Here's Matt Phillips, formerly of the Wall Street Journal and honcho at the Journal's MarketBeat blog, and whom we thought was a lock for the 2010 Bulwer-Lytton Award for:
"Like a rottweiler on a slightly undercooked leg of lamb, MarketBeat refuses to let go of its probe of the depths of Thursday’s Flash Crash, particularly the momentary trades that priced ostensibly healthy companies such as Accenture at one cent....That makes "It was a dark and stormy night" read like Blake in comparison...
Anyhoo, following on the post immediately below*, more on leveraged loan packages.
From the New York Times:
The C.L.O., a cousin of the mortgage-related product that malfunctioned a decade ago, has become one of the hottest investments on Wall Street.
A financial assembly line that went haywire a decade ago and contributed to an economic crisis is gearing up again on Wall Street.
Back then, one of the products the banks churned out — bondlike investments based on thousands of mortgages — proved far riskier than most had understood when it turned out that the borrowers couldn’t pay. The banking system froze, a financial panic ensued, and the country experienced its worst recession in decades.
This time around, a similar kind of investment, called C.L.O.s, are at the heart of the boom. And that’s not the only parallel: The loans are being made to risky borrowers, lending standards are dropping fast, and regulators are easing the rules.
While it isn’t necessarily destined to end in a 2008-style collapse, the situation today is eerily familiar. Even top Federal Reserve policymakers cited the surging growth of this market as a reason to “remain mindful of vulnerabilities” and possible risks to the financial system.
“If there turns out to be an issue, this is where the unfinished business of the post-crisis financial reform efforts is going to be revealed,” said Daniel K. Tarullo, a professor at Harvard Law School and a former oversight governor for bank regulation at the Fed.
Here’s what you should know about one of the busiest lines of business on Wall Street.
A different set of risky borrowers, and slipping standards
The process of issuing loans, packaging them together and carving them into investments has many names: securitization, structured finance, even shadow banking.
The last shadow-banking frenzy on Wall Street centered on home loans, which were repackaged into investments used to build collateralized debt obligations, or C.D.O.s.
Banks pooled millions of mortgages — some of them to borrowers with a shaky ability to repay — to create C.D.O.s. They kept some, and the rest they sold off to a slew of other investors: in-house hedge funds, European banks, large American pension plans and more.
The investments at play now are C.L.O.s, for collateralized loan obligations. But this time, the underlying loans aren’t going to high-risk homeowners. They’re going to high-risk companies.
These C.L.O.s are made up of loans to between 100 and 300 already indebted corporate borrowers. Sears, which filed for bankruptcy this week, was among the companies that took what are called leveraged loans.
Such loans to companies with junk-level credit ratings hit a record of more than $550 billion last year, eclipsing levels in the last years before the financial panic.
Most of the borrowers with junk-level credit ratings are already carrying a debt load. (Other low-rated borrowers might just be small or new.) But demand for C.L.O.s has been so strong that investors aren’t placing as many requirements on the loans being made to these risky borrowers.
Traditionally, such loan contracts would have all sorts of protections, known as covenants, aimed at providing investors an early warning that borrowers were getting in trouble.
These covenants keep debtor companies from acting in ways that put payments to investors at risk. They restrict things like paying out dividends to owners, and put limits on additional borrowing.
Nowadays, the vast majority of leveraged loans contain much weaker protections. So-called covenant lite loans now account for roughly 80 percent of the new leveraged loans on the market.
And when loans are repackaged and sold, most of the money effectively comes from the investors, not the banks....MUCH MORE*Although the NYT article is not time-stamped I'm pretty sure that Alphaville's Colby Smith beat the old pro to the punch with her piece, linked in Next Big Short? "Warnings mount for leveraged-loan market"
Additionally, because she is writing for the Financial Times audience, she comes at the story from a different angle.
Enough about money.
Here's Bulwer-Lytton:
"It was a dark and stormy night; the rain fell in torrents--except at occasional intervals, when it was checked by a violent gust of wind which swept up the streets (for it is in London that our scene lies), rattling along the housetops, and fiercely agitating the scanty flame of the lamps that struggled against the darkness."That's pretty awful eh?--Edward George Bulwer-Lytton, Paul Clifford (1830)
It's genius compared to some of Bill Gross' stuff.
I should dig up the post Izabella Kaminska did on his scribbling; just brutal.
