Gettin' Paid

🎵Paid was the issue of the day🎵

Anyone remember SIVs, aka Structured Investment Vehicles? They were quite the thing, weren't they? If you remember, the game was maturity transformation--SIVs borrowed by issuing short-term commercial paper (CP), which was typically purchased by money market funds and HNW investors. Then, the SIV manager invested in less liquid structured finance products, including mortgage-backed securities and CDOs, which might be expected to pay better-than-short-term interest rates. It's all in the risk praemia, Baby, yeah!

At the time--eh? Oh, y'know 2006-ish, pre-GFC anyway--there was a lot of talk about complexity and big brains. "It may not be rocket science," we all said "but that's only because rocket scientists are underpaid". And how we laughed.

Ouch! Turns out our over-financialised economies were going to be underpaid for a generation.

Of course, now it all looks a bit stupid--and not just because, apparently, no one was clever enough to figure out that maturity arbitrage is a risky thing from almost any perspective: CP investors may lose interest, the issuer may become unpopular, macro economic factors may inhibit the flow of petrodollars, a bubble may burst, asset values may fall precipitously, illiquid assets may prove hard to sell, regulators may ask whether shadow banks should get away with unregulated banking, issuer credit risk may crystallise, wholesale market panic may set in... well, as it turns out, all the prize numbers showed up on our GFC game card, am I rite? Bingo!

No, the principal reason why it all looks a bit stupid now is because simplicity is suddenly en vogue and complexity just looks like a silly fraction we were too ignorant to normalise. "The answer, Sir? Er, um, would that be thirty forty-fifths of an orange?"

Today it would be more like...

So, Grasshopper, you want to do maturity transformation? Then you must sell instacoin and buy slowercoin. That is the DAO.

What? No. That's exactly how it is.