Firms Packaging Unsellable, Toxic Waste Corporate Loans Into “Collateral” In Order to Borrow More Money from the Fed
April 11th, 2008“We Americans were very clever.”
Via: Bloomberg:
Wall Street firms may be bundling high-yield, high-risk corporate loans into securities to use as collateral to borrow from the U.S. government, according to a report by Morgan Stanley analysts.
Securities firms can borrow against collateralized loan obligations at the Federal Reserve’s Primary Dealer Credit Facility, the analysts said. The Fed set up the facility last month, its first extension of credit to non-banks since the Great Depression.
The creation last month of CLOs comprised of loans for private-equity buyouts or other leveraged loans to larger companies totaling $11.4 billion ended “the deep freeze” in the market, and many arose from unusual motives, today’s report said. “At least one” recent CLO was probably done to take advantage of the Fed’s new facility, it said.
“It’s not cheap to finance loans today in the market,” Vishwanath Tirupattur, a Morgan Stanley analyst in New York, said in a telephone interview.
Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, last month created the $2.8 billion Freedom CLO, the largest this year, out of loans that couldn’t be readily sold to investors, such as for buyouts of payment processor First Data Corp. and power producer TXU Corp. JPMorgan Chase & Co., Deutsche Bank AG and Barclays Plc also underwrote CLOs in March, according to data complied by Bloomberg.
