Busted Bonds & Financial Illusions
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MarketWatch is reporting $43 billion in loan deals pulled in past two weeks.
In the past two weeks, another 13 corporate loan or bond deals have been postponed or reduced, representing slightly less than $43 billion, according to new research released Thursday by Baring Asset Management.46 busted deals since June 22 is a lot of busted deals. Instead of being able to pass the trash, companies like Citigroup have already committed to funds the IPOs are stuck with it. Merrill Lynch,Lehman, Bear Stearns, etc all made fortunes passing the CDO trash to pension plans, life insurance companies, and foreign governments.
That lifts the total number of deals pulled since June 22nd to 46, analysts at the firm said. They valued those at more than $60 billion. Last year, no pulled deals were counted by the firm's research staff.
The amount of incomplete cash-financed leveraged buyouts and management-led buyouts sitting on bank balance sheets remains substantial, wrote Toby Nangle, a fixed-income manager at Barings, in a note. "Given their inability to pass this credit risk on to the market, their short-term acquisition finance is increasingly looking like a series of long-term loans," Nangle added.
Flashback June 1 2007
Banks Sell 'Toxic Waste' CDOs to Calpers, Texas Teachers Fund
June 1 (Bloomberg) -- Bear Stearns Cos., the fifth-largest U.S. securities firm, is hawking the riskiest portions of collateralized debt obligations to public pension funds.If they were confused before they should not be now. It's as simple as this:
At a sales presentation of the bank's CDOs to 50 public pension fund managers in a Las Vegas hotel ballroom, Jean Fleischhacker, Bear Stearns senior managing director, tells fund managers they can get a 20 percent annual return from the bottom level of a CDO.
"It has a very high cash yield to it," Fleischhacker says at the March convention. "I think a lot of people are confused about what this product is and how it works."
Chriss Street, treasurer of Orange County, California, the fifth-most-populous county in the U.S., says no public fund should invest in equity tranches. He says fund managers are ignoring their fiduciary responsibilities by placing even 1 percent of pension assets into the riskiest portion of a CDO.
"It's grossly inappropriate to take this level of risk," he says. "Fund managers wanted the high yield, so Wall Street sold it to them. The beauty of Wall Street is they put lipstick on a pig."
- Bear Stearns has lost all credibility.
- Bear Stearns Cos. co-president and co-chief operating officer Warren Spector was fired.
- The firing of top level management is seldom a sign that the problems have been taken care of.
- Anyone buying toxic garbage from Bear Stearns on the promise of 20% returns now regrets it.
- Anyone buying anything Wall Street is pumping is likely to regret it.
Tollowing are excerpts from Hayman Capital Partners on The Greatest “Bait and Switch” of ALL TIME
I recently spent some time with a senior executive in the structured product marketing group (Collateralized Debt Obligations, Collateralized Loan Obligations, Etc.) of one of the largest brokerage firms in the world.Misconstrued Views
This individual proceeded to tell me how and why the Subprime Mezzanine CDO business existed. Subprime Mezzanine CDOs are 10-20X levered vehicles that contain only the BBB and BBB- tranches of Subprime debt. He told me that the “real money” (US insurance companies, pension funds, etc) accounts had stopped purchasing mezzanine tranches of US Subprime debt in late 2003 and that they needed a mechanism that could enable them to “mark up” these loans, package them opaquely, and EXPORT THE NEWLY PACKAGED RISK TO UNWITTING BUYERS IN ASIA AND CENTRAL EUROPE!!!! He told me with a straight face that these CDOs were the only way to get rid of the riskiest tranches of Subprime debt.
Interestingly enough, these buyers (mainland Chinese Banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, UK banks) possess the “excess” pools of liquidity around the globe. These pools are basically derived from two sources: 1) massive trade surpluses with the US in USD, 2) petrodollar recyclers. These two pools of excess capital are US dollar denominated and have had a virtually insatiable demand for US dollar denominated debt…until now. They have had orders on the various desks of Wall St. to buy any US debt rated “AAA” by the rating agencies in the US.
How do BBB and BBB-tranches become AAA? Through the alchemy of Mezzanine-CDOs. With the help of the ratings agencies the Mezzanine CDO managers collect a series of BBB and BBB- tranches and repackage them with a cascading cash waterfall so that the top tiers are paid out first on all the tranches – thus allowing them to be rated AAA. Well, when you lever ONLY mezzanine tranches of Subprime RMBS 10-20X, POOF…you magically have 80% of the structure rated “AAA” by the ratings agencies, despite the underlying collateral being a collection of BBB and BBB- rated assets... This will go down as one of the biggest financial illusions the world has EVER seen.
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Sincerely,
J. Kyle Bass
Managing Partner
A couple of people have posted comments that I have misconstrued the views of Bill Fleckenstein in Fleckenstein (and others) State the Deflation Case . If so, it was not intended. The point is that whether Fleckenstein believes in deflation or not, he sure presented a strong case for it. Furthermore, not knowing whether or his views on deflation in the US had changed or not I posted "Like it or not (and I suspect he might not because he did not use the D-Word itself) Fleckenstein described how and why a Japanese style deflation is headed for the US." That is a statement of fact. Fleckenstein described deflation as did others in the article. He simply chooses not to believe his own arguments, I suspect on grounds that the Fed has an ability and willingness to hyperinflate and that it will work. On that latter point, I do not share his view for reasons I have stated many times.
A Saturday Song
To the tune of Me & Bobby McGee
Busted bonds in Wall Street, waitin' for a pump
This market’s near as faded as my jeans
Goldman thumbed Bernanke down just before the dump
Said act or stocks are only good as beans
Feelin' good was easy, Lord, when Greenspan cut the rates
And feelin' good was good enough for me
Good enough for me and you Ben B
If anyone cares to add verses to this song and/or to completely rewrite the above, please send the lyrics my way. If there are enough submissions I will combine the best of them and post the result.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
