Financial innovation, you say?
July 9, 2009 8:36 AM   Subscribe

Madness? This is Bank Loans!
posted by NiteMayr at 8:38 AM on July 9, 2009 [2 favorites]

Sweet. I've been a fan of theirs since seeing "Our House" in heavy rotation on MTV. Of course, they'll definitely get different results now, as MTV no longer plays videos.
posted by scrowdid at 8:44 AM on July 9, 2009 [13 favorites]

One step beyond.
posted by Dr-Baa at 8:44 AM on July 9, 2009 [5 favorites]

The strategy is increasingly being used for commercial mortgage debt. Standard & Poor’s said on June 26 that it may lower the rankings on $235.2 billion of bonds backed by loans on properties such as office buildings and shopping malls.

Banks have issued about $2 billion of the debt in the last three weeks, according to Barclays Capital. That compares with $5.8 billion of similar offerings in all of 2008, Credit Suisse Group data show.

“Somebody does something and it seems to make magic, and the other guy says ‘Hey, let’s do that, too,’” Raynes said.

it's not insanity.... it's 'magic'!
posted by geos at 8:45 AM on July 9, 2009

Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News.

"baa, baa, black sheep, have you any wool?"
posted by pyramid termite at 8:49 AM on July 9, 2009

I like The Specials.
posted by Navelgazer at 8:50 AM on July 9, 2009 [1 favorite]

Hey you, don't invest there, invest here!
This is the heavy heavy security sound
The nutsiest security around
So if you've been reading all the news
And those details are all starting to fuse
Well listen buster
You'd better ignore pesky historic trends
(and invite your neighbors and friends)
To the rockin'est, rock-steady investments in Madness
One step beyond!
posted by filthy light thief at 8:59 AM on July 9, 2009 [19 favorites]

So long as there are people who are given the power and resources to do this sort of thing without repercussions serious enough to discourage it, this will be the business model. Screw everyone else as much as possible and try to bail before things fall out.

The last time the economy went into a depression, bankers and investors hurled themselves from the top of tall buildings. Good times, good times.
posted by Saydur at 9:05 AM on July 9, 2009 [2 favorites]

posted by HabeasCorpus at 9:08 AM on July 9, 2009

The recovery is here. Million dollar townhomes for everyone!
posted by dortmunder at 9:11 AM on July 9, 2009

OK. Here's what I don't get about the CDO collapse. These debt obligations, they're collateralized, right? So they can only collapse so far, since in the end, there's some collateral backing them up. So they can never be completely worthless, and once the real estate bubble is deflated, they bottom out at a market value. Or am I missing something?
posted by mr_roboto at 9:14 AM on July 9, 2009

We're doomed.
posted by fleetmouse at 9:17 AM on July 9, 2009

mr_robo: Well, the simplest answer is no one wants the CDO's, so they are worthless without buyers. The other problem is with many CDO's it is difficult to track down the collateralized asset. Everything was thrown together and then divided up so many times the "collateral" in question is very nearly an abstraction. And then, even if you do find the foreclosed home that backs 3.4% (figure totally made up) of your CDO, there is no guarantee anyone wants to buy the house, rendering it worthless as well.
posted by elwoodwiles at 9:24 AM on July 9, 2009

Although to be fair, after reading, this looks like a CLO for corporate loans. If the loans they are slicing up and and repackaging are high quality, big cap corporate loans, then it might be a reasonable way to allocute risk?

The sketchy part is that they are somehow turning low-rated products into AAA rated ones (the article isn't clear on how they are doing this; redistributing lower risk loans into a good tranche, and keeping the poor performance one's in a lower rated tranche?).

I don't have a problem with CLO's, generally. Corporations need huuuuuge loans, and I think it's a good idea to carve out pieces of it to distribute the risk to those who want it. It went horribly wrong last time when bankers took a shitty product like an adjustable rate mortgage, and packaged it with gold plating and a ribbon. A CLO can be good if it's underlying assets are solid. Otherwise you're just building a palace on thin air.

From the few details, I'm not sure what the underlying assets are.
posted by HabeasCorpus at 9:24 AM on July 9, 2009

Elwoodwiles, I totally agree that a CDO can make it difficult or impossible to track down the collateralized asset. But it's easier for a CLO because when you make a giant corporate loan, you know exactly what your collateral is and where it is located.

With residential mortgages, you have to bundle up a ridiculous number to reach size a hedge fund or bank will notice. Thats where the confusion and abstraction comes in. With a big corporate loan though, you're just taking a chunk of the larger loan and selling it, so it's clear who owns what.
posted by HabeasCorpus at 9:30 AM on July 9, 2009

Is this the thread where I can make my "I'd never be in a band with Suggs - that'd just be Madness" joke?
posted by Jofus at 9:32 AM on July 9, 2009

They should store all their money in their "Baggy Trousers". After all it's safer than storing it in a bank.
posted by ob at 9:33 AM on July 9, 2009

therefore allowing those people who have AAA written on their forehead to buy

regulator fail

AAA = percieved credit quality

AAA CDO = our excel spreadsheet says
posted by fistynuts at 9:35 AM on July 9, 2009 [1 favorite]


From the few details, I'm not sure what the underlying assets are.

That right there always struck me as THE question that people should have been demanding an answer to with CDO's based on mortgages. The very process of constructing the modern crap-CDO is like a one-way hash in a sense; the amount of obfuscation of the underlying assets is unbelievable. I would really like to see a detailed deconstruction of a REAL mortage CDO with full explanation of what assets are involved.

"For Mr. Smith's loan on his house in Tuscon, the principal payments are going here, the interest payments are going here, this was placed into the best tranche, this was placed in the worst...... yada yada a banker in Belgium is screaming in pain."

But, when everyone else is making the magic happen, everyone will point fingers at the person not joining in and accuse them of being irresponsible because they're not getting the return that they could be. Sigh.
posted by Skrubly at 9:44 AM on July 9, 2009

I refuse to even read the article since I feel shafted in not getting something relating to the nutty boys. I figured that since they have a new album (which is fantastic, by the way) this had something to do with them. Way bummed. So bummed I need to throw on a little Madness.
posted by Slack-a-gogo at 9:49 AM on July 9, 2009

> The sketchy part is that they are somehow turning low-rated products into AAA rated ones

The AAA rating comes from Reviews For A Dollar. It's a new line of business for them, they only used to do paperback book blurbs.
posted by jfuller at 9:55 AM on July 9, 2009

Madness is doing the exact same thing over and over again and expecting different results.

Innovation is refining and improving an idea until it works.
posted by Nelson at 9:57 AM on July 9, 2009

Innovation is refining and improving an idea until it works.

Innovation is refining and improving a hook until the fish bites.

The madness is the biting of hooks over and over again. Ooh, shiny.
posted by Devils Rancher at 10:14 AM on July 9, 2009

We left the pyramid standing, and just built it a little higher with some plaster and chicken wire.
posted by RobotVoodooPower at 10:15 AM on July 9, 2009

Dogs and cats swapping their default credit! Mass hysteria! Vampires have GUIDs now! Mutant, come hope us!
posted by goodnewsfortheinsane at 10:57 AM on July 9, 2009 [1 favorite]

Why is nobody directing their vitriol at the institutions who only buy AAA-rated securities?

You can't get money for nothing. The only way to get higher returns is by accepting risk. But people aren't happy with that. So they say, "we will only buy AAA-rated securities! That way we will have no risk!" But they still demand higher return. Clearly, if you want 0 risk, shouldn't you just stick your money in TIPS? And as long as you are fine with more than 0 risk, why do you care that everything's all AAA? That just encourages people to game the system. Instead, it's time to think for a change and encourage the creation of a balanced portfolio that combines some amount of growth and income with more risk-averse properties.

Some large part of this whole structured instrument clusterfuck is built on people trying to find a substitute for understanding what they own.
posted by goingonit at 12:00 PM on July 9, 2009

But institutions are legally obligated to purchase only instruments rated at or above a certain minimum level; therefore, nobody ever rates anything below that level.
posted by Rat Spatula at 12:19 PM on July 9, 2009

Didn't these guys learn their lesson last time they crashed the global economy? I guess not. Time for the little guy to get screwed again...
posted by spitefulcrow at 12:36 PM on July 9, 2009

The new version of old, failed financial instruments is like "Baggy Trousers" compared to "Blue Minty Gel": same music, new lyrics.

Oh what fun we had
But, did it really turn out bad
All I learnt at school
Was how to bend not break the rules
Oh what fun we had
But at the time it seemed so bad
Trying different ways
To make a difference to the days.

posted by iviken at 1:59 PM on July 9, 2009

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