The Wall Street Journal [subscription required] reports that $4.26 billion in funds is leaving bank-loan mutual funds -- marking the 18th straight week in this cash exodus. This means that any hope for a revival in the private equity-driven M&A market that fueled stocks through the first half of 2007 is in even deeper trouble than many thought.
In so doing, the spreading credit contagion is forcing me to learn yet another acronym resulting from the securitization industry. This time, the new acronym is Collateralized Loan Obligations (CLOs), which are bundles of so-called leveraged loans -- themselves high-risk corporate loans used for leveraged buyouts whose average price fell to a record low of 86.28 cents on the dollar at the end of last week. There are an estimated $300 billion worth of CLOs on the market.
Why should you care? Well, over the weekend, the G7 -- a meeting of seven leading countries' finance ministers -- decided that the biggest issue in the global capital markets was the $400 billion in losses that the world's banks will need to take to clear their books of Collateralized Debt Obligations (CDOs) built from subprime mortgages. Along with that little problem is the need to recapitalize those banks once they take their hits.
With CLOs declining in value, banks are exposed to further unanticipated write-downs. Take Citigroup Inc. (NYSE: C), which structured nine of the 24 CLOs Fitch downgraded, amounting to about $4.5 billion of loans.
And the CLOs are not alone. There are problems with student loans and municipal bonds due to fear of downgrades among the insurance companies that are supposedly insuring their investors against non-payment.
There's a simple principle at work here -- if it seems too complicated to understand, hold onto your wallet. All the PhDs in the world can't protect you when investors wake up and realize that nobody wants to buy the financial rocket ships they designed as they burn up during reentry into the atmosphere of economic reality.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares.
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Reader Comments (Page 1 of 1)
2-11-2008 @ 9:47AM
jrullman said...
"He owns citigroup shares!!?" (Must be short against the box.)