Wednesday, May 20, 2009

Geithner Asks for Greater Wind Down Authority as European CLO's Implode

Treasury Secretary Tim Geithner testified before the Senate Banking Committee on greater wind down authority for systemically important financial institutions. While Geithner spoke, European collatoralized loan obligations sat on the implosion precipice. Bloomberg reported:

About 40 percent of collateralized loan obligation funds in Europe are failing tests that may trigger immediate debt repayments to senior lenders and cut off interest owed to junior investors, according to Fitch Ratings.

Failures of over-collateralization ratios could cause some CLOs to default by the end of next year, Fitch said in a separate report today.

The main losers are CLO managers, among the largest of which are The Carlyle Group, Dublin-based Harbourmaster Capital and Alcentra Group Ltd., owned by Bank of New York Mellon Corp.

Will Uncle Sam ride to the rescue yet again? Or will it be the Fed widening TALF for existing toxic commercial loans? Defaults are on the horizon.