Insight: A stretched credit cycle, a more savage downturn. (Financial Times)
High finance has never been more sophisticated. Bankers have never been more clever. Yet in the US subprime lending boom, banks fell over themselves to advance 100 per cent loan-to-value mortgages to out-of-pocket deadbeats. According to industry folklore, even an insolvent arsonist was given accommodation.
Lending standards to private equity are collapsing just as risks rise and returns are being competed away. “Cov-lite” loans are the order of the day, meaning that restrictions on a borrower’s interest cover and balance sheet leverage cease to apply.
The alchemists of finance (Economist)
AT LEAST since 1823, when Byron’s Don Juan described “Jew Rothschild, and his fellow Christian Baring” as the “true Lords of Europe”, investment bankers have inspired awe, envy and, rightly or wrongly, a measure of disdain. Exactly 100 years ago the undisputed patriarch of the modern industry, J. Pierpont Morgan, stemmed the Panic of 1907, a financial crisis caused by unregulated trusts (the hedge funds of their day). Acting, in effect, as lender of last resort from his Wall Street office, he was briefly feted before Americans realised the danger of having such power vested in one man. Cartoonists then mercilessly mocked him. After his death in 1913 the Federal Reserve was set up.
How S&P put the triple A into CPDO (Financial Times)
Last summer a team of financial whizzkids at ABN Amro, the investment bank, developed a new debt product that has since taken the markets by storm. Using complex mathematics, the designers had wanted to create an instrument that would pay the same high interest rate as a “junk” bond but be as free from risk as a bank deposit.
The effect of collateralised debt should not be underplayed (Financial Times)
Once upon a time, it was presumed that the actions of central bankers controlled behaviour in the risky lending world. For if central banks jacked up rates, the argument went, the cost of borrowing would rise - making it harder for highly leveraged groups, such as buy-out funds, to snap up deals.
Now, however, this argument is looking a touch quaint. In the last couple of years, Western central banks have indeed been raising rates. Meanwhile, investors have had to contend with minor matters such as surging oil prices, Middle East turmoil, and now subprime woes. Yet, the credit party has continued, seemingly oblivious - triggering a buy-out frenzy.
So could anything else take the punchbowl away?
Stocks Can’t Fall? Check Out REITs’ Retreat (The Street.com)
In late 2006, Sam Zell made history by selling his prized Equity Office Properties to The Blackstone Group. Investors saw this transaction as confirmation of value. By contrast, I viewed the sale by the “smartest man in the room” as a cautionary sign.
LBOs Attack Finance Company Bondholders; SLM Unravels (Bloomberg)
Bondholders were ambushed by last month’s $25 billion takeover of SLM Corp., the student loan company known as Sallie Mae. They had assumed that companies whose profits depend on investment-grade credit ratings couldn’t afford to pile on debt.
