Monday, August 24, 2009

Meet the New Bubble, the Old Bubble?

Remember me? Wall Street repackages debt for sale
(8/24/09 AP via Yahoo Finance)

"WASHINGTON (AP) -- Wall Street may have discovered a way out from under the bad debt and risky mortgages that have clogged the financial markets. The would-be solution probably sounds familiar: It's a lot like what got banks in trouble in the first place.

"In recent months investment banks have been repackaging old mortgage securities and offering to sell them as new products, a plan that's nearly identical to the complicated investment packages at the heart of the market's collapse."

"In recent months, banks have been tiptoeing toward a possible solution, one in which the really good bonds get bundled with some not-quite-so-good bonds. Banks sweeten the deal for investors and, voila, the newly repackaged bonds receive AAA ratings, a stamp of approval that means they're the safest investment you can buy.

""You've now taken what was an A-rated security and made it eligible for AAA treatment," said Richard Reilly, a partner with White & Case in New York.

"As for the bottom-of-the-barrel bonds that are left over, those are getting sold off for pennies on the dollar to investors and hedge funds willing to take big risk for the chance of a big reward.

[Arizona State University economics professor Herbert] "Kaufman said he's optimistic about the recent string of deals because, unlike during the real estate boom, investors in these new bonds know what they're buying.

"The sweetener at the heart of the deal is a guarantee: Investors who buy into the really risky pool agree to also take some of the risk away from those who buy into the safer pool. The safe investors get paid first. The risk-taking investors lose money first.

""We're back to financial engineering, absolutely," he said. "But I think it's being done at least differently than it was before the meltdown."

""There's no voodoo going on here. It's just math," said Sue Allon, chief executive of Allonhill, which helps investors analyze such hard-to-price investments.

"Financial gurus call it a "resecuritization of real estate mortgage investment conduits." On Wall Street, it goes by the acronym Re-Remic (it rhymes with epidemic)."

Soooo... What's the difference this time around? The previoius round of securitization that ended up in disaster also had the "guarantee" that the article talks about - the safe investors (AAA tranche) get paid first, the risk-taking investors lose money first.

"It's just math" - that's what people said the first time around.

This time it's different because they are repackaging the already packaged "hard-to-price" assets, they say. But the concept is the same. Instead of raw inputs (mortgages) bundled for the first time into a security, they are simply treating these securities thus created as raw inputs for the higher-order security.

The only difference I can tell is that "investors in these new bonds know what they are buying". I sure hope so, and I hope they won't turn to the government when those bonds blow up in their faces.

As long as they (bankers and investors) don't ask for the government bailout in case of another disaster, I'm for the free-market solution.

Another article from Wall Street Journal says leveraged loans are coming back: "Leveraged P&G Deal Has Banks Jumping In" (8/24/09 Wall Street Journal)

"Specialty drug maker Warner Chilcott Ltd. is expected to announce as early as Monday the acquisition of Procter & Gamble Co.'s prescription-drug business for more than $3 billion, say people familiar with the matter, a sign that the market for loans on more highly levered deals may be loosening.

"Six banks, led by J.P. Morgan Chase & Co. and Bank of America Corp. and including Credit Suisse Group AG, Citigroup Inc., Barclays PLC and Morgan Stanley, are expected to put up as much as $4 billion in financing for the transaction. Roughly $3 billion will go toward the acquisition, with the remainder refinancing $1 billion in existing Warner Chilcott debt.

"This would be the fourth-largest "leveraged loan" of 2009 in the U.S. and the largest globally for an acquisition, according to data provided by Dealogic. The last leveraged loan of this size for a deal in the U.S. was in April 2008, when Mars Inc. announced its planned purchase of Wrigley.

"A leveraged loan is typically defined as a loan made to a borrower with a credit rating below investment-grade or that already carries a good amount of debt."

I have to give it to these bankers. They got burned badly, just recently, and they are back doing the same things that caused the injury. I almost wish the other sectors of the economy were just as foolhardy and reckless, or I should say risk-taking.


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