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Brett Jefferson

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108

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2024-09-12

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2024-09-12

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1. “As you just heard me say, this is one of the final forward guidance episodes that I will host. But I've got great news Felix Javin, current host of the On the Margin podcast, is taking over. Felix is not just a great podcast host, but also a very talented trader as well, and he follows the macroeconomic and central banking news like a hawk, or should I say a dove. I truly am resting easy, knowing that the future forward guidance is bright and that I have passed it along until a worthy successor who has all the skills that I do possess and many that I do not. I truly am very excited to see where Felix takes the show. I also will be returning to the world of financial interviewing quite soon. Follow my new YouTube channel Monetary Matters to stay tuned with my upcoming work, which you can expect to see shortly. And lastly, thank you again to everyone who has ever watched my work. I'm very grateful to Blockworks and De Van Eck for taking a bet on me. To you, the audience who has stuck with me over four hundred episodes.”

   2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

2. “He does not think that everything that is happening has happened in the past. He actually has an original thought. If I listen to him. But when I listen to people just tell me, like, well, this looks like this because it happened this way. Like, yeah, well, you know what? We used to have phones on the walls with very long cords and we paid long distance phone bills then too. So the world's changed. So yeah, you can't always look at things just because it happened one way. It's going to continue that way.”

   2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

3. “Philadelphia Fed has bothered me for a long time because I called him up and I said, you know, I'd like to discuss this with me. They never discussed with me. And after I prove them wrong, I want them to write me a letter of apology. I'm going to put it on my fridge and I'm going to look at it every day and touch it.”

   2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

4. “But we can get information from this is an information game, right? This is about getting information, processing information, and making a decision off of that. And when you have all this different information, you have to learn to process it in a certain way. That's why we have a system of processing. Come back to the same thing, looking at the value of the assets, the value of the structure, the value of the option. And it's a simple way in which I started looking at it years ago, and we still do the same thing, but it's just, it's tweaked over the years. It's gotten a little bit different.”

   2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

5. “Are both we? We agreed to buy a certain amount of equity from their next whatever many deals, and we get a portion of their management stream forever, of their GP. The only form of revenue that they're getting is management fees from their CLOs. Because we truly look them over, check them out, and we are partners with them, when we see a problem credit, we go to them and talk to them, get their opinion on. If I go call up somebody at a large CLO shop and be like, can you tell me about this name? They're going to be like, who are you?”

   2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

6. “Because that little push that we're giving them is going to get them over the hump. And these are guys who are usually very, very good at trading within the system, working within the system. And we use them to understand problem credits. So we invest in these managers. We agree to take some of their equity. We don't have to hold it. But it's been a very good trade for us.”

   2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

7. “There's been a great rally in CLO market. The equity returns are a function of where can you assure your liabilities. Your liabilities have been coming in. AAA has been coming in all along the capitalist track, right? This is a funding game, right? So it's not so much as the assets because you're buying your assets usually at par. They don't really go up more than par. It's what is the funding and then the timing of the funding. So I think that's why the CLO market has been performing well and it's because of where the funding costs have been happening. Look, it's always about where are you creating CLOs. We play more than the secondary market with CLOs or we have actually, we'll call it done some investing in CLO managers, which CLO managers we like. We like CLO managers who are, this is everything they got. They understand how to play the game. They're not part of a bigger organization. And they just need a little humk.”

   2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

8. “There's two ways to look at it. The recovery rates have been going down on the actual assets that default. A lot of these companies never default. They get bailed out, right? So if before you had 10 companies that were defaulting, right? And they were all getting 40 cents on the dollar. Okay, great. Well, now you got 10 companies and five of them are getting bailed out, but then you've got the other ones that are getting 30 cents recovering. Whereas the other ones might have gotten more if they actually come to market. So I don't know if it's statistics are an interesting thing and you have to actually look deeper into it. Like you really have to look at problem credits with sales when are people getting out of and taking losses in CLO. I think there's more there than just that statement.”

   2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

9. “It comes down to the losses that are in there. You go into a recession and you have masses and amounts of loss that's going to occur, then yes, you will have issues. What are the recoveries is the question. And who are the people backing these companies? That is the real question at hand.”

   2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

10. “But maybe we don't have to have a recession every five years. Maybe it doesn't work like clockwork like that. So I don't necessarily think we're going into a recession. I think that, look, we've got an election year, usually strange things happen in the market in election years, and I'm not trying to say that things are fixed or raped or anything else, but speak to a lot of people. They think that, you know, the feds with their buying patterns are just fixing the whole economy. So I just take it for what it is. I take it for what it is. Our rates going down right now? Yes, they are going down. Rates are going down. I don't think we're going to have massive amounts of losses in the non-investment grade market. Remember, we've had losses before because of technology, because of changing businesses. That can always occur. But, you know, I think the world's getting smarter realizing that. So, yeah, I'm not overly concerned. And I think, look, the CLO market's going to do fine, okay?”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

11. “Anytime there's a recession, you're going to add credit losses. Your underlying assets are non investment great. So you're going to have losses. As I said before, if you look at the amount of loss or defaults that you're going to have over a five-year period, 2020 accelerated those. Accelerated those rapidly. And then we kind of bailed out some of them with government intervention and things like that. Look, here's what I'm going to say about economists. The exception of one, okay. Most of them don't have an original thought. And they go back and they're looking at what happened in 1929 or what happened in 1946 or what happened. We're in a different world right now. Okay. We're in a different world. We have an inverted curve. Okay. We have an inverted curve, but we have an inverted curve because, you know, people are buying up the short end. Okay. And you're looking at this now and you're saying, wait, wait a second. Like, why are we going into a recession? Like, like, yes, we are going to lower rates. And we accelerated because they said there was inflation.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

12. “My capital is permanent. What I've said to the investors, I said, we will take our excess. So you build up excess. And as Mr. Buffett went out and bought things, I will either pay a dividend or I will do a tender for that. I don't plan on going anywhere. We have some people who have expressed that they're ain't as long as I am. So is it permanent capital? It's permanent capital for me. I think it's permanent capital for a couple other folks. I think there's a lot of folks that are still looking at us because we don't really need that much more. In the way of capital to get where we want to be. So, you know, is it permanent? No, because I'm a man of my word and I say, you know, I will do these tenders for you. But if I have excess and I'm just buying the shares with the excess, then it's just, you know, we're buying them out, the existing shareholders. So that's just one way to think of it.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

13. “A lot of people. We have office in the Cayman Islands, we're licensed in the Cayman Islands. We've got a forward flow of stuff. And did we have some luck? Yeah, we did. But we found it. We've built it. And, you know, who knows? Maybe we'll be originating our own annuity sometime soon. We'll have to see.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

14. “Understand that we really, really like, and we like him because guess what? We're not a subprime issuer. We're a 50 loan to value issuer. Think of it that way. We got a lot in here, okay? We're really, really watching this. So yeah, what am I excited about? I'm excited about that. Okay. I don't look and say, well, I like Bitcoin because I don't like Bitcoin. And I don't sit there and say like, gee, I think the stock market's going to do this. I think that's actually really, really hard. Like I buy a bond and you're going to pay me or we're going to go to a courtroom and we're going to go argue about how we're going to get out of this thing. And that's a lot easier. So that's what I like. I like what I've got going on. And it was a lot of work to get there. But I'm very excited about it. I got a great team that was working with me. And they're excited about it. And we built this thing out. And let me tell you, a lot of people want to build an annuity, reinsurance.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

15. “But you know, I will say this, you know, hedge fund managers and athletes, you know, their careers usually don't end in a positive way. And I've told everyone there, like, you know, I'm going out on my way. And for many ways, I have a very, very great, you know, respect and fear and understanding of risk. Okay. And I understand that risk. And I understand what it is. And I don't go just go out and jump into this market because all the cool kids are doing it or jump into a different market because I can make money doing it. Right now, look, I've done very well in myself and I'm saying, you know what, I'm going to bet on me and I'm going to bet on the products that we have. But the reinsurance and the non-QM market, as long as we have the ability to buy cross-country mortgage, we have a huge competitive advantage. As long as we have the ability to get reinsurance, annuity liabilities, and we have assets that we can buy that we really.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

16. “Where I see the greatest risk reward for me, Brett Jefferson, is I've got a lot of assets which are in my reinsurance company. I can find other assets where we're in the business now of sourcing and finding other assets. We're not growing it in such a rapid pace. We had a great ramp up period with the assets and we had to get it going there. I think that our net interest margin is going to be phenomenal. And to me, it's the coolest thing that I've ever seen.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

17. “Got it. Yeah, when it comes to the mortgage market, I mean, I just read reports and seen charts of the FICO scores of the borrowers. And yeah, it is a factual assertion to say that credit standards have tightened enormously, meaning that people who your average person who gets a mortgage is more likely to pay it back than, let's say, in 2005 through 2007. Okay. And so you don't think we're anywhere close with the private credit CLO market. Where are you viewing the risk rewards? You know, let's say you're not even thinking about a crisis, but the risk reward of I know CLO spreads have tightened dramatically.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

18. “Think we're there. I don't think we're there. Okay, I think that we did a great job when I say that all financial people involved. Everyone was involved in some way, shape, or form. Okay. And did a great job almost blowing up the world, you know, just getting rid of the whole capital markets. We made it through. And we've learned a lot of lessons. I don't think we've forgotten those lessons. Like I said, if you look at the mortgage market and you look at the bank market, they certainly haven't forgotten this. I don't think we're at anywhere remotely close to anything like 2008 while we're going to see that while I'm still on this earth.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

19. “and you've already invested in that company in the equity and now all of a sudden they got problems with the debt. Well, you might just wipe out the equity and be like, all right, I'm going to give you some bailout money. So I don't think it's as clear as that. I think it used to be a lot different when there wasn't. I'm not saying that the original CLO market, you were going to these companies, you were finding it, you were selling it to the deal, right? Maybe that company shouldn't have wouldn't have ever that high yield bond or that leverage loan would never have sold in the marketplace unless there was a securitization bid for it. I think those days are long gone. Just like there was never going to be a bid for a subprime mortgage unless there was a securitization market, which was this giant incestuous market, because then they created the CDO squared market.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

20. “It's not small. When they do a lot of these securitizations, a lot of them never, you know, they're already placed. So the equity is being taken, let's just say, by the people who own the loans. Let's just say it's one person doing this securitization. They're probably going to take the residual tranche because they're in the business of getting good financing and getting term financing. That's it. A bank's going to take the seniors, the bonds in the mill will probably go to some insurance company. And the insurance company might be part of the private credit market or the private equity market or the market in general like Aries, they got insurance company. Paul's got insurance company. Blackstone's got an insurance company. KKR's got an insurance company. So they're all taking that also. Or they're parceling that out to other people. I don't think it trades as much as the broadly syndicated market. I think that might change. Now it comes back down to risk. Like I said before, if you're a behemoth.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

21. “I said some couple minutes ago. So first thing you said was these are small nichey markets. They're not small markets. Okay. So the private credit market is not small. Yeah.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

22. “So we may have been paying, let's just say one cent on the dollar for a bond that's going to pay us zero, but then we were buying the senior bonds at 55 cents on the dollar and they paid us 100. And they were much bigger. And we did that twice. Do that twice. Got a couple more. We're looking at doing that. But it's a lot of work. It takes time. That's just being in this market and thinking about things and finding things and taking time and doing it. But in the retruck market, you know, we manage these deals. And when I say manage, there's really no management to it. It's like mortgage servicing rights. You're doing administrative work and there's a problem, then you come in and you deal with the problem.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

23. “No, they were just putting in one or two mez bonds from these deals. They have blown up. These retruck CDOs, like let's just say there was a, because I'll tell you an exact one, there was A down to F, A, B, C, D, EF, okay, and then equity, right? Nothing under the B is ever going to receive money, okay? And let's just say we own the A, we own the B. Well, when a deal goes into event of default, you can liquidate the deal as to what the indenture says. And most of these deals, it said you can't liquidate these deals unless you get 66 and two-thirds of every charge to vote yes. And we got friends. So we sat down one day with a couple of our friends who have these things. We said, what do you got? And we was kind of like putting all your baseball cards out there. And we're putting them all out there. And then we're like, wow, we only need these two, you know, we only need to pick up some more of these bonds. And then we can liquidate the deal.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

24. “Drupal CDO. So back when they were back when 2005 to 2007, when anybody with a pulse could get financing in the CDO market, they created this market where there were 16 securitizations and they're called REET trucks. They're basically real estate. There were three types of real estate assets that went in there. There were big name real estate companies, okay, KKR, colonial or some of the other ones in there. You know, a couple other really big ones are just not coming to mind. Then you're just a mid-tier one-off type of projects. And some of those have worked out and some of those haven't. Then you had securitization tranches, which didn't work out usually, and little like little developments, like spectrum. What do you mean?”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

25. “Is not going to come to light. That's not bad. That's not good. Look, there's a lot of money in this system. There's a lot of money in the system. Okay. And it's not coming from banks either. But that's really where we are with private credit and the change or the phenomenon with it. Look, I'm not saying it's all going to go bad. It's just now that we do, but we look at the securitization aspect of it. Like I said, we right now, we do a few different things. We buy non-QM mortgages and we buy multifamily. We securitize those. So that's another thing that we're doing there or we're buying consumer assets and we're securitizing them. Or we're putting things that, you know, are either rated or we're getting them rated or repackaged.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

26. “Okay, sure. They find a company that they have, instead of the garden at JP Morgan, that company, they go to Aries. Aries says, I'll give you better terms. I don't want to be in the Broadland syndicated market. I mean, there's a lot of different reasons. It comes down to economics. That's one reason. But I'm telling you a lot of them is that a lot of these guys are invested in these. And it's very, very incestuous. On the flip side for private credit, if you own the equity of the company, You've issued the debt, you put it in your securitization, that company has problems. This is where the distress market has changed dramatically. It used to be there was a distress market people run around and buy all the debt in a secondary market. Now a lot of times these things are restructured because if I own the equity already, I'm just going to go in and I'm going to give you bailout money, which basically means I'm going to charge you a very excessive amount. I'm going to own more of your company, but it's not going to really, you know, that problem.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

27. “Well, let's talk about that. So JP Morgan will be finding a company that's either public or private, and they go to JPMorgan and they say, here, I want to issue $500 million of debt. And their bankers look at it. They say, okay, we think you're single B. We think CLO people will buy this. Maybe that company has some private equity investment, but maybe it's all owned by the people who own the company. Aries goes out and invests in a company. Then they say, I need to go issue debt. Why won't I go to JP Morgan? I'm going to go issue debt and I'm going to take that debt and I'm going to put it in my insurance company. Okay? I'm going to put it in my insurance company or I'm going to securitize it and I'm going to take the Mediterranean part of it and put it in my security in my insurance company.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

28. “CEOs both with average prices of ninety five, both with very, very different profiles. The second one, okay, I need to understand what those loans are trading at 50, what they really, really are. The one that's at 95? Okay, and this is kind of a real extreme example. Like they're trading at 95. 95 doesn't tell me that they're going to go bad. It's not something that's telling me like we're going to have a lot of problems here, but I still got to understand that. I got to say, how much risk can I take before I really, really get into? One is telling me that there could be a direct loss component in there. And the other one is saying, how much loss could I incur before I have problems? So those are different ways of looking at two similar structures.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

29. “You buy a CLO, there's 100 loans in there, right? Let's just say you buy a CLO, there's 100 loans in there. Let's just say you got two CLOs, okay? One of them, all of the loans are trading at 95 cents to the dollar, okay? And you say to yourself, like, okay, 95 cents in the dollar, that's not bad, but okay, 95 is telling me that they're probably going to be okay, right? Then you have a CLO, another one, and 90% of the loans are trading at par and 10% are trading at 50. And that gets me to 95. My math is correct. I think it is. So now you got two.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

30. “Company. You got to deal with that person. And there might be a CLO manager, but for the most part, they're not going to do anything that's going to jeopardize their franchise. So in some ways, it's a really, really nice thing, but it's a really different thing because most of the people are in private credit. They're talking about this company, this EBA, and this, the way it is and its peers. And we're looking at it as like, here's a pool of assets. Okay, let's take a CLO and I can go on and get an opinion on from 12 people on all these assets because people mark them and trade them. And I'm not really looking at each and every one of them and doing a full deep dive on them. I'm saying, what are the ones that are going to get me into trouble? Because I'm not in the business of looking at one credit unless it's a problem within a securitization, if that makes sense. I hope that makes sense.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

31. “Pretty much everything we own is either in a securitization or creating a securitization or it's a broken securitization or maybe it's something that we bought out of a securitization and there was nowhere to go with it. Like I just sold it to trust preferred from this bank in California that we've had for five years and it was just one of these banks that lingered around and somebody came to me, they were buying the bank. I said, here, I'll sell it to you. Didn't make money on it. But that was one to hold too long. You know, one of the funny things about what we do, I was telling you something about this the other day is that we don't really deal with people. Like we deal with, we buy, when you buy a securitization, you get an indenture. Here are the rules. So you can never have like a CEO who's going to pivot it and you don't have someone who can steal from you because all the money goes to the trustee. Now, people will try and steal from you in other ways and trustee might not know where to send the money, which has happened. But you see what I mean? Like when you go out and you invest in a”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

32. “And I say, guys, this is not private credit. And they're like, well, it's private consumer credit. And I'm like, oh, we do non-QM mortgages and we do multifamily. So we're involved with a program through Freddie Mac and it's basically called the Freddie SBL program. And Freddie likes to go out and issue a 70 loan to value, but then they sell off that bottom 10%. It's kind of like a club. There are four people in it and you're able to buy this bottom piece. You can go through and do your work on it. It's a pretty interesting thing. But when I say private credit to us, we may be buying a private credit securitization.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

33. “Some of these assumptions, let's just say they went on in the CMBS market. I'm not saying it's all going to go bad, but it's a market which we're not really directly involved with.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

34. “So, I think that some securitization markets are getting into some of these newer ones, I kind of want to see them develop before we jump into them. Now, the commercial real estate market, we've got to change. We've got to change the demographics. I live in North Carolina now. I moved from Connecticut to North Carolina. There was more development and growth down here than I've ever seen. I moved here because nice place to live. Nice place to have my kids go to school. And I don't sit in traffic anymore. And if you look at places like Nashville and Austin and Raleigh, North Carolina, Salt Lake City, these are places that are booming, but the people are leaving other places. And then you ask yourself, like, what are you going to do with all that commercial real estate? There's a mall in Stanford, Connecticut that they couldn't find anybody, so they played pickleball in there. That's what they do. They play indoor pickleball in the winter. Okay, you've got a problem with.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

35. “Yeah, no, well, if you go to a bank, you don't have to go to Fanny or Freddie. If you go to a bank and you get a loan from a bank and that bank fails, the FCIC is on”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

36. “So maybe some of those, you know, we should be having more defaults right now, but they will take it out in COVID. The things that I'm looking at, if you think about somebody who's buying a home right now, I'm buying a non-QM mortgage, that's a self-employed person, right? Can't be selling that to Fanny and Freddie. All right, you and I go get a mortgage today. All right. You've got to go get an appraisal. The appraisal rules have changed. Appraisers just can't go and, you know, whatever you paid for is good. Praisers are very, very highly scrutinized and they will take their licenses away. You have to sign more documents and authentications and everything else there is. Okay, if they are not allowing people to misrepresent when they're going out and they're getting a loan because they're saying that could lead to a banking crisis and who owns the super senior risk of all banks. The United States government.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

37. “owning that debt but then they're securitizing it and they're getting other people involved that's an indicator that okay there's some people here and and they actually have some skin in the game they have a rational reason to work if you if you ever listen to michael milk and he talked about when he started looking um for people who wanted to issue you know jump bonds high yield bonds he looked for people who had really good ideas but more importantly they had everything they had in these businesses and they would fight for these businesses And that's a big difference between person buying a house with no money down. Now red flags for businesses for things that we're investing in right now. Seattle market's a big market. They've talked a lot about, wow, we're looking at a crisis that's going to occur. What COVID did was COVID kind of, anybody who was a bad company got cleaned out in COVID. So if you believe that you're going to have X amount of defaults over a certain period of time, COVID kind of front-loaded.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

38. “Well, there's a few things. There's a few things here. One, we talked about subprime, the difference between subprime and the mortgages we're buying today, and a lot of it had to be with the commitment, right? The amount of money that you have in, which means that you're going to, you're going to make a better selection. You're going to work and fight to make sure that works. So I'm going to touch on private credit, but we're not involved directly in private credit. Okay. When I say, when you say we are in private credit, our private credit, our non-QM mortgages that were securitized. Do we look at middle market and private credit securitizations? Yes, we do. Do we go through, and one of the things we look at is of the debt of the private credit of the originators, how much equity do they own? Because a lot of times they own these companies or private equity companies. So they're buying equity. And now they can finance these companies with this debt. They own the equity, right? Now they're issuing the debt.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

39. “And different types of receivals, music royalties. I don't really get into all those things. Okay. But things like, you know, mortgages were 30% down those interest me, CLO markets large, but we can still find good opportunities. Obviously, the bank one works. There are some real estate type products that we look at. We do not play in CMBS because it's a very, very large, crowded market. And I'd rather be in some place where there's, you know, it's off the run, I'm going to say.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

40. “Was saying that everyone is going to lose on this. And I'm watching them all pay off. Now, it was a bumpy road, okay? It was a long bumpy road. But I got them where they're paying off. He say the seniors weren't going to make it. So how we got to this point, like I didn't create these things. I didn't make the new issue market. I came in afterwards and I said, what do I got here? And, you know, it's like that's really what you look at if you're buying a distressed situation. You don't care like how did we get here? I don't really care how we got here. We got a problem. Is it worth me coming in to buy this? Is it going to be worth my time? So, I mean, I guess going back to the securitization market is smarter because we are more regulated. There are more people looking at it. There's more things that you have to do. There's more forms of securitization, whether it be solar.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

41. “Not really because it say, if you have small community banks in an area and You have a factory in that town, right? And that factory goes out of business. Okay. That's going to affect that town. That's a microeconomic variable that is occurring. You know, you're basically saying that the correlation or diversification, you know, it is important. It's important to have. But if your assets are good, your assets are good, right? That's really what it comes down to. If you're putting in really, really bad assets, okay, it doesn't matter if they're all diversified or not diversified. Right. And what happened with subprime mortgages was it just like there was no loyalty to that mortgage. Like when I say loyalty, I mean, no one's going to fight to keep that house. People get handing their keys and walking away. In regards to diversification amongst banks, we had a banking crisis. I'm not arguing we didn't have a banking crisis. The problem I have with that paper was.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

42. “Okay, okay. Well, just that they said that the trust preferred securities in the late 1990s and early 2000s that they divided the into five regions and that they assumed that the correlation between the banks who had the debt in the regions was zero. So literally if you had a bank on two banks across the street from each other, but in the middle was a dividing line, they would assume that they had a zero correlation of default. So it was that a similar issue”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

43. “And the key point just for our audience is that if you invest in these structures products, you really are short the correlation. You want them to be diversified. And if the implied correlation is that they won't be that correlated, but they actually are correlated, that's where they get in trouble, where the mortgages go bad in Florida and California. And likewise, from your favorite Philly Fed paper from 2011, they said that the, and you'll correct me if this is wrong, if this is something else that they got wrong, then...”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

44. “That home, and even if they do, are we going to have a 30% drop in the value of that house? So that's where we look at things and we say, yeah, we're okay with that risk. But don't get me wrong, historically, Wall Street has made some of the greatest blunders of all time. And yeah, I don't mind capitalizing on them. It's okay. There's nothing wrong with that.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

45. “Had telecom bonds in there. They just call them different things. They call it long distance carrier, long distance provider, long distance infrastructure. So they were just calling them all different things. But guess what? When cell phones came around and long distance phone companies went out of business and had no recovery value? That wasn't good. So yeah, mistakes have been made. I would say where we are in securitization market today, I'd say the CLO market is very, very smart because the people who are buying it are going to come in and they're going to question and they're going to pass. They got a lot of things to look at. You know, there are different nuances with the CLO market, which we look at and say, you know, maybe that person's too big because you have to go get the assets, different things like that. When we're buying non-QM mortgages and someone's putting 30% down, okay, they're putting 30% down. Are they going to get up and walk away?”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

46. “Would that be a good way to analyze how people are going to drive in their blindfolded using non-historical data? No. So the diversification issue, yes, you were talking about diversification. But if everybody's putting zero money down and you have inflated prices, and the only way that they can get out of them is to sell them to the next person, but all of a sudden that market dries up. There is no diversification. There is no diversification. And you can argue like, well, when you're putting all these different banks into, you know, securitization, yeah, historically, certain parts of the country, they would have different problems in other parts of the country. Okay, but when you have a banking crisis that's driven by a mortgage crisis and a lot of these banks were aggressive, well, the diversification doesn't mean anything. It goes back to telecom. Well, you're supposed to have a diversification and you really weren't supposed to have, you know, we'll call it more than 5% in any one industry. How come there were 40% of CB?”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

47. “Money down who had no real Thai financially to that asset. And you're saying we should use that debt. Was that a good exercise? I would draw the comparison as it's like saying, all right, we're going to analyze driving statistics, okay? And we're going to analyze people who are driving, okay, regularly, and then people who are driving blindfold.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

48. “You're basically saying that you have historical data when people put 20% down. My father was a merchant marine captain, he was a sea captain, the first Jefferson hasn't gone to sea. So when the housing crisis was going on, he said, can you explain to me what's going on? I said, yes, people are buying houses with no money down. And he looked at me, he was shocked. And he said, when I bought the first house, I had to go in with all my material, put my tie on, put my suit on, went in and I put all my money. I took all my money I had, put 25% down. So you're doing an analysis on an asset class where people had put a large, you know, made a large investment. Your million dollar house, you're putting $200,000 down. Okay. And at $200,000 means a lot to you. And you're not just going to walk away from it. And you're taking that data and you're comparing it to somebody who put zero.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

49. “A benefit of securitization is diversification. In the same way the SP 500 owns 500 companies and it's not just dependent upon one of them, although it has become less diversified as the percentage of the magnificent seven Apple has grown and it is dominated by those large names in the same way a subprime mortgage bond or a CDO constructed of subprime mortgage bond, you had a subprime mortgage in Florida. You had a subprime mortgage in Nevada. You had a subprime mortgage in California. And it's my understanding that the historical models said that those were not very correlated, that the real estate markets are regional. And if there's a real estate crisis or a real estate downturn in Florida, California holds up and it doesn't affect everything. Of course, if the underlying thing that's fueling the real estate market is”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT

50. “Being securitized, whether in their restaurants securitizing their receivables, whether it's subprime auto, mid prime auto, auto securitizations, whether it's credit cards, they've been around for a long time. So there's many, many different asset classes that are being securitized. And it's a great way to fund these assets. And it also makes things cheaper because you're funding them in a way where now you can create a better source of funding. If you, the trust prefers that were issued would have come so much wider if you had to go out and sell $10 million of a trust preferred into the marketplace. But when you're selling them into a securitization and now you're selling an A-rated bond, whether it was right or wrong or whether it got written down, that's okay. It was a long journey. I said it's a long journey. I'll buy it at five and see where it takes me. It's been a great ride. But yeah, I get it. When they were trading at five, a lot of people weren't excited to keep.”

    2024-09-12 · Forward Guidance · CDO Whisperer Brett Jefferson on Securitization Markets and TruPS CDO Relics · IDENTIFIED FROM THE TRANSCRIPT