Let the Games Begin: Bundled Loans Secured by Depreciating Assets Test the Waters

I posted another article about this last night from Z.H. and it is a good way to determine the froth of a new bubble….

“In 2005 and 2006, CDO’s were being pushed like crack.  I remember asking many of the pushers why I would leverage into credit at historically tight spread levels.  Their stock answer: “Because you can get a AAA rating at a much higher yield!  This thing will never break because it has so much subordination!”  My follow up question: “how do you know the correlations that you are using are right?”

Now I definitely did not know how bad it could get, but I was smart enough to know that you cannot make a (good) apple pie with a bunch of rotten apples.

Fast forward to today: searching for investment income (yield) and capital relief (lower capital requirements/higher asset ratings).

Jump into the news from WSJ:

The consumer-lending joint venture of private-equity firm Fortress Investment Group  and insurer American International Group is planning a rare securitization of subprime personal loans as early as this week, in the latest test of risk appetite for asset-backed bonds, where soaring demand has pushed yields to record lows.

The $604 million issue from consumer lender Springleaf Financial, the former American General Finance,will bundle together about $662 million of loans secured by assets such as cars, boats, furniture and jewelry into ABS, according to a term sheet.

Are you kidding me?  Furniture?  …”

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