Gareth Vaughan on a looming US bank collapse, Melbourne hotspot residents try to avoid new lockdown, Duncan Garner & the COVID-19 refugee crisis, the next housing boom & more

This Top 5+1 COVID-19 Alert Level 1 special comes from interest.co.nz's Gareth Vaughan.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz. And if you're interested in contributing the occasional Top 5 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 5s here.

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— mike luckovich (@mluckovichajc) July 1, 2020

1) A looming US bank collapse?

In The Atlantic Frank Partnoy has a dire warning about CLOs, or collateralised loan obligations. It's a frightening article.

Against the backdrop of the COVID-19 pandemic, Partnoy notes Americans are well aware of the toll this has taken on the economy with broken supply chains, record unemployment and failing small businesses. Additionally there’s another threat to the economy, he suggests, located on big banks' balance sheets that could be "cataclysmic."

Imagine if, in addition to all the uncertainty surrounding the pandemic, you woke up one morning to find that the financial sector had collapsed.

As Partnoy puts it CLOs bundle together so-called leveraged loans, the subprime mortgages of the corporate world. Such loans are 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. Partnoy says there are more than US$1 trillion worth of leveraged loans currently outstanding, with the majority held in CLOs.

Partnoy compares CLOs to collateralised debt obligations, or CDOs. The securities at the centre of the Global Financial Crisis, banks repackaged individual home loans into CDOs which were then sold to investors on the secondary market.

I was part of the group that structured and sold CDOs and CLOs at Morgan Stanley in the 1990s. The two securities are remarkably alike. Like a CDO, a CLO has multiple layers, which are sold separately. The bottom layer is the riskiest, the top the safest. If just a few of the loans in a CLO default, the bottom layer will suffer a loss and the other layers will remain safe. If the defaults increase, the bottom layer will lose even more, and the pain will start to work its way up the layers. The top layer, however, remains protected: It loses money only after the lower layers have been wiped out.

There are hundreds of billions of dollars of CLOs out there. Partnoy is worried that they have been praised by US Federal Reserve Chairman Jerome Powell and US Treasury Secretary Steven Mnuchin for moving the risk of leveraged loans outside the banking system.

I have a checking account and a home mortgage with Wells Fargo; I decided to see how heavily invested my bank is in CLOs. I had to dig deep into the footnotes of the bank’s most recent annual report, all the way to page 144. Listed there are its “available for sale” accounts. These are investments a bank plans to sell at some point, though not necessarily right away. The list contains the categories of safe assets you might expect: U.S. Treasury bonds, municipal bonds, and so on. Nestled among them is an item called “collateralized loan and other obligations”—CLOs. I ran my finger across the page to see the total for these investments, investments that Powell and Mnuchin have asserted are “outside the banking system.”

The total is $29.7 billion. It is a massive number. And it is inside the bank.

It's a lengthy article and as you read on, it doesn't get any more encouraging.

Since 2008, banks have kept more capital on hand to protect against a downturn, and their balance sheets are less leveraged now than they were in 2007. And not every bank has loaded up on CLOs. But in December, the Financial Stability Board estimated that, for the 30 “global systemically important banks,” the average exposure to leveraged loans and CLOs was roughly 60 percent of capital on hand. Citigroup reported $20 billion worth of CLOs as of March 31; JPMorgan Chase reported $35 billion (along with an unrealized loss on CLOs of $2 billion). A couple of midsize banks—Banc of California, Stifel Financial—have CLOs totaling more than 100 percent of their capital. If the leveraged-loan market imploded, their liabilities could quickly become greater than their assets.

2) Melbourne hotspot residents try to avoid new lockdown.

Melbourne's lockdown of selected suburbs will be watched closely by health officials and politicians in other countries including New Zealand. This story from The Age reinforces my view that any return to lockdown in New Zealand wouldn't get the level of public compliance that the initial one got.

The Age reports that some residents from Melbourne's 10 coronavirus hotspot areas have tried to change the address on their driver’s licence to help them avoid restrictions.

The Victorian Transport Department moved on Wednesday to foil the spike in licence amendments to ensure large numbers of people in locked-down suburbs are not freely moving around the state by presenting false addresses to authorities.

No proof is required to change a licence address online and changes are made instantly.

A new licence card is not required to show proof of a new address, as VicRoads sends labels to stick onto cards in the short term.

VicRoads is now reviewing each application made since Premier Daniel Andrews’ announcement mid-afternoon on Tuesday to reintroduce stay-at-home orders in suburbs largely north-west of Melbourne.

3) Technologies to keep offices free of coronavirus.

The Financial Times is running some coronavirus related stories outside its paywall. In this one, the FT looks at a range of innovations aimed at making office workplaces safe. Self cleaning surfaces, germicidal ultraviolet irradiation, monitoring a building’s pulse and good old ventilation feature.

So what is monitoring a building's pulse?

Real-time environmental monitors that “check the pulse” of a building already exist to assess things like CO2 levels and could be retuned to focus on the virus.

Some researchers in Switzerland are trying to develop sensors that detect the virus itself. Researchers at the Swiss Federal Institute of Technology (ETH Zurich) and Swiss Federal Laboratories for Materials Science and Technology (Empa) have developed a sensor set inside a chamber that emits a light signal if it comes into contact with the virus’s RNA.

Testing in real life environments — including hospitals, train stations and shopping malls — will start in the next few months. 

Image: FT.

4) Duncan Garner cops a serve.

Newshub shock jock Duncan Garner copped a deserved serve from one of his own colleagues this week. Lloyd Burr, Newshub's London-based Europe correspondent, took Garner to task after he said New Zealand's borders should be shut to returning New Zealanders. Personally I've been wondering when we're going to start calling this what it actually is, a COVID-19 refugee crisis.

His argument is that us expats are "taking the mickey" by "meandering and dawdling home" and we've "had plenty of time to get our backsides home". 

What a load of crap. Crap that's causing a whole lot of unnecessary angst to many Kiwis who're in really tough situations over here. 

If it was as easy as you say it is, then we'd all be home and hosed by now and you'd have your perfect utopia closed off from the world. 

But it's not that easy. Not all of us can pack up our lives and move back to the other side of the world in the space of three months. Have you ever had to deal with British bureaucracy before? The rental contracts, the work contracts, car lease agreements, and all the other god-awful devilish British red-tape to work through, all in a country that's still locked down. 

Then there's the flights (that are rare, exorbitantly priced and change a dozen times provided the airline doesn't collapse). And moving companies (that aren't running at full capacity because of supply chain delays). And organising transit visas or exemptions (which are VERY confusing). All before you even get to New Zealand. 

And that's just for those who want to move home. What about the other scenarios? 

5) The next housing boom?

John Bolton, the boss of the Squirrel mortgage broker business and peer-to-peer lender, often has interesting things to say about the housing market. And his latest article is no exception.

After a short hiatus and a 5%-10% fall in house prices, I’m going out on a limb given the current market pessimism and predicting we will stretch into what might be the last great housing boom.

I thought house prices were cooked. Now I’m convinced there is another surge coming that will see the average house price in New Zealand hit $1 million in the next ten years. Some would say that’s a no-brainer because property prices double every ten years. The outcome might be the same but the logic isn’t. Others will predictably say I’m ‘just’ a mortgage broker and talking up house prices is confirmation bias.

6) Why meatpacking plants are super spreaders.

Meat processing facilities have emerged as significant COVID-19 clusters in several countries including Australia, the US and Germany. Here Der Spiegel looks at why.

If there is a paradise for SARS-CoV-2, it would probably be a slaughterhouse. Work units in meat plants are cooled to under 12 degrees Celsius. Workers stand near one another and sweat as they labor under pressure - an ideal situation for viruses transmitted by droplets, aerosols or contact.

Canadian and British researchers working under Quentin Durand-Moreau of the University of Alberta have studied the working conditions in meat plants. The "metallic surfaces” and the "low temperatures,” they report, enhance the longevity of viruses like SARS-CoV-2. They also explain that the plants are often very loud: "The need for raised voices to overcome noise may increase transmission of SARS-CoV-2,” the researchers wrote. Workers, they argue, also feel pressured by their precarious work situation to "keep working despite having symptoms of COVID-19.”

And finally here's comedian Sarah Cooper. Like many comedians and satirists, US President Donald Trump is Cooper's muse of the moment.

How to Compilation Volume 1 https://t.co/mIW1IYGQEp

— Sarah Cooper (@sarahcpr) June 29, 2020