American Consequences - September 2020

exorbitant costs, and exploring risk-reducing transactions that would ensure the survival of their firms but erode economics as sales were made at distressed pricing. But today, they are visiting Washington, D.C. to plead for bailouts of industries where they are imprudently exposed... and for support of financial instruments such as collateralized loan obligations (“CLOs”). These leveraged financial instruments were known to be exposed to “tail outcomes” like, say, a pandemic... but paid well in times of plenty. And because of unprecedented support from the government, advocating for bailout dollars is time well spent. However, the benefit may be short lived, as bailouts do not solve long-term economic issues. Instead, they frequently forestall the inevitable . So perhaps those firms with less discipline may yet find themselves reliving the past as bad industry bets and investment discipline come home to roost. Fortunately for stakeholders, our firm belongs in the first camp. Our prospects for survival are well-measured and calibrated, and we have an unwavering focus on the medium- and longer-term outcomes. So let’s examine the drivers that will define the shape of the distribution of potential outcomes in the future. While the number of potential drivers is virtually infinite, for the benefit of simplicity and brevity, I have attempted to confine them to four.

Many financial institutions and CROs spent the post-2008 decade building strength and resilience in our firms through careful analysis of risks taken and robust stress- testing regimens – perhaps even including a pandemic scenario built off the Spanish flu of 1918. For them, solvency and independence are assured, leading to a measured response with the goal of optimizing long-term economics. Each of these possible paths forward is reliant upon specific economic and policy outcomes as we move through the

post-COVID decade and beyond. Today, how do we think about the

possibilities for paths forward? What are the implications for policy, for the economy, and for fiscal sustainability? Record unemployment? A COVID-19 vaccine... Or not? Federal deficits and debt? World appetite for the U.S. dollar remaining the reserve currency? Societal evolution or revolution? The erosion of capitalism through the removal of failure as an outcome? None of these are easy questions. And many of the potential answers can be unnerving. But ultimately, those of us who were prepared are playing from a position of strength. On the other hand... For those who spent the years leading up to 2020 seeking to arbitrage regulatory capital constructs to effectively maximize risks taken per dollar of capital and maximize earnings, it’s a much different story... In crises past, these unfortunate souls would have been negotiating with regulators and ratings agencies for leniency, raising capital at

American Consequences


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