Monday, March 25, 2013

More Bubble Activity- Synthetic CDOs Are B"AAA"ck

Only they are not rated AAA anymore.  They don't get ratings, that's the lesson learned from the last decade.  If you don't rate them, you will still find buyers.  BBG explains in Synthetic CDOs Making Comeback as Yields Juiced:

Derivatives that pool credit- default swaps to make magnified bets on corporate debt, popularized in the last credit bubble, are making a comeback as investors search farther afield for alternatives to bonds at record-low yields. 
Synthetic credit, which amplified the financial crisis five years ago, is enticing investors after corporate-bond yields dropped to less than half the 20-year average. By betting on the degree to which a group of companies will default, a CDO may pay relative yields of more than 5 percentage points, four times that of a typical credit-swaps transaction on similar debt. 
“That’s a valid strategy for this part of the credit cycle: Don’t stretch on credit quality, but rather leverage your exposure to better-quality credit,” Ashish Shah, the head of global credit investment at New York-based AllianceBernstein LP, which oversees $256 billion in fixed-income assets, said... 
Unlike many of the synthetic deals created during the market’s peak before 2008, the transaction pitched by Citigroup wasn’t to be sold to investors in the form of securities and wasn’t graded by ratings companies.

About $2 billion notional of similar trades were created last year and between $500 million and $1 billion in 2013, Mickey Bhatia, the head of structured credit at Citigroup, said in an interview. The trades average between $10 million and $30 million, he said, declining to comment on any specific transactions. 
“Investors are in a desperate search for yield,” said David Knutson, a credit analyst at Legal & General Investment Management America. “CDO products offer incremental yield to plain-vanilla transactions.” 
Nothing has changed.  What "inning" is it?  There is no reason to argue with Howard Marks, who said recently it was the 5th inning.

If so, could the game be called because of rain at any time?  Or, will it go into extra innings?

Meanwhile, there are lots of cheap financial stocks to allow the reflation game to be played.  These range from GNW and LNC, both of which I am long, and MS and GS, either of which I may hold my nose on and buy.  All are below tangible book value, and the longer the game goes on, the more their assets will appear to be worth stated book.

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