Monday, June 8, 2009

Declining Need to Socialize CDO Losses

May saw prices for collateralized debt obligations (CDO's) improve dramatically. Bloomberg reported:

A “remarkable change” in investor sentiment has doubled the price of some collateralized loan obligation securities in the past month, according to Morgan Stanley analysts.

CLOs are a type of collateralized debt obligation that pool high-yield, high-risk, or junk, loans and slice them into securities of varying risk and return. Pieces graded AA, the third-highest level of investment grade, rose to 47 cents on the dollar from 23 cents in the past month, Morgan Stanley analysts led by Vishwanath Tirupattur wrote in a June 5 report. Securities ranked A have gained 13 cents to 23 cents since the end of last month, the report said.

The top-rated CLO bonds have risen to 77 cents on the dollar from 71 cents in May, the report said.
Improved investor sentiment could be behind Treasury Chief Tim Geithner's and Sheila Bair's predictions that public-private investment partnerships (PPIP) may not be needed. How did the $25 billion tax break for firms buying back debt factor into the equation? President Obama can stimulate the big money boys.

In February, Obama invited Sheila Bair into his office on Air Force One.

"Sheila, come on back. I want to talk to you," Obama told Bair, who was seated in the plane's conference room. He then escorted her into his airborne Oval Office for their first private meeting, where they discussed the government's role in alleviating the worst financial crisis since the 1930s.
Did he and Bair discuss allowing private equity underwriters to buy banks? I don't know, but the rules keep changing in favor of PEU's.