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

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's Gareth Vaughan.

As always, we welcome your additions in the comments below or via email to And if you're interested in contributing the occasional Top 5 yourself, contact

See all previous Top 5s here.

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.

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'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.'

My question is - where does the earnings capacity come from to pay the additional debt that would allow the average house price to hit $1 million? That would assume a booming economy with low unemployment and most likely wage increases well above CPI - and that would assume that businesses would put staff wage increases above paying down company debt. I just don't see it. If interest rates were still 5-8% sure, no problem. But they're not, they already pretty much zero.

Or bucks being sucked out of stocks, superannuation, other investments and Kiwi's returning home with bucks. All looking for a place to park bucks that is a tangible asset that won't crumble on a whim.

Sure its a possibility, but I'd argue we've already been doing that over the last 10-15 years. I can imagine a time if house prices go even higher than they are, NZ just doesn't look like a very attractive place to live, especially for younger generations (post COVID). Why would you if you could have a better paying job overseas and purchase a cheaper house?

I understand the argument, but the consequences of it aren't good.

2.6% home loan rates, people unable to spend money on international travel, lack of trust in equities, low to zero interest return on term deposits, most people continuing in their jobs, 3 months of forced savings during lock-down, etc. It all points to a housing boom. Where else can the spending go?


most people continuing in their jobs? at full pay? no wage subsidy? Love to see your figures.

Job-seeker numbers up a bit, but unemployment still only 4.x?

This one is the most recent. Notice the CIRP and Jobseeker payment overlaps. "Income support on the rise"

Not exactly a job-market collapse.
"190,600 on 5 June, but the pace of increase has
slowed. Jobseeker numbers fell in the latest data as
some recipients transitioned to the Government’s
COVID-19 Income Relief Payment. Experimental
data from Stats NZ show the number of paid jobs
rose in May, after falling significantly in April"

"The wage subsidy scheme and measures to support
businesses are preventing a more severe fall in
employment and income. To date, the wage subsidy
scheme has paid out almost $12 billion, covering
1.66 million workers (63% of total employment). "

You forgot this bit

"The wage subsidy scheme and measures to support
businesses are preventing a more severe fall in
employment and income. To date, the wage subsidy
scheme has paid out almost $12 billion, covering
1.66 million workers (63% of total employment). "

You forgot this bit


Sure, its a possibility - nobody that I know is looking to upgrade their house or take on more debt at present and that would be a requirement for future house price increases. And 2 out of 3 of my close family members are now out of work since COVID started and living on government support with their kids. So I don't think things are a rosy as what people are making it out to be. I think there could be some serious problems ahead.

We're upgrading our place, by $200k since we figured being stuck at the bottom of the world, may as well be comfortable and enjoy our home. However the $200k spend is on top of first downsizing, and we think prices will at best go flat but probably down a bit for a while. But yes, inclined to agree, wouldn't be at all surprised if there's another mini housing boom.


Yep. He assumes that low interest rates are permanent but flat wages are temporary. I think those two things may in fact be connected...


Locked at the hip.


House prices have long been divorced from average wages so what's stopping it getting more out of whack, especially if investors and speculators are active, there's lots of money floating around and ocr might go negative....

Sure - its a possibility. I think if house prices do go higher, it just means were in for more serious trouble and longer term pain in the future.

The banks would need to be confident that new debt will be able to be serviced though, regardless of interest rate movements, and at present, dropping rates appears to be encouraging people to save more not spend. Further rate drops may further that trend as people will perceive the economy getting worse, not better and needing cash at a future date. As always - I could be wrong, have been wrong, and have been reminded of that so nothing new!

I have plenty of sympathy for your views, and I am not saying prices *will* boom again after moderate falls. I think we will probably see a mini boom but it will be shortlived, then we will have mild increases, until the next economic crisis. But who really knows!

Why sympathy?

'Until the next economic crisis' - this one would appear to only be in its opening act in my view - are you assuming its over?

As per my post:
Recession and moderate falls (2020) then...
Recovery and mini boom (2021) then...
Gentle increases (2022 - ?) until....
Next economic crisis (?).

Surely it's going to require further debasing of the NZ dollar to support such a scenario. I.e. a deliberate transfer of money from wage earners to asset holders.

I cannot see this creating good results for the fabric of NZ society.

What stops it getting more out of whack (hopefully) is yield. You can only live in one house. Rental yields are already pretty low in most cases, very low by historical standards. Rent can't go up unless a) wages are rising or b) demand is going up too, and population growth is taking a breather this year. Local investors do have a die-hard love for property, but even they'll start to question its value if the yield is deeply negative.

It's a good point, but I am not sure how important yield actually is any more, especially if people are buying for capital gain - which I think is common

Rents can fall because the cost of servicing debt has fallen, that seems to elude most comments. Falling rents aren't necessarily a problem.

They become a problem when they don't cover the owner's debt servicing

Local investors do have a die-hard love for property

They're like Bitcoin maximalists

Or c) govt handouts increase..

IO - I think it's inevitable there is a significant rise coming up maybe not boom. QE money , low TD rates, low low mortgage rates, lots of Kiwi's returning home, a managed Pandemic etc.

Inevitable - I like the confidence!

The bottom line is people always need somewhere to live. Shelter is one of life's essentials, like food and water. And they need it everyday, not like a share portfolio, or a super scheme needed decades later.

Yes but that hasn't stopped housing markets from falling significantly in the past.

It also hasn't prevented empty houses, in the thousands, while homelessness has steadily increased.

I think I've been discussing the issues with CLOs for maybe 5 years or more in various financial communities. The contents are correlated with an r value of 1, when they go down they all go down. It's obvious to me that they would become and issue, but for the banks they loaded up on them. I assume they are expecting social welfare in the form of a bailout.

Any idea whether these were/are sold globally to non US banks and pension funds ?

This was the issue with the GFC ~ the poison was placed in every chalice.

They are sold on the market so many large funds are likely to have them on the books the same way large funds had MBS and CDOs.

It's all about the correlation. To be AAA rated, the senior tranche correlation input has to be low. It went to 1 which was the reason the Fed had to start buying corporate bonds. I think this is probably the most dubious activity in capital markets - low doc leveraged loans in over-valued financial sponsor buyouts using pension money and which are then tranched into CLO's. And you wonder why I prefer houses....

Japanese fish farmers, lost billions

This has been talked about for some time now: the next potential financial crisis will come from rural Japanese banks who've been chasing yield from the mountains of cash savings from farmers.

Can we see if our banks have CLOs?

I don't believe that CLOs would be a part of their assets. They should be an investment product only like junk bonds. US banks have a blurred definition where during the GFC some of the investment banks were issued bank licenses or purchased and integrated existing banks.

#3 - what are these 'Office Premises' of which the FT article speaks? Post-Covid, the need for such spaces is shurely well down, as WFH, with its multiple environmental benefits (less commuting, less congestion, less coffee consumption, less stress, less copper, less goods movement, more fibre, more localism, more community, more optimised logistics) takes over?

Fibre at home? In Britain? Are you sure?

Only talking about the Developed World here, Rog...(-;

The US has breached the 50,000 infections in the last day.
V shaped recovery - GONE..
The worst of this virus is over - little to no chance.
It's going to get worse on a lot of different levels - Hell yeah!

A rebranding of that will be needed.

Let me suggest that John Bolton is looking on the bright side of things and suggesting that the status quo can possibly be maintained for some time. He makes a crust from the debt economy so you shouldn't expect any less.

And here's me thinking "What's the former US National Security Advisor got to do with Kiwi property prices?'
I guess Squirrel gets that a lot!

From warmonger to Auckland debt salesman

At least his first name isn't Michael.

He's probably assuming the Reserve Bank will wage war on savers and earners to keep debasing the currency spectacularly.

seems a very safe assumption.

Re: No 5. The white-collars are getting a bit frazzled...not surprising, and it's probably just getting started.

The percentage feeling confident dropped from 41 per cent to 36 per cent with middle-aged New Zealanders (35 to 54 years old), homeowners and higher-income earners ($130k income plus) seeing the biggest hit to their confidence.

A cartoon that actually made me smile. Most embarrassingly childish efforts dished up in MSM these days are cringe makingly gauche.

If house prices and credit growth are correlated then Bolton clearly has a COI

Let’s get this straight:
House prices in Auckland have doubled each decade since mid 1980s. You may want to note that history of NZ did not start in 1985 and stats are so bad that record from say 1950 onwards are not available. Bit like IFAs quoting stock market returns over 20 year period and not longer periods. It is a convenient and oft repeated myth

Not Auckland, but my parents Wellington house was purchased in 1968 for $6,800. It sold in 2017 for $900,000.

Have wages gone up 130x in the same period?

That would make the average wage (say $70,000) / 130 = $538 per year in 1968 terms. Is that about right?

Wouldn’t have a clue. I know they did it on a single income with a concessional employer mortgage loan, in their late 20s. The house was 50 years old when they bought it. Edit - Google suggests the average wage was 2,500 per annum in 1969.

Were interest rates 2% in 1969?

I was told their original loan was fixed for life at 3%. A later loan to do an extension was at 6%. One time loans based on a multiple of salary. Quite common in the day but Douglas and FBT killed that. I suspect the trend to double income and easier credit helped to fuel a rise in prices.

Inflation needs to be deducted form house price "rises"
Often this is not done. In fact, usually

Refs did FA about all the stupid fin acronyms after 2008 and the pile of weapons of fin mass destruction as Buffett called them is now much bigger. And no doubt when it blows or threatens to all the “Government keep off my money” brigade of non interventionists will have their debts socialised again and pay no penalty as bloody usual

Sure housing boom once meant the situation of lots getting built ? Now it just means rising prices and equity to him that hath. And we are all supposed to welcome that as a societal good including its inherent social exclusion? Pathetic avarice

The Atlantic piece is concerning indeed, risk of US bank collapse in a place no-one's looking, amidst 'we're all fine this time, yet eerily similar to last time. Do we know what the AU and NZ banks have in the way of collateralised loan obligations? NZ is one of the few places where ordinary people lose out if there's a bank collapse..

Isn't JP Morgan the parent to BNZ via Deutsche and Nat Australia...


Garner has a point but chooses the wrong angle of attack. Burr appears presumptuously ignorant of the current sentiment in NZ. We achieved elimination but know the great personal cost to do so and are keenly aware of the dire risks posed by incomers from countries that delayed longer than our government and then took softer options. Bleeding heart journos seem to think that because someone was born here (and in many cases have barely set foot in NZ for decades) we ought to fund whatever resources are necessary to accommodate their chosen departure timeline, roll out the welcome mat, tolerate their bitching about trivia such as having to take a bus ride on arrival, all with gushing acceptance and servile kindness. Hundreds exited quarantine and went incommunicado which demonstrates their entitled don't give a stuff attitude. That 70 selfish pricks point blank refused to be tested is contemptible. So Lloyd, Boo Hoo really. We'll do our best but there are limits on how many we can take each week and it takes a pretty special kind of arrogance to dismiss kiwi anxiety about plague carrying aircraft regularly arriving here.

Genuine kiwis returning after being trapped on holiday etc no problems. But the fair weather kiwis who all of a sudden want to live here again can fork out some of the cost.

Agreed. Those choosing a foreign tax jurisdiction clearly have the money to pay.

I remember getting roasted a few months ago for suggesting that some Kiwis just see NZ as the world's most generous passport office and that having a huge portion of our population overseas and not contributing to the state would bite us in the arse if things went wrong globally. Well, here we are.

I hope Interest will publish John Bolton's full article in a separate "opinion" piece

He has some OK points, but I think he's too optimistic on the extent of the next upswing. I think it will be much milder.