“It’s a creative way for banks to get liquidity from assets they don’t want to sell at fire sale prices,” said one industry exec. Others called it “brilliant.”
Creative? Brilliant? The “C” word, as in “creative financing,” is what got us into trouble in the first place; it’s often another way of saying, “We’ve figured out yet another way to help you afford what you can’t.”
As for brilliant, one former head of asset-backed trading at a few big banks (whose name is being withheld to protect the innocent) says:
I think calling it “brilliant” is about the most jaded comment I have seen through this entire deleveraging fiasco. That’s like calling it “genius” for a teenager to have his Dad bail him out of jail after a drunk driving arrest by using a bail bondsman who only takes a 10% security deposit.It used to be that banks were required to consolidate 100% of an issue on the balance sheet even if they held only a small “B” or first loss note. The rationale was that if you held the risk of the pool, even only, say $15 million of a $200 million issue, you had to show the entire balance as assets, because you still held the effective VaR (value at risk) of all of the loans, as nothing changed except your maximum loss, not your maximum probable loss (which is effectively the basis fo all bank risk management).
My point is that in a real world, if Lehman still holds the majority of the risk on balance sheet and merely has a loan against the balance, it doesn’t exactly warm the cockles to think they have somehow turned it into “cash (they) could use to finance its business.”
Like I said — dead end economic policy arbitrage. It’s actually kind of sickening. I wonder if the Fed would like to give me a non-recourse loan so I could go “finance my business” down in Atlantic City at the roulette table. I have a foolproof stochastic VaR model that predicts nothing but red numbers for a long time!
Of course, if it doesn’t go as planned, they can always blame it on the short-sellers.
This article has 9 comments:
Last year at this time LEH could pull off this type of deal, but even with Fed backing they will find the Freedom CDO only worth what the market thinks the underlying securities are worth.
Also, I hope you are well paid for putting up with Dennis Knelle on CNBC, what a pumper!
Last year at this time LEH could pull off this type of deal, but even with Fed backing they will find the Freedom CDO only worth what the market thinks the underlying securities are worth.
Also, I hope you are well paid for putting up with Dennis Knelle on CNBC, what a pumper!
They are facing the challenge of many generations -- and with them the entire US industrial fabric, our currency and our economy.
Yes, they should have been a lot more prudent with leverage and risk management. But, no, sitting on the sidelines and throwing rocks at them is not the solution.
If Lehman retains the first loss piece of this garbage, that means that the holder of Freedom has counterparty risk to LEH right? So, buyer of Freedom steps up and buys CDS insurance on LEH.
Fast forward a month or two and LEH goes into a rumored solvency crisis...... the FED has no choice now but continue chasing its tail trying to and protect LEH by allowing for more toxic swaps. On the other hand, if LEH goes down (it won't be permitted to) then Freedom buyer now holds garbage without anyone taking the first loss position (ok, yes, he's in line with all other creditors). Sure he's got CDS protection from someone on LEH, but are they good for it?
What if Freedom buyer levers up this stuff because it is AAA and then LEH goes down? Suddenly margin calls will be made and hedgefund buyer must sell at any price to get out of the trade.
Again, IF EVERYTHING GOES GREAT, EVERYTHING WILL GO GREAT! Unfortunately, we don't know where the next problem will come from, we can just be pretty certain they'll be another problem that will impact others.
Sound familiar? Oh yeah, it's the same song, second verse.
The CRA (Credit rating agencies) are so brutal and complicit in this! Everyone in this mess is simply grasping at straws hoping that everyone will go along with the party.
Herb, I enjoy your stuff because you actually question the bull that is being shoveled around.