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

absolutely right. One of the ones that springs to mind is the one we did with Claudia Psalm back in I think it was January or February about actually giving people money as a form of econo stimulus in order to stave offer session. And now we're sort of seeing that actually happen in the US, 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 about 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 well, and it turns out there's quite a

lot that's been happening with these right. So for those who do remember, in January, we recorded an episode about these Korean structured products popular with retail investors that we're 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 career 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 are guests back in January is the same guest we have today to do Part two is Ben Effort. He's the c i O and founder of qv R Advisors. Uh Ben, how are you doing so, Tracy? Hey, I'm doing well. Thanks.

It's it's great to be back. So 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 well, we just sort of give us the sort of 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 autocollable notes, which is a lot words, but the idea is effectively, you know, the retail investors 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 five percent or a seven percent annual coupon unless or until one or more of what you know, at least one of

the underlying equity indices that the note is linked to is down by let's say thirty percent or at some point during the life of the note, and in that eventuality, at the point where that happens, the note is is triggered into a knockout state and the investor loses that say, thirty or of their investments. So the investor puts in a hundred dollars, they're going to get a hundred and

seven back unless the markets down. But if the market at some point is down, let's say in one in let's call it the euro stocks or the knee K or the SMPH, then the investor is actually just going to take a forty percent loss at that point, and that will be crystallized, and then they'll have other features.

Often they'll be callable on a on you know, a year out, so for example, if the underlying equity market is up, they'll just get their coupon, and then then 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 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 industries 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 principal. 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 of these types of products globally that you know turns over over some period of time. The and you have your 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 drawdout and inequity markets globally. Now we're a bit off of the you know, off of the lows, but the lows where let's call it, you know, thirty plus percent down from from the highs

and the inequity markets. So you did see, um, you know, globally quite a lot a large stock of these notes you know, approaching those barriers where where the trigger a 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 SMP levels and the barriers more more on the

eurostocks and some Asian industries, if you're called. So the SMP has been down quite a lot, but also the SMP in the you know, call it thirty five percent from the highs at you know a few about a couple of weeks ago. But remember the SMP had rallied very aggressively up to the highs from you know, late nineteen 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 smp IS is still a little bit off of off of you know, the levels of where some of the SMP barriers are. But yeah, we've seen call it some you know, low double digits percentage probably of the note stock actually knockout. And then you know, a large part of the notes stock obviously need on a probabilistic basis,

become much closer to a knockout point. And as a result, of course, the investors who owned those notes, if they were to look at their stay months, uh, you know,

would see a large market market loss. And of course the the risk managers you know, who managed structured product portfolios and headed 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 are nearing termination, which you know probabilistically reduces the volatility component there. So you know, large draw 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've 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 elevating. Did the S and P even if it hasn't crashed as much as some indusicries, is still down quite a bit? How much does 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 uh to manage their risk? Yeah, absolutely, So we'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. You know, these notes have a barrier option characteristic to them if

you kind of no derivative speak. Essentially, the retail investors are selling what are called down and in knock inputs 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 going to be that they sell some fairly deep out of the money, call it out of the

money two or three year puts on the on the underlying indices, and that will be kind of just the first order proxy heads for the type of risk that they have. Now, as the markets start to go down, the combined hdged 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 gives you know, barrier options are tricky. They have 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 call it the first ten or fiftent of the move on the way down. But then as those 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 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 where the banks have you know, have started to see you know, their hedges, you know, the volati of the vegua exposure, the volatility on exposure on their hedges now kind of falling as the market goes down much slower than than their long exposure is falling um and you know, the

rally alleviated that somewhat. But you do have to put that in the broader context of of everything else that's happening in the world, in in equity, derivatives, portfolios and banks, you know, and there's and there's you know, have some insight here. Again, every bank of course is different and has different clan flows and so forth. But um, this the key thing to understand is that this crisis has developed and the equity market experienced a large draw down

at an extremely fast pace. Right. So the credit crisis, of course, was you know, a a materially deeper market crisis across a variety of markets, uh, 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 and in asset values over a sustained period of time, right whereas here we saw um just to truly up excel off over the course of you know, three or

four weeks. And so in the broader risk portfolios of banks, you know, contrary to maybe what some folks might expect derivatives portfoli, it was a banks have generally done very well in this environment, and you know, they have not been exposed to large losses across there, 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 Dodd Frank world than they were back in two

thousand and eight. In two thousand and eight, you know, bank in 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 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 Basil three, we dramatically de risked the banks. We enforced dreamly type stress testing requirements on the banks with very you know, 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 um proposing trades that those hedge funds and st managers would do you know that was associated with

potentially some positive carry uh, you know, so the idea was banks shouldn't be holding this stuff, and banks were very well hedged um 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 um in derivatives portfolios were on the buy side, not the south side this time, and partly as a result of how fast everything happened, you know, the on that initial shock, the banks were actually pretty

well covered, even though they are auto called portfolios. We're getting pretty risky. So banks, having de risked from post financial crisis rules, are relatively well insulated from the volatility and the market sell off that we've seen. But as you point out, a lot of that tail risk has been pushed onto the bye side, 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 blow ups in those? Sure? So I'll give you a couple of examples. So and these, you know, these get a bit um a bit wonky as is as is just the nature of the business. But I'll do my best there so um so. For example, historically there have been some large sophisticated organizations that have liked to sell capped variance as

a carry trade. UM. The the what there so A variant swap is a pure volatility position which pays off the difference between implied variants and realized variants over the maturity of the trade, and variance being the square of volatility. And anytime you have squared terms in you know, the p and l of something, it gets very exciting, right, So the reason that they now want a capt varian

swap is um. A cap variant swap is one where you if you are said carry trade or you sell that variant swap um, but you sell its 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 it is, right, you know? So this was if you're going to be selling variants, this is at least some somewhat of a prudent step, right. And the the type of organizations that were you know, engaged in this um you know, we're extremely large sophisticated peension 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 variant 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 variant 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 UM. So these are you know, somewhat funny products. So when a bank actually buys capped variants 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 variants in the inter dealer market

or to another hedgephund. And what the bank is left with when it does that trade is a long position in capped variants and a short position and uncapped variants, 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 variants struck at you know, two and a half times the initial

level of variance. And that is exactly the kind of position that you know, in two thousand and seven, the bank would have just done that and said, hey, we're just gonna, you know, keep those and we're going to get paid a lot of money and carry to keep those because and we like getting rich and getting bonuses and that's cool, um in you know, these days, the banks cannot hang onto that kind of thing because you run a proper stress test and you immediately see that

if the market goes down and it's very volatile, that

are going to lose an ungodly amount of money. And so what one of the earlier risk transfer trains within this alternative risk transfer universe was the bank's going out to hedge funds and esset managers and trying to find people to take exactly that position, so they would would trade you know, short term one month capped variants versus uncapped variants where the hedge funds sells the uncapped and buys the capped, and that trade and and and pockets

the difference between those two variance 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, variant uncapped variants at sixteen and buying capped variants at fifteen. Uh, you know, by last year this is you know, very popular among hedge fund carriage traders, and it might have only been point for 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 I'm more than two and a half times within the course of one month. Right. And if you look back historically, as long as you don't include, what to say is oh we'll look boss um. Even in the credit crisis, these trades didn't lose money because volatility increased a lot, and it increased you know, ten times over the course of you know, several months.

But during no month did it rise more than two and a half times. Look at only you know during Lament it only rose two point four times, right, So this is what they call back test over optimization right, because you know it could have certainly just risen four times on Lehman instead of two point four times. Um, it just didn't. And this time, of course, it rose by a factor of closer to eight. And so if you so, if you were to do this trade again, that the p m l is is proportional to the

square of the increase in volatility. Right, So in March, if you had sold the February you know cap uncap trade as a hedge fund engaging in alternative risk transfer, you collected you know, point four points and you ended up losing let's call it two d and fifty and the you know that, so those positions alone were enough to you know, wipe out the whole portfolio managers and hedge funds. And there, 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 twenty 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 um 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've had extraordinary volatility, but it's the speed of the volatility in such a short period of time that's been it's obliterated so many positions.

I'm curious, sort of this might be a silly question, but you know, when we're talking about all these products, whether it's just the products 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 like 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 uh, you know knocked in. How do you like sort of get your hand around the size of this universe and the state of this universe. Sure, so let's start with the Korean autocoll market for example. So this is the kind of thing where you know, many of

the large banks are 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 this data is public because these things go up for you know, the products themselves go up for you know, for OURFQ you know, out of 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 and they'll publish that type of information. That's the kind of thing that you know, it's 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 the A R T side, again, it's

it's very much so. The way you know where new prices are trading in that stuff, of course, is that you're you know, your your participant in these markets. Probably not you know, in our in our case, not you know, literally trading those products. But but you know, we are cover you know, large large institutional derivatives UM. You know, managers and traders are are covered by the UM, the large investment bank salesforces and speak with the traders and

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, uh, there's only a certain subset of people who would actually

be selling this stuff. But as a as a derivatives investor, you need to know where the risks are in the marketplace, and you have to understand, you know, 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 buy side. Is that vindication for regulators? Did they basically get this

one right? Uh? 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. Um, I think very much there are two, very much two sides to that, and the regulators will will tell you exactly this, and you can read exactly this into their their actions over the

last three or four weeks. Right. So, on the one hand, from a systemic risk perspective within the banking system and resilience of the banking system to know market shocks that might come from different unpredicted angles, this was a big win, right exactly as you said, um, you know, in two thousand and eight 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 hitge.

But in general, actually, um, as we talked about, the banks are doing you know, pretty pretty reasonably at least at this point, and then largely as a result of you know, being very well hedged facing the by side the and that and also not importantly not holding you know,

large inventory, not trading aggressively. But the flip side of that is that the 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 by coronavirus. Right, then 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 witty market and in you know, higeled an investment grade credit et f s moving seven percent 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 help and don't hold inventories and are not facilitating and intermediating markets.

And that's the flip. They be sort of the other side of the coin, right where um, we've made the banking system a lot safer from from market shocks by de risking, by taking tail risk out and by keeping inventories and 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, global central banks over the last three weeks to a month, you know, there's 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 um, you know, very aggressive expansion of of buying of different kinds of investment grade debt to

try to stabilize broken markets. But then also you know, incremental steady rolling back and many of the types of capital restrictions and UH and general you know. So so for example, you know, cutting banks need to hold capital, and you know the and C car stretch ratios, doing a variety of things that look basically like rolling back many features of dot frank on a temporary basis, right.

And the reason that they're doing that is UH is to get banks lending, you know, to make sure the 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, right And I think the recognition that you're seeing, or the what 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 know, some people on the buy side that have been pointing out over the last several years that the inhibiting the level of banquet was taken to the extent that we did, you know, 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 where the regulatory framework is maintaining the right controls around system 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 um you know, the vix had gone above

a d as of this most recent Friday. I get by the way, I guess this is the point of the show where I remind people what date we're recording this distinction the world has changed ranged since are you going to do the hour to job? Yeah, it is right now. It is nine am East Coast time on April five. 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 fifty.

And as you mentioned, the fan has done multiple things both in terms of the stepping into market standpoint and regulatory tweaks and so forth, without necessarily predicting the future of what the market holds. Between all these washouts and moves, is there much uh? You know, is it reasonable to think that, like we've seen the worst, not necessarily in the X levels of the economic crisis, but that the washout from a sort of pure volatility I liquidity standpoint,

we saw the worst of it. Or what kind of potential triggers could there still be out there? Yeah, that's a great question. I think that within the um, 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 of the moves is

past us. The reason being all of the highly over leveraged speculative risky positioning in you know, short tail risk on the hedge fund side, um that 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 variants or short a ton of fixed calls, they've been liquidated, and so that the acceleration factor that has gone also on the 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 of those markets. You've already seen the liquidation in many of the leveraged mutual funds in the community space and and MBS space and so forth. So I think that the most disorderly market behavior on the public side is probably over um. 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 real, very large fundamental economic shock, and it's likely to take quite a while to work through the system, and you know, 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 credit.

You know, things that aren't market to market and you know aren't don't get unwound in a messy way on the first big leg down, right. So private credit over level is private equity assets that are held probably at very inflated valuations and that are very sensitive to you know, the performance of small cat businesses that you know are seeing their you know, their revenues fall dramatically and their basic ability to uh to run their businesses, um, 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 gonna 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, right, Ben Effort, really appreciate you rejoining us.

As as I mentioned, there are a lot of people are constantly asking for a sequel to your January episodes and light of everything we've seen, and so I think they'll be very excited to have listened to your perspective of now that much of what we talked about Ben

is really playing out. Hey, guys, thanks for having a lot of fun than Thanks 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 our cane 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 learned 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, um 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. Um 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, has 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 cushi in the market. Um. 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 UH to think about right now is we have seen some talk from the US about rolling back parts of Dodd Frank, things like the vocal 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 DoD Frank vindicated or the banks proved to be safe. It's like, I kind of want to wait a few months before I started saying like it all worked, because everybody is

just so tense right now. But if you think about, like, Okay, what is it the core I purpose of a bank is most people know it a place to sort of hold your money. It's good on some level that where we've seen the blow ups so far, see, it seems to me it's good that on some level where we've seen the blow ups on 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 exologenous shot, and it will be interesting, and it's sort of been alluded to it at the end what happens to sort of you know, at some point people just can't keep paying their bill, alright, I mean we've already seen that. I mean we started with April one, and rent and mortgage checks do because of the extraordinary sort of human told 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 you know, a recent interview with Tom Barrick uh 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 were in public u in sort of

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 US treasure US. 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 Ellowhit. You can follow me on Twitter at Tracy Ellowoit and I'm Joe wi Isn'tal. You can follow me on Twitter at the Stalwart. And you should definitely follow our guests on Twitter. Ben Effort really put up high value, high information stream these Ben with two ends p Effort Ben Effort. 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 Leavi, under the handle at Francesca Today and check out all of our podcast at Bloomberg under the handle at podcasts. Thanks for listening.