Before you say it, yes, we know that Déjà vu again is redundant.
But when you realize what Wall Street is doing, it becomes obvious that the Boyz in the “Club” are looking at old ways to peddle their new junk.
Henceforth Déjà vu again.
Cue Up: A “New and Improved Version” of one of Wall Street’s layer of genius protection plans known as Credit Default Swaps. AKA: CDS.
Remember those?
Get ready…
Because according to Bloomberg, UBS and other firms have been exploring structures that package stakes in private-credit funds into bonds.
Their reasoning is that perpetual private-credit vehicles do not fit neatly into conventional ratings models
As a result, bankers are looking to add insurance “wrappers” that allow portions of the deals to benefit from the insurer’s stronger credit profile.
The resulting paper (the CDS of 2026) can then be marketed as investment grade, even though the assets underneath remain opaque, illiquid private-market investments.
This is what Wall Street considers innovation.
Ironically (or NOT) these same geniuses creating these time bombs will also be the same people who (after it blows up investors’ portfolios) will scream their familiar mantra:
“I’m Shocked, I tell you…SHOCKED!
Who Could Have Foreseen This Happening?”
Déjà Vu Again
Think back to before the financial crisis (2007).
Wall Street packaged mortgages into residential mortgage-backed securities and collateralized debt obligations. Those securities were divided into tranches, and ratings agencies assigned extremely high grades to senior portions based on assumptions that nationwide housing losses would remain limited and geographically dispersed.
Then the Boyz on Wall Street added another layer of insurance known as credit-default swaps.
Insurer AIG’s Financial Products division sold Billions of CDS protection on mortgage-related securities.
Those contracts operated much like insurance, promising payment if the protected securities suffered specified credit losses.
AIG collected fees up front and initially posted very little collateral because everyone treated the company’s high credit rating as a substitute for cash.
Along comes 2008 and the catastrophe grew largely inside AIG Financial Products…which was an inadequately regulated derivatives business that used the broader AIG organization’s pristine rating to guarantee complex financial bets.
AIG had more than $1 trillion in consolidated assets in mid-2008 and sat at the center of a sprawling network involving major banks, retirement plans, commercial-paper markets, municipalities and other insurers.
The rest, as they say, was history.
Translation: The insurer had become the time-bomb.
So now, Wall Street is again using insurance guarantees to turn difficult-to-rate credit exposure into highly rated securities.
