There are a number of blogs and portals I visit on a regular basis that offer valuable insights about what is going on in the belly of the Wall Street beast. One of my favorites is Winter (Economic & Market) Watch, which features commentary by Russ Winter, a knowledgeable financial writer with a unique and entertaining style that makes for compelling reading. Aside from his own perspectives and research, he also serves up useful bits and pieces from other websites and a network of informed sources. In today's post, "Money for Nothing and the Chicks for Free," Russ makes note of two brief reports that lend further credence -- as if that was necessary -- to the notion that today's financial world has evolved into little more than precarious piles of play money and wobbly houses of cards.
I continue to be outraged by the whole Milky Way and credit agencies scam. At risk of sounding like a broken record, a poster at Prudent Bear spotted this.
A friend of mine works as a Portfolio Manager for a $2.2b CDO pool of subprime loans. I spoke to him today for an hour. Asked how he is doing, he says “nothing”. I ask what do you mean nothing, I hear all these stories about CDO’s and losses (Bear Stearns for example), he shrugs and says nothing will happen until the Rating agencies do something. Asked about losses, he says they are there but he doesn’t have to mark to market his portfolio until someone discovers it, or the Rating agencies force his hand. So his plan is to lie low and collect the management fees and pretend as if there are no losses. Asked about management fees, he laughs and says it’s a low 50 bips. On $2.2b, that’s a cool $10m yearly which he and his four colleagues have to split up at the end of the year. He says he has the best job in the world and says there is really no work to do every day. Just wait and hope that the rating agencies don’t downgrade his CDO pool and voila, at the end of the year, he and his partners can split the $10m spoils (minus the expenses for one Park Avenue office, and a secretary). I am amazed that no body (regulators, investors, the public) hasn’t beseeched the Rating agencies to review all the Subprime CDO’s by now given the headlines and the incredible losses hidden there. This is a SCAM and somebody needs to stop it.”
Wiley Coyote deal making and risk taking:
The fees for arranging loans are as alluring for the commercial banks as they were for subprime lenders. “It’s like crack cocaine for them,” says the unnamed private equity partner. In LBO deals, “the banks don’t care any more about the [quality of] credit. As long as they can sell it all, they’re fine.
Why do bond investors put up with this? “They don’t really have much choice…..if you’re managing a high-yield bond fund, there’s really not an option of going to 25 per cent cash. So you have to invest in the best deals that you can find. And because there’s so much money out there, the issuers can say, ‘You want to argue about covenants? The deal’s oversubscribed 3 to 1. See you on the next one”…..
If that strategy explodes in their faces because they end up holding some worthless junk debt, so be it. For as long as it lasts, it’s an easy route to profits. Hedge funds get into trouble and are forced to close shop all the time, but no one ever asks them to return their fees. “Why would you not just take the highest possible risk with other people’s money? If there’s literally no downside, it’s the rational thing for you to do…
Click here to read the rest.
Comments