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Let it Blow Up in Their Faces, Rather than in Ours

testosteronepit's picture




 

Wolf Richter   www.wolfstreet.com   www.amazon.com/author/wolfrichter

What gets stuffed into the Wall-Street sausage maker on the American side are dollar-denominated risky “leveraged loans” – loans issued without collateral by over-indebted junk-rated companies. Banks slice and dice these leveraged loans, lumped them together into Collateralized Loan Obligations, and sell them to other financial institutions. These CLOs are then repackaged and peppered with derivatives to hedge against currency fluctuations.That’s what goes into the sausage maker.

What comes out of the sausage maker on the Japanese side are plump-looking, yen-denominated, highly rated bonds.

Blame the Bank of Japan. Where there’s enough demand, there will be supply. The BOJ, as part of its mega-QE program, is buying every Japanese Government Bond that hasn’t been nailed down. It has been telling banks, insurance companies, and pension funds to dump their vast holdings of JGBs. It pushed 10-year yields to 0.33%. And it’s strangling the JGB market.

Conservative Japanese pension funds, and even the Government Pension Investment Fund with ¥137 trillion ($1.14 trillion) in assets, long reliant on these JGBs, are dumping them into the lap of the central bank to replace them with a variety of goodies that provide some visible yield, including the latest Wall Street sausage.

It’s logical in our absurd world. Corporate America is already racing to sell euro-denominated junk bonds in Europe where the epidemic of negative yields in government bonds has suppressed yields across the corporate spectrum as well, to where junk bonds yield about 200 basis points (2 percentage points!) less than in the US. Low-cost money for high-risk US issuers, the new nirvana [read… Dumping American Junk in Europe, Draghi Asked for it].

But the deal with Japan is vastly more glamorous. These aren’t junk-rated US corporations going to Japan to sell yen-denominated bonds directly. This is Wall Street offloading murky, risky products at a high price.

These leveraged loans that form the base for the CLOs have long worried US banking regulators. Yellen personally warned about them. So they’ve fallen out of favor with banks. Issuance in the first quarter dropped 52% from a year ago. Retail investors have soured on them too, and they’ve been yanking their money out of leveraged-loan mutual funds for 12 months in a row.

The other option for banks to offload their leveraged loans is to slice and dice them and repackage them into highly rated CLOs. That too worries regulators because banks retain some risks. But never mind. Investors are clamoring for CLOs. So year-to-date, US issuance jumped 22% from a year ago, to $30.4 billion, with March issuance setting a new all-time record – though investors suffered “dismal” returns.

Where does this demand for CLOs come from? From all kinds of directions, including from across the Pacific. Now it’s time to turn these dollar-denominated CLOs into yen-denominated bonds for desperate Japanese pension funds – and thereby retirees. “To make it easier for Japanese investors to get to this US debt,” as Bloomberg put it. And it’s in the true spirit of sausage:

The Repackaged CLO Series GG-A1 Ltd., for example, “consists of a special-purpose entity that will issue Japanese yen-denominated notes and is backed by the U.S. dollar-denominated notes” issued by Kitty Hawk CLO 2015-1 LLC, according to a Standard & Poor’s March 24 pre-sale report.

Essentially, it transforms $249 million worth of a $331 million U.S. CLO managed by Guggenheim Partners Investment Management into highly-rated Japanese-yen denominated bonds, according to an April 15 Moody’s Investors Service report.

The deal was finagled by Mitsubishi UFJ Financial Group, which, as Bloomberg reported – I had to hold my nose as I was writing this – “is also the counterparty on the currency swap that mitigates the risk of losses from changes in the yen-dollar exchange rate.”

Japanese institutions that turned their JGBs over to the BOJ have other options to use their freshly printed cash and obtain a visible yield. They can buy US Treasuries, for example. And they’re doing that. They can buy US corporate bonds directly which are a lot less murky than the sausages they’re buying from Mitsubishi. And they’re doing that too. They’re buying everything in sight that has a measurable yield. Right now, there isn’t much in Europe to fit that strategy, outside of Greek bonds. As far as a large market is concerned, the US is it.

The bitter irony of QE in Europe and Japan? The ECB and the BOJ are repressing yields to absurdly low levels, to levels where borrowers make money on their liabilities while lenders are losing money on their assets – by design! They’re doing this even while the cacophony emanating from the Fed has been evoking interest rate increases in the US.

The ECB and the BOJ are encouraging Wall Street and Corporate America to head to their shores and dump even the riskiest US securities for the juiciest price. And they’re motivating their hapless folks to buy even inscrutable and potentially toxic American securities at ludicrously low yields to obtain a feeble illusion of income.

But it’s great for America. We get to export breath-taking risks, nicely packaged and relabeled as “safe,” to other countries and let them take the losses when they come due. By the looks of it, this risk-dumping is going to be a huge trend. Until it blows up. But this time, it’ll blow up in their faces, rather than in our faces. And they can thank their central bank.

These junk-rated US corporations are already showing what material their debts are made of. Read…  Bankruptcies Suddenly Soar Across Corporate America, Worst First Quarter Since 2009

 

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Sun, 04/19/2015 - 10:56 | 6008345 jonjon831983
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One last dance, baby. Until the music ends. Just like when we were young.

Sun, 04/19/2015 - 00:41 | 6007835 are we there yet
are we there yet's picture

The dollar is staying strong because Japan, Europe, China, are all more irresponsible than we are. The Russian Ruble is somewhat strong only because it is slightly detaching itself from the west.

Sun, 04/19/2015 - 10:28 | 6008013 GuusjA
GuusjA's picture

=== Het is nog niet geheel duidelijk wat we in de cijfers moeten lezen ===

 

http://www.volkskrant.nl/economie/dnb-president-knot-ziet-ruimte-voor-ho...

 

BleomigeJeroen heeft tegen directeur Christine Lagarde verteld dat de @BuitenhofTV uitzending van vandaag het TippingPoint zou zijn voor ...?!?!?

Sun, 04/19/2015 - 05:13 | 6007991 chilli sauce
chilli sauce's picture

I freelance over th? internet and earn about 80-85$ an hour. I was without a job for 7 months but last month my paycheck with big fat bonus was $15000 just working on my computer from my home for 5-6 hours. Here's what i have been doing... www.globe-report.com

Sun, 04/19/2015 - 09:41 | 6008204 Mi Naem
Mi Naem's picture

Are the Tylers overwhelmed by the number and variety of internet attacks on their site,

too disinterested to coordinate an effective response,

or just pissing on the floor in their own house?

Sun, 04/19/2015 - 10:57 | 6008350 Kickaha
Kickaha's picture

Maybe they hired some freelance guy working out of his home 5-6 hours/day on his computer.

Sat, 04/18/2015 - 22:20 | 6007636 orez65
orez65's picture

"If they don't have enough US Treasury's to buy, then let them buy Wall Street repackaged junk"

Ms. Marie Antoinette, from the J P Morgan bond trading desk.

Sun, 04/19/2015 - 09:17 | 6008167 GuusjA
GuusjA's picture

Hans de Boer van werkgeversorganisatie VNO-NCW zet druk op netwerk @MinPres om de 'Logica van de 1' vrij te geven. 

 

http://nos.nl/artikel/2031155-werkgevers-kabinet-doe-even-normaal.html

 

Natuurlijk weet De Boer dat de crisis rond de bed-bad-broodregeling te maken heeft met de weigering van de VN om een wereldwijd @basisinkomen voor iedere wereldburger in te voeren. Natuurlijk gaat China mee om bevoorrechtte (rechts)personen de gelegenheid te geven om 'gratis geld' te ruilen voor onderpand die in het systeem 'Leven en Laten Leven' nog relevant zijn. 

 

http://nieuws.nl/economie/20150419/china-stimuleert-economie/

 

Buitenlandchef van de Europese Unie Federica Mogherini riep vandaag de Europese regeringen niet op om het systeem 'Leven en Laten Leven' in te voeren, maar wil ...!?!??

 

http://www.volkskrant.nl/buitenland/europa-kijkt-weg-van-afslachting-in-...

Sat, 04/18/2015 - 20:28 | 6007436 Weaponized Innocense
Weaponized Innocense's picture

Like Japan is far enough for this not to affect us...... Idiots should have put it in a spaceship and shipped it to the aliens on the other side of the universe.

Sat, 04/18/2015 - 20:29 | 6007439 Weaponized Innocense
Weaponized Innocense's picture

Or to another universe entirely!

Sat, 04/18/2015 - 19:56 | 6007378 Al Tinfoil
Al Tinfoil's picture

WOW! High-rated collateralized bonds! Got to get lots of those! What could go wrong?  Have any collateralized bonds issued by Wall Street ever caused a problem? 

Oh. Yeah..... Um......

Here, hold this grenade.  Don't worry about the missing pin.

Sat, 04/18/2015 - 04:55 | 6005821 JailBanksters
JailBanksters's picture

Same old....same old

Nothings changed, the Government will never outlaw this practice because Fraud is the US Banks business model. Without fraud they would all be Bankrupt.

Fri, 04/17/2015 - 23:08 | 6005492 Oldwood
Oldwood's picture

People who make their living from "investing" deserve what they get. Unfortunately they carry with them the ability to burn the world to the ground in their heated pursuit of something for nothing. If people really wanted to invest they should do so with actual enterprises, rather than buying scraps of paper that do nothing but provide a chip on the table. It is gambling and it is absorbing capital that could actually be invested in something productive.

Sat, 04/18/2015 - 03:50 | 6005785 GuusjA
GuusjA's picture

The U.N. general secretary’s appearance at an upcoming Vatican event promoting a worldwide movement to combat ...

http://www.wnd.com/2015/04/author-vatican-aligns-with-u-n-on-world-gover...

Netwerk @MinPres: "Als er een mogelijkheid bestaat geschiedenis te schrijven, moet je blijven lachen".

http://www.volkskrant.nl/economie/werkgevers-lyrisch-over-stand-nederlan...

Hans de Boer wil van de @MinPres weten wanneer de werkgeversorganisatie VNO-NCW de beschikking krijgt over het algoritme van Über. Werkgevers hebben behoefte aan flexibele krachten en dat zijn jongeren. Ze krijgen via Über te zien welke klus moet worden gedaan (lokale politiek bepaalt wat) en kunnen zo gemakkelijk aan het werk en bepalen zelfs de uren.

Het Centraal Planbureau rekent op een groei van 1,7 procent, maar De Boer is optimistischer: hij gaat uit van ten minste 2 procent. De grote hervormingen die het kabinet de afgelopen jaren heeft doorgevoerd om zo de 3e SpinozaGolf mogelijk te maken is nog lang niet ten einde. Nu komt de strijd, waarbij de ideologische verschillen van de verschillende politieke partij'en moeten worden getoetst aan de 'wiskundige definitie van de absolute waarheid'.

http://www.neurope.eu/article/dutch-ministers-resigns-over-drug-compensa...

Hoofdredacteur Philippe Remarque van de volkskrant weet dat het heel lastig is om 'gebeurtenissen te beschrijven waar je niet bij was'. Door het aftreden van de ChaosRidders Opstelten en Teeven kan netwerk @MinPres dadelijk gemakkelijk beweren dat het ministerie van 'waarheidsvinding en verzoening' de plek was waar het personeel van hotel GradjA het presidium voorbereidde op ...

Fri, 04/17/2015 - 17:46 | 6004550 Downtoolong
Downtoolong's picture

When there’s really no collateral backing a CLO, shouldn’t it be called a cLO, or a c-minus LO, or something? Or maybe just UCLO, for Unsecured Crap Loan Obligations.

Sat, 04/18/2015 - 22:05 | 6007615 neidermeyer
neidermeyer's picture

It's the whole UCC3 v UCC9 thing , when you take a real thing with colatteral value and convert it into a "security"/"shares" you by operation of law lose the security aspect of the obligation because the note no longer exists , the colatteral now secures nothing. Yes the industry needs to be overhauled. 

Fri, 04/17/2015 - 23:03 | 6005481 the great rift
the great rift's picture

I think, I can never earn over which I paid by my precedent employer, but I was wrong, world is so large to try their fate.but now I am making $92/hr even more, can easily minimum $1700/week, on the experience everyone must try to do work online, easy way to earn, here's an example what I do... www.globe-report.com

Fri, 04/17/2015 - 17:02 | 6004378 Amy G. Dala
Amy G. Dala's picture

Um, pardon me, sir.  Could you point me in the direction of the nearest credit default swaps?  I have a sudden "yen" for them . . .

Fri, 04/17/2015 - 16:14 | 6004196 RaceToTheBottom
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How can ownership be determined after slice and dice?

Fri, 04/17/2015 - 16:42 | 6004297 TheReplacement
TheReplacement's picture

Is it in your hand or my hand?  Oh, it is in my hand.  I own it.

Fri, 04/17/2015 - 17:05 | 6004382 RaceToTheBottom
RaceToTheBottom's picture

Exactly so collateralised means jack shit in terms of both collateral and ownership.

Blythe should hang....  Where are the class action lawyers?  Stop with the one off repo fights and take on the industry.  Everything collateralized is free game.

Fri, 04/17/2015 - 17:45 | 6004534 Thisson
Thisson's picture

The problem is that all of the risks are disclosed.  These buyers know they are buying time-bombs.  They don't care.

Fri, 04/17/2015 - 15:19 | 6003981 ThroxxOfVron
ThroxxOfVron's picture

When can we slice and dice the CONgrASShoses and Wall St. Banksters, stuff the minced shit into sausage; ans sell the garbage to insane Euro Trash bureaucrats and sex-hating Japanese Housewives?

Fri, 04/17/2015 - 14:38 | 6003817 astoriajoe
astoriajoe's picture

How do you say Puffery in Japanese?

Google translate says:

????
Fri, 04/17/2015 - 15:22 | 6003991 Stuck on Zero
Stuck on Zero's picture

Fugu.

Fri, 04/17/2015 - 14:08 | 6003676 delivered
delivered's picture

I forgot where I saw this quote so I can't take credit for it but it went something like this. There's no other country in the world that has mastered the art of not repaying debt/loans better than the US. These Yen denominated CLOs are just another example of just how clever (or crooked, your choice) the wolves on Wall Street really are and how gullable (or desperate, your choice) foreign investors have become.

It's hard to believe that the Japanese would fall for this sausage, made up of the worst part of zombie companies, but then again and just as the old saying goes, the more things change the more thing stay the same. No different than 2007 I guess other than the holders of the debt. On top of recent plunge in the Yen over the past year or two which basically pushed inflation on Japense Pensioners (thus reducing their standard of living), now they will soon find out they own some of the worst of the worst debt from the US (further depleting their savings). I guess this is the proper strategy to build a strong ally in the Pacific, NOT!

Sat, 04/18/2015 - 00:41 | 6005631 Buck Johnson
Buck Johnson's picture

2007 is going to happen again in Europe and Asia and it will be worse.  This time their won't be any money coming from the US.

 

Fri, 04/17/2015 - 17:46 | 6004539 Thisson
Thisson's picture

What choice do they have?  They either hold their noses and buy yield, or they face the pensioners at their doorstep with pitchforks.

Fri, 04/17/2015 - 20:48 | 6005163 new game
new game's picture

i thinks one person will loose enuf to wan t to get even, and i'm not talking a nailgun...

Fri, 04/17/2015 - 14:17 | 6003738 weburke
weburke's picture

stuff like this makes me think the IMF SDR is for the rest of the world, and the new Rome, gets to still rule. 

Fri, 04/17/2015 - 14:09 | 6003674 ebworthen
ebworthen's picture

Didn't entire towns and regions in Europe get burned by Wall Street in the last collapse?

Invested all their pension money into bonds that dumped in the crisis and were worth .01/1.00?  Not learned their lesson I suppose.

Fri, 04/17/2015 - 14:28 | 6003668 KnuckleDragger-X
KnuckleDragger-X's picture

Well I 'invested' in a couple of yearling steers this week and I'll be working on my garden tomorrow and riding my motorcycle Sunday, but I encourage y'all to buy, buy, buy, so as to provide my future entertainment.....

Fri, 04/17/2015 - 14:15 | 6003654 weburke
weburke's picture

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