Zombie apocalypse isn't what you were expecting

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Had to go outside and take a look around to see what chapter of Revelation was happening today.
 

pmbug

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The financial crisis of 2008 was about home mortgages. Hundreds of billions of dollars in loans to home buyers were repackaged into securities called collateralized debt obligations, known as CDOs. ...

... To prevent the next crisis, Congress in 2010 passed the Dodd-Frank Act. Under the new rules, banks were supposed to borrow less, make fewer long-shot bets, and be more transparent about their holdings. The Federal Reserve began conducting “stress tests” to keep the banks in line. Congress also tried to reform the credit-rating agencies, which were widely blamed for enabling the meltdown by giving high marks to dubious CDOs, many of which were larded with subprime loans given to unqualified borrowers. Over the course of the crisis, more than 13,000 CDO investments that were rated AAA—the highest possible rating—defaulted.

The reforms were well intentioned, but, as we’ll see, they haven’t kept the banks from falling back into old, bad habits. After the housing crisis, subprime CDOs naturally fell out of favor. Demand shifted to a similar—and similarly risky—instrument, one that even has a similar name: the CLO, or collateralized loan obligation. A CLO walks and talks like a CDO, but in place of loans made to home buyers are loans made to businesses—specifically, troubled businesses. CLOs bundle together so-called leveraged loans, the subprime mortgages of the corporate world. These are loans made to companies that have maxed out their borrowing and can no longer sell bonds directly to investors or qualify for a traditional bank loan. There are more than $1 trillion worth of leveraged loans currently outstanding. The majority are held in CLOs.
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... according to many estimates, the CLO market is bigger than the subprime-mortgage CDO market was in its heyday. ...
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Loan defaults are already happening. There were more in April than ever before. It will only get worse from here.

Even before the pandemic struck, the credit-rating agencies may have been underestimating how vulnerable unrelated industries could be to the same economic forces. A 2017 article by John Griffin, of the University of Texas, and Jordan Nickerson, of Boston College, demonstrated that the default-correlation assumptions used to create a group of 136 CLOs should have been three to four times higher than they were, and the miscalculations resulted in much higher ratings than were warranted. “I’ve been concerned about AAA CLOs failing in the next crisis for several years,” Griffin told me in May. “This crisis is more horrifying than I anticipated.”
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More: https://www.theatlantic.com/magazine/archive/2020/07/coronavirus-banks-collapse/612247/

The Fed is trapped by their ZIRP policy. They can't let the zombie companies fail en masse or the banks and whole financial system might collapse.
 

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Well, looks like bankruptcies are starting to gain steam at the same time that corporate debt markets are exploding (expanding). :(

Retailers, airlines, restaurants. But also sports leagues, a cannabis company and an archdiocese plagued by sex-abuse allegations. These are some of the more than 110 companies that declared bankruptcy in the U.S. this year and blamed Covid-19 in part for their demise.

Many were in deep financial trouble even before governors ordered non-essential businesses shut to help contain the spread of the virus. Most will reorganize and emerge from court smaller and less-indebted. The hardest hit, however, are selling off assets and closing for good.

They include plenty of big, iconic names. Hertz and J.C. Penney and now Brooks Brothers, too. The vast bulk, though, are small and medium-sized businesses scattered across the country. Their downfall might not normally garner much attention, but it does underscore the full extent of the damage Covid-19 has inflicted on the economy.

The list compiled for this story is based on court records, statements or interviews in which company executives explicitly linked the virus to their filing. It is only a snapshot of the thousands of corporate entities that have landed in bankruptcy court since the pandemic took hold in March.
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