Wall Street has started bundling Donald Trump's past payout pledges into securities, and a change machine in Ohio got there first.
A Toledo laundromat has begun issuing IOUs priced against Donald Trump's promise to pay every American adult $5,000 after a Republican midterm win. Wall Street, meanwhile, has bundled his past payout pledges into tranched securities. A short-seller says it is 2007 with the serial numbers filed off.
The change machine at a laundromat in Toledo, Ohio began dispensing IOUs on Wednesday. Feed it a dollar and it returns a printed slip reading "IOU", payable on a Republican midterm win. The owner priced each slip at fourteen cents. (Watch that number. It has a way of falling.)
The machine is the retail end of a much larger problem. President Trump announced this week that he would pay every American adult $5,000 if Republicans win the midterms. The BBC has counted earlier occasions when he promised Americans money. Wall Street counted them too, and then it did what Wall Street does. It securitised them.
Three desks in Manhattan now offer what traders call Promise-Backed Securities, or PBS. Each pools the president's payout pledges into one instrument, then slices it into tranches, which is finance for "layers that get worse as you go down." The top layer holds the newest promise. The bottom holds the old ones. Nobody has yet found the bottom.
"We are seeing 2007 with the serial numbers filed off," said Gretchen Vole, chief investment officer at Cassandra Capital, a short-only fund that has never once been early. "Back then the collateral was houses that existed. This time the collateral is a sentence." Vole's fund has taken the other side of every tranche. (It has also stockpiled tinned fish, which she declined to discuss.)
Ratings agency Moodier's graded the senior tranche AAA, then added a footnote, then a second footnote explaining the first. Its analysts flagged "a novel default trigger." If Republicans lose, the security pays nothing. If they win, it pays whenever Congress decides, and ABC News reports economists are not thrilled about that part either.
"Back then the collateral was houses that existed. This time the collateral is a sentence."
Watch the dryer
Doomsayers, this reporter included, see the shape of it clearly. A government hands out paper. The paper trades. The paper trades above what the paper is. Then one Wednesday the paper trades for what it is, which is paper. In 1929 they called it a correction. In 2008 they called it a liquidity event. In Toledo they call it "the dryer ate my slip."
"Every time a president promises the public money, the promise becomes a liability on someone's balance sheet," Vole said. "The question is whose. Right now it's the laundromat's." She then had to go, because her fund had just shorted the laundromat.
Laundromat owner Dale Fenwick took a sunnier view. "People love them," he said, gesturing at fourteen customers clutching slips. "A lady bought forty. She's putting a down payment on a Camry." Asked what happens if the slips never pay out, Fenwick paused. "Then I have a lot of very clean dollar bills," he said.
Cassandra Capital's model gives the $5,000 pledge even odds of reaching polling day intact, and worse odds of surviving contact with an appropriations committee. Its model for the laundromat is bleaker still. History doesn't repeat, but it sure is about to rhyme.
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