The carries are turning negative in a lot of areas.
As much as $64 billion worth of leveraged buyout finance has been withdrawn in the last month. Serious speculators and investors are reluctant to take up more debt; they’ve seen what has been happening to the debt they have. Suddenly, buyers want to know what those fancy financial sausage derivatives are derived from. They want to know what the collateral is really worth…and how debtors are going to be able to make their payments. All up and down the capital structure, they’re asking questions.
“Rates rising on jumbo loans,” says the WSJ . “No Money Down Disappearing as Mortgage Option,” reports the Washington Post.
When the going was good, you could sell a mortgage or an LBO finance deal – no questions asked. The question marks only appear after something goes wrong. And then, suddenly, there can be a lot of them.
And a lot of the questions are posed by lawyers. “Are you telling us that you didn’t know what was in that CDO when you sold it to your customer?” “Do you mean you had no prior warning of any sort that there was any trouble with your hedge fund portfolio when you accepted my client’s check?” “Did you really think you fulfilled the legal requirement of full disclosure by putting the rate adjustment explanation in my client’s mortgage contract in Greek? Did you think my client reads Greek…ancient Greek at that?” “Could you explain to the court exactly how an ‘enhanced leverage credit fund’ works?”
There are a lot more trial lawyers in America than there were during the last major credit contraction. Our guess is that many of them are boning up right now – on bankruptcies, derivatives, workouts… “What’s a ‘CDO tranche’? they will want to know.
for The Daily Reckoning Australia