I don’t think it says anything about specific data center risks: capitalizing loans is standard operating procedure for these banks. It gets the loans off their account books, so they don’t have to hold capital to balance the risk, but they still get to collect management fees on the loans, regardless of whether they default. The big stories back in the 00s were residential real estate loans, but they do the same thing for commercial and industrial property.
Isn’t fact they are having a hard time offloading that debt an indication that other investors are shying away from it because they see the data centre risk?
I offer you an IOU. I’m on a good streak, and the IOU is that I’ll pay you back over time with interest.
You accept. You then find 9 other people offering IOUs of varying reliability.
You package up all the IOUs into an asset group. In theory we all pay you back regularly, but some of us will not. With 10 IOUs it’s unlikely we’ll all default, so the asset is safer and your risk models can assess this.
You still have the same amount of debt and risk on your hands.
You turn sell the rights to the payouts from the group, in exchange for cash now, because paying $X for payback of Y% interest over Z years with Q risk is an easy to reason about deal.
But your potential buyers squabble over Q, some don’t want to lose anything, some want to be risky.
So you split that risk level out into groups and say “if the overall goes down, this group pays first, then this group, then this group”, and you’ve created a securitized asset.
You’ve now sold off these assets to various groups, with defined risk levels, and you’ve made back money to offset what you paid out to the initial 10 IOUs.
Now imagine you took IOUs from crack addicts who are talking a lot about the power transformer behind the mall. They say they need money for tools and this will be the big one. You’re intrigued.
Odds are good this will pay off you think, those crackheads were excited and confident.
Later that day you hear sirens. Like, a lot of sirens. It’s coming from the mall area. Huh.
You still haven’t sold off all the slices of your asset, you were maybe hoping for more upside, and selling can take a while. But those sirens… they’re concerning.
Maybe it’d be a good idea to swap out your asset for another one, or offer those slices at a discount for some higher than expected risk. So you go out and start making phone calls hoping someone else isn’t worried about it. The only people who are less worried are a biker gang you normally wouldn’t do business with, but you figure for a discount they’re happy to deal with the crackheads.
(This was more about securities than recapitalizing, but kinda the idea)
My impression is that commercial loan securitization is a little different.
When you’re talking about residential mortgages, you’re talking about loans of a few hundred thousand, which is kind of too small for capital markets to bother. So the banks bundle them, like you say, and sell them in $1e8-1e10 offerings… Pension fund’s gotta park $100,000,000 somewhere, and that MBS is easier than actually managing 500 separate loans.
When you’re talking about commercial real estate - and especially things as big as data centers - it’s the opposite problem. They need such big loans that only a big bank or even consortium of big banks can get all the capital together, then the big bank turns the loan into a bond offering, so investors can buy them in slices as small as $1e4… That bond may only have one or two loans in it, so it can’t necessarily get broken into risk tranches like the MBS.
With 10 IOUs it’s unlikely [they’ll] all default, so the asset is safer and your risk models can assess this.
This is where my spider senses go off. Are we assuming that these IOUs defaulting are independent events? Even though they’re from 10 crack heads talking about stealing the same generator?
Yes, probability gets much messier with correlated events, and most models assume independence. You can vary intensity/hazard in counting processes, but really there’s not much you can do at a certain point.
I don’t think it says anything about specific data center risks: capitalizing loans is standard operating procedure for these banks. It gets the loans off their account books, so they don’t have to hold capital to balance the risk, but they still get to collect management fees on the loans, regardless of whether they default. The big stories back in the 00s were residential real estate loans, but they do the same thing for commercial and industrial property.
Isn’t fact they are having a hard time offloading that debt an indication that other investors are shying away from it because they see the data centre risk?
this finbabble makes my head spin bois how is all this even allowed
The golden rule: he who has the gold makes the rules.
Any sufficiently advanced financial instrument is indistinguishable from fraud
I offer you an IOU. I’m on a good streak, and the IOU is that I’ll pay you back over time with interest.
You accept. You then find 9 other people offering IOUs of varying reliability.
You package up all the IOUs into an asset group. In theory we all pay you back regularly, but some of us will not. With 10 IOUs it’s unlikely we’ll all default, so the asset is safer and your risk models can assess this.
You still have the same amount of debt and risk on your hands.
You turn sell the rights to the payouts from the group, in exchange for cash now, because paying $X for payback of Y% interest over Z years with Q risk is an easy to reason about deal.
But your potential buyers squabble over Q, some don’t want to lose anything, some want to be risky.
So you split that risk level out into groups and say “if the overall goes down, this group pays first, then this group, then this group”, and you’ve created a securitized asset.
You’ve now sold off these assets to various groups, with defined risk levels, and you’ve made back money to offset what you paid out to the initial 10 IOUs.
Now imagine you took IOUs from crack addicts who are talking a lot about the power transformer behind the mall. They say they need money for tools and this will be the big one. You’re intrigued.
Odds are good this will pay off you think, those crackheads were excited and confident.
Later that day you hear sirens. Like, a lot of sirens. It’s coming from the mall area. Huh.
You still haven’t sold off all the slices of your asset, you were maybe hoping for more upside, and selling can take a while. But those sirens… they’re concerning.
Maybe it’d be a good idea to swap out your asset for another one, or offer those slices at a discount for some higher than expected risk. So you go out and start making phone calls hoping someone else isn’t worried about it. The only people who are less worried are a biker gang you normally wouldn’t do business with, but you figure for a discount they’re happy to deal with the crackheads.
(This was more about securities than recapitalizing, but kinda the idea)
My impression is that commercial loan securitization is a little different.
When you’re talking about residential mortgages, you’re talking about loans of a few hundred thousand, which is kind of too small for capital markets to bother. So the banks bundle them, like you say, and sell them in $1e8-1e10 offerings… Pension fund’s gotta park $100,000,000 somewhere, and that MBS is easier than actually managing 500 separate loans.
When you’re talking about commercial real estate - and especially things as big as data centers - it’s the opposite problem. They need such big loans that only a big bank or even consortium of big banks can get all the capital together, then the big bank turns the loan into a bond offering, so investors can buy them in slices as small as $1e4… That bond may only have one or two loans in it, so it can’t necessarily get broken into risk tranches like the MBS.
This is where my spider senses go off. Are we assuming that these IOUs defaulting are independent events? Even though they’re from 10 crack heads talking about stealing the same generator?
Yeh and they all hang out with each other and bribe the same
policesenators and bulk buy theircrackdreams from the samedealer3 AI companiesYes, probability gets much messier with correlated events, and most models assume independence. You can vary intensity/hazard in counting processes, but really there’s not much you can do at a certain point.
Yes. The banks are there to just be an intermediary for this crap. The part where they unload at a loss was not part of their plan.