Context is a harsh critic. To think that a month ago, inspired by this year’s award-winning film , I was perilously close to writing a satire about two gnarly CLO managers fighting homoerotically for control of some barnacled deals and throwing sailors’ curses at each other. How simple and carefree those times now seem. In March I had to self-isolate in the secret Welshcake bunker under the mountains near Beddgelert. But blast my absent-mindedness, I forgot to buy toilet paper. Needs must when the Devil comes to call. Boris Johnson’s has gone and I’m onto Adam Smith’s . The seriousness of this pandemic makes it feel insensitive even to analyse a structured credit meltdown when millions of lives are at stake. But such is my small piece of ivory.

Government policy affects everyone

Today’s crisis has important differences from the last, especially in its causes and its direct effect on people. But again financial and real-world pain will be affected by government policy. Historians will link the severity of measures that governments eventually put in place to their speed and pragmatism in dealing with the outbreak in the first place. Is it possible that some could have settled for short, sharp economic shocks, instead of an indeterminate period of uncertainty? Record financial bailouts are the result — and neither companies nor populations can be blamed. This gives some solace for both and raises the prospect of new mechanisms being trialled, such as helicopter money. But it raises the ceiling for systemic risk. There are also troubling similarities with 2008. Like then, speaking of good credits becomes akin to speaking of good vehicles in a motorway traffic jam. What use are powerful engines if they run out of fuel? The bigger the impasse grows, the longer traffic will take to get moving again.

Everything is uncertain

Until new covid-19 cases in Italy stop increasing, no-one knows how long the battle with the virus will be in other countries. No-one can plan anything. Unfortunately, this creates as much desperation in financial markets to sell assets and cut liquidity lines as the general population has in buying pasta. has given many column inches to defending the reputation of the CLO market — and rightly so. But this is a massive test. CDOs of ABS were all-out rotten, but they failed because their assets were the same, from one jurisdiction, with a common underlying trigger. Corporate risk was never like this — yet covid-19 could prove a leveller of geographies, sectors and market access. If margin calls, warehouse unwinds and repo line closures follow, there may come a tipping point. On the plus side, if the CLO market survives this, it must be invincible. Which brings us to CDS. Miscast as the villains of the 2008 crisis, CDS may prove to be the unsung heroes of 2020. These survivors of 2008 have bequeathed many valuable signals to the credit market this year. They moved faster than cash in the initial sell-off, warning bond and loan holders of what they now face in a deathly secondary market. Geographical exposures and supply chains were delineated. CDS curves measured the horizon of the crisis far better than bonds, where liquid trading points are few. CDS index tranches expressed the transition from idiosyncratic risk to something more systemic. And financial and sovereign CDS will guide us through systemic elevation. When this crisis ends, regulators will have a tough job deciding who and what to blame. Maybe corporate CEOs shouldn’t have sold so much debt to buy back stock. Maybe central banks shouldn’t have backstopped this activity. Maybe governments could have dissuaded them both by promoting growth. But after this winter of discontent, regulators might view CDS differently.