CDO's, Derivatives & Pension Funds
We've nattered many a time on this subject, not to mention the similarities between today's "low risk" yield chasing and Orange County's 1994 BK.
Excellent coverage in Flecks latest and from Bloomberg.... excerpts...
Chriss Street, treasurer of Orange County, Calif. : "It's grossly inappropriate to take this level of risk. 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. . . .
Very few pension plans could meet their fiduciary duty by buying portfolios of subprime loans. They (Wall Street) spiked up the yield, but that yield means nothing when the defaults start to mount, as we know they will. The funds will take big losses."
Worldwide sales of CDOs -- which are packages of securities backed by bonds, mortgages and other loans -- have soared since 2003, reaching $503 billion last year, a fivefold increase in three years.
Bankers call the bottom sections of a CDO, the ones most vulnerable to losses from bad debt, the equity tranches.
They also refer to them as toxic waste because as more borrowers default on loans, these investments would be the first to take losses. The investments could be wiped out.
Edward Altman, director of the Fixed Income and Credit Markets program at New York University's Salomon Center for the Study of Financial Institutions:
"I have trouble understanding public pension funds delving into equity tranches, unless they know something the market doesn't know...
That's obviously a very risky play. If there's a meltdown, which I expect, it will hit those tranches first."
Fleck: "a variation of this theme is going on in the funding of all the junk debt being created for the current LBO craze.
Ultimately, the debt market is going to gag. That will certainly end the equity party (though other things could end it, as well), and this LBO mania will be over."
Excellent coverage in Flecks latest and from Bloomberg.... excerpts...
Chriss Street, treasurer of Orange County, Calif. : "It's grossly inappropriate to take this level of risk. 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. . . .
Very few pension plans could meet their fiduciary duty by buying portfolios of subprime loans. They (Wall Street) spiked up the yield, but that yield means nothing when the defaults start to mount, as we know they will. The funds will take big losses."
Worldwide sales of CDOs -- which are packages of securities backed by bonds, mortgages and other loans -- have soared since 2003, reaching $503 billion last year, a fivefold increase in three years.
Bankers call the bottom sections of a CDO, the ones most vulnerable to losses from bad debt, the equity tranches.
They also refer to them as toxic waste because as more borrowers default on loans, these investments would be the first to take losses. The investments could be wiped out.
Edward Altman, director of the Fixed Income and Credit Markets program at New York University's Salomon Center for the Study of Financial Institutions:
"I have trouble understanding public pension funds delving into equity tranches, unless they know something the market doesn't know...
That's obviously a very risky play. If there's a meltdown, which I expect, it will hit those tranches first."
Fleck: "a variation of this theme is going on in the funding of all the junk debt being created for the current LBO craze.
Ultimately, the debt market is going to gag. That will certainly end the equity party (though other things could end it, as well), and this LBO mania will be over."
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