by Quoth The Raven, QTR’s Fringe Finance:
Wall Street is again using insurance guarantees to turn difficult-to-rate credit exposure into highly rated securities.
Assholes who wear Vineyard Vines all summer on Wall Street have once again put those Wharton PhD’s to good use by again “discovering” that assets so toxic and illiquid they make drinking cement taste like Fiji water apparently become safe when you rearrange them, rename them, and place an insurance company between the losses and the people buying them. Sound familiar?
TRUTH LIVES on at https://sgtreport.tv/
According to Bloomberg, UBS and other firms have been exploring structures that package stakes in private-credit funds into bonds. Because perpetual private-credit vehicles do not fit neatly into conventional ratings models, bankers are looking to add insurance “wrappers” that allow portions of the deals to inherit the insurer’s stronger credit profile. The resulting paper can then be marketed as investment grade, even though the assets underneath remain opaque, illiquid private-market investments.
This is apparently considered innovation. I just hear Anthony Bourdain explaining CDOs during The Big Short over and over again.
An insurer guarantees a tranche against losses, the tranche receives a better rating, and other insurers can buy it while setting aside dramatically less capital. In the example described, an A2-rated tranche could require less than 1% in regulatory capital, compared with a charge that could reach 30% for a direct investment in a private-credit fund.
Nothing says “rock-solid asset” quite like needing several lawyers, a ratings agency, an insurance guarantee and a regulatory-capital loophole to explain why it is safe.
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