“To free their books of the estimated $1,000bn (that’s $1 Trillion) of sub-prime assets and $340bn of leveraged loans banks have been left carrying since the credit markets shut down last year, lenders are offering to sell these damaged assets cut-price and – crucially – are willing to lend investors the money to buy them. In other words, the banks are providing new debt for the old debt they no longer want.
“At first glance, as with the investment trusts, the arrangement seems little more than trickery – recycling a bank’s own funds back into its own assets. As one senior industry expert described it: “It is like walking through a hall of mirrors in a fairground. There are far fewer people who really understand it than profess to understand it. Even the central bankers don’t know where all the risk is ending up.” [Telegraph]
I had to read that first paragraph several times until it finally sank in. Banks stuck with CDO’s are loaning money to PE firms and hedgies to take these declining assets off their hands- at a considerable discount from par. So the solution to our debt ‘problem’ (not everyone sees this as a problem, as the Fed Res’ recent actions endorse this concept whole-heartedly) is MORE DEBT apparently. And, when they take them off the books, the banks can also book that sale as profit. The mind bends.
It’s one big circle jerk, I tell ye.
1. “The rule, adopted last year, was intended to expand the ‘mark-to- market’ accounting that banks use to record profits or losses on trading assets, allows them to report gains when market prices for their liabilities fall.” [Market Ticker]
“Bankers require an abundant supply of debtors.” -Paco Bell