The Shell Game?

Business Cycle Watch:  So Citi is talking to KKR about putting together a fund to buy LBO loans.  In other words, lend KKR [4:1?] leverage so they can afford to pay an inflated price for the debt that sits on Citi’s books.  Take a smaller-than-expected loss on the LBO loans and trade it for a par loan to the new vehicle.  I quote:

However, one issue that some investors and regulators are watching carefully is whether any sales of loans will be "true" transactions, at genuine market prices – or will be conducted at artificial rates, as part of a bigger commercial transaction, to flatter bank balance sheets.

Another issue is whether the banks will be tempted to create new off-balance sheet vehicles to hold troubled assets. One banker denied the new special purpose funds could be considered off-balance sheet vehicles. "This is not an off-balance sheet technique. It is about raising a fund – something we do all the time – to buy these assets definitively…"

It’ll work as long as the First Data deal et al work out ok.  In the end, the "liquidity" that everyone has talked about is still in the market (our capital account surplus from abroad, aka "the savings glut"), its just that one of its prime transmission mechanisms, the CLO market, is temporarily shut down.  Since the capital account surplus vastly exceeds our governement deficit, the money still needs to find a home.

It should be noted that the trade deficit, and with it the capital account surplus, is shrinking.  If it closes, so does the liquidity window.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.