Tuesday, March 24, 2009

CLO's Imploding While Geithner Asks for Expanded Power to Intervene

Collatoralized loan obligations from U.S. and Europe implode the balance sheets of insurance companies, banks and hedge funds. Reuters reported:

Already, holders of the lowest-rated CLO tranches are losing their interest income which is being diverted to pay senior noteholders, in what is viewed as a prelude to a wipeout that will ultimately see them lose their money.

Banks, hedge funds, asset managers and insurance companies are the buyers of CLO tranches, with hedge funds and asset managers typically piling in the riskiest tranches and banks in the safer AAA tranches.

Any damage from CLOs would follow on the back of writedowns by banks of more than $700 billion (476.8 billion pounds) from credit-related losses since the credit crunch began.

The number of CLOs in distress is rising as the credit quality of their portfolios continues to decline. Moody's placed 2,600 tranches of U.S. and European CLO obligations totalling $100 billion on review for possible downgrade on March 4.

Bankers expect 25 percent of European CLOs to be in the vulnerable position of having turned junior fees off by April and the number could rise as high as 95 percent by year-end.

Here's the odd part. CLO's were used to finance private equity buyouts from 2005-2007. While the PEU boys renege on these loans, they ponder partnering with Uncle Sam to buy this very junk from banks. If they repurchase CLO debt of affiliates, they get a tax break, one totalling $25 billion in the Obama stimulus package.

Treasury Chief Tim Geithner asked for authority to save nonbank financial firms. Coincidence or response to the CLO implosion? The world's gone flippy floppy.