Wall Street Is Recycling the 2008 Playbook and Your Pension Is the Target

They Never Actually Stopped

Everybody acts surprised when Wall Street pulls another one. I am not surprised. Not even a little. Because the incentives never changed, the accountability never came, and the taxpayer backstop never went away. So why would they stop?

Ben Hunt at Epsilon Theory put a name to it that I am borrowing permanently: gain of function Wall Street. The same concept as the lab research that makes a virus more deadly, applied to financial products. Take something risky and illiquid, engineer it into something that looks safe, and sell it to every pension fund and insurance company that is legally required to hold investment-grade assets.

Here Is What UBS Is Actually Doing

UBS is proposing a product that bundles stakes in private credit funds into a bond, targeting an A2 rating from Moody’s, backed by an insurance wrapper from Nationwide Mutual. This is being described in the financial press as part of a quote, rapidly evolving realm of fun finance.

Fun finance. I am not making that up.

Here is what this structure actually does:

• Takes illiquid, hard-to-value private assets and repackages them
• Uses insurance wrappers to manufacture an appearance of safety
• Gets rating agencies to stamp an investment-grade label on the product
• Sells the finished product to pension funds and insurers managing your retirement money

This is not innovation. This is the 2008 mortgage crisis script, performed by the same cast with a different costume. Subprime mortgages became mortgage-backed securities became collateralized debt obligations, all rated AAA, all garbage inside.

The Systemic Risk Nobody Wants to Talk About

Regulators are already quietly acknowledging that they may lose visibility on the underlying risks inside these structures. Buyers are concentrated in a small number of firms. When one cracks, correlated downgrades hit simultaneously. Forced selling begins. The contagion moves fast.

And who pays for it? You already know the answer. The bankers who built the product collect their fees and bonuses. The executives who signed off retire comfortably. And the taxpayer gets the bill while retirement accounts take the hit.

The Only Rational Response

I do not touch this stuff. Not for my clients, not under any circumstances, regardless of the short-term returns being dangled in front of people on financial television. Here is how I think about portfolio construction in an environment where Wall Street keeps releasing new variants:

• Own high-quality companies with real earnings and real balance sheets
• Dollar cost average through corrections instead of panic selling
• Build positions that are anti-fragile, meaning they get stronger when chaos hits
• Avoid anything that requires a 40-page prospectus to explain why it is safe

Market corrections are coming. They always come. The gain of function products being built right now will unwind. My job is to make sure that when they do, the people I work with are positioned to survive it and come out stronger on the other side.

The Question You Should Be Asking

If you have a financial advisor, ask them one question: do any of my holdings include private credit funds, structured products, or insurance-wrapped investment vehicles? If the answer is yes, or if they cannot clearly answer the question, you have a problem that needs to be addressed before the next variant hits.