The Hottest Way for Banks to Get Risk Off Their Balance Sheets | Odd Lots

Synthetic risk transfers, in which banks purchase insurance-like protection on some of their loans, is a growing market on Wall Street, with billions worth of deals made in the US last year. But of course, anything with the words "synthetic" and "risk transfer" is probably going to remind people of the 2008 financial crisis, when securitizations of loans blew up and infected the banking system. So what exactly are these new trades? Why do banks want to do them and what are investors getting in return for taking on this risk? In this episode, we speak with Michael Shemi, North America structured credit leader at Guy Carpenter (www.guycarp.co..., about what these deals are, how they're structured, and what they say about bank capital and the wider financial system.
Mentioned in this episode:
One of the Hottest Trades on Wall Street, An Etymological Study (bloom.bg/4fRj1jn)
JPMorgan’s Risk Swap Ends Up at a Familiar Place: Rival Banks (bloom.bg/3Xc5dZp)
‘Blind’ Bets on Bank Risk Transfers Have Never Been So Popular (bloom.bg/4dQ2BpF)
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[@noremacmada]

9:46 - Example of traditional securitization 10:02 - Example of synthetic securitization 11:33 - Definition of Synthetic Risk Transfer 13:57 - The justification for regulatory capital 14:25 - Defining regulatory capital frameworks 22:22 - Structuring an SRT 26:41 - Executing an SRT (no counterparty risk) 27:49 - Alternative SRT (consult your advisor regarding counterparty risk) 33:36 - I think it's reasonable to expect reference asset shenanigans, where possible, on the part of hedge funds and other sophisticated entities 36:12 - Defining cost of capital (I think realized cost of capital could be lower if the reference asset deteriorates) 43:36 - I need to really ponder this comment because I'm imagining possible edge cases (do these things trade on the secondary market? If so are their position limits?) 49:26 - Wouldn't that count against RWA?

[@jochemfisher7786]

The answer to the question "why were and are CRTs mainly a Fannie & Freddie affair" is that these transactions were initially designed as yet another way to use the GSEs as money printers. I have no dog in that hunt, and I am not a boomer with meme stocks, but most parties agree on that. He just can't say it. The GSEs are historically being fleeced by a huge margin in terms of the risk they're actually transferring, and what the value of that risk transfer really is.

[@trespittman1055]

What happens when one DTCC member fails or defaults on their swaps?

[@pldevries]

non-stop jargon. waste of time if you are not familiar with their jargon.

[@Ahamhum108]

Excellent listen. Thank you for covering this and for digging into this. Keep at it. Keep these guys honest, and keep us informed.

[@KK-pm7ud]

It was too jargony. Needed a bottom line. But it does improve in the last 25% of the interview.

[@БарноДосметова]

Я люблю Казахстан