appeal is? These are all different variations of bundling up debt, repackaging it, and then selling it to a different investor base. What's really interesting about this is when they do that when they repackage these very sort of weird and wonky types of loans They can turn it into a bond that has an investment grade rating Which means it can be sold to a huge market of insurers and pension funds and endowments

It's a highly rated instrument and because it's kind of weird it pays a little bit more yield than And because it's kind of weird, it pays a little bit more yield than, say, a AAA-rated treasury bond or muni bond. And so that's the whole attraction of these things, is that they're ways of taking something that's sort of esoteric, as you said, and wonky, chopping it up, getting a rating on it, and then selling it to these investors that want yield. And what's driving this trend? The thing that's different now is that the institutions in the driver's seat of Wall Street now are less the banks,

and it's more these giant asset managers. Think Blackstone, which now controls more than a trillion dollars worth of assets under management and actually was involved in this deal. Think Apollo Global Management. Think even BlackRock, which they also have weird private debt funds and private equity funds. So these funds are massive now, and they want financing.

They want loans, and they need that to lubricate the deals that they are doing. And so that's where a lot of these new different structures are coming from. Okay. So to some skeptics, this feels very reminiscent of the 2008 financial crisis. Then it was CDOs, the collateralized debt obligations that helped fuel it. I think something that's different this time that is actually potentially more risky than the last time. Last time you could actually see what was in these deals and so there was transparency. This a lot of what's being done is in the private market and so we don't really see

those deals. Regulators don't see them, reporters don't see them, even analysts don't necessarily see them. And so that makes it very difficult to understand what are the connections between these very large funds and these very large banks. Like, how are they connected? What are the correlations? What are the potential impacts? If one of them is starting to have trouble, how might that then be transmitted through the financial system? And because so much of this is happening in the private credit market, we really don't know and we might not know until it's too late. Matt Wirtz writes about credit for the Wall Street Journal.

We're about two weeks out from Election Day and most polls show a tossup between Democrat Kamala Harris and Republican Donald Trump. Early voting data so far shows Republicans embracing voting before election day more than they have in the past and eating into Democrats' typical advantage. Experts think these people are likely Republicans who usually vote for the party and just chose to vote early this year, but the numbers have added to Democrats' anxiety. Joining us now is WSJ reporter Tarini Parti. Tarini, things were looking much better for Harris about three weeks ago.

What happened to that momentum? So this has been a very tight race for a while now, but there's a sense creeping in among Democrats that time is running out and Harris has still not nailed down support from key voting blocks that have formed winning Democratic coalitions in the past. So black men, young voters, Arab Americans, men in general, she's losing support from. So there's, there's a sense that she has not quite nailed down this coalition of supporters and what they're trying to do is appeal to Republicans, appeal to suburban women.

And they're trying to make those appeals to sort of make up for any support that they might be losing. She's also particularly been having trouble in the so-called blue wall of states, Michigan, Pennsylvania, and Wisconsin. What are the challenges she's having in those states? So the blue wall states, that is Harris's easiest path to victory. And in those states, she needs a high turnout in urban centers, in the suburbs.

And they feel like if they run up the margins there, those states will be hopeful in helping Harris secure her path to the White House. But it's still unclear, you know, where those states are going to go in part because in a state like Michigan, Harris is losing support among Arab Americans. Arab Americans have been frustrated by Biden's handling of the now widening conflict in the Middle East. And so it's unclear if she can make up ground elsewhere. And that's what's fueling this anxiety in part.

Serene Pardee is a White House reporter for the Wall Street Journal. And in tomorrow morning's episode of What's News, we'll discuss the data from the last WSJ poll before the elections. And finally, in international news. Turkish authorities said at least four people were killed and 14 were injured today in a suspected terrorist attack at a major defense facility near the country's capital. Footage showed an exchange of gunfire and a loud explosion at the Turkish Aerospace Industries headquarters northwest of Ankara. Turkish President Recep Tayyip Erdogan, currently in Russia for the annual BRIC Summit, said he condemned, quote, this nefarious terrorist attack. Militant groups, including Islamic State,

have carried out attacks in Turkey over the past decade. No group yet has claimed responsibility for today's attack. And U.S. Defense Secretary Lloyd Austin said today that North Korea has sent troops to Russia in recent weeks, confirming earlier assertions by Ukraine and South Korea that Pyongyang was deepening its military partnership with Moscow. Austin would not say how many troops the U.S. believes are in the country, but said there is concern they intend to join Russia's war on Ukraine. If they're co-belligerents, their intention is to participate in this war on Russia's

behalf, that is a very, very serious issue. North Korea and Russia haven't confirmed the presence of North Korean troops, but Kremlin spokesman Dmitry Peskov said earlier this week that cooperation between the two countries wasn't directed against third countries. And that's what's news for this Wednesday afternoon. Additional sound by the Associated Press and Reuters. Today's show was produced by Anthony Bansi and Pierre Biennime with supervising producer Michael Cosmitis. I'm Tracy Hunt for The Wall Street Journal. We'll be back with a new show tomorrow morning. Thanks for listening. People are the lifeblood of every organization, but they're also the greatest source of

risk. That's why Mimecast has pioneered the connected human risk management platform to help your business protect collaboration, educate employees, and detect insider risk. That's why MIMECAS has pioneered the connected human risk management platform to help your business protect collaboration, educate employees, and detect insider risk. Learn more at MIMECAS.com.