This page has been archived and commenting is disabled.

Show Of Hands: Who's Interested In A CDO Backed By A Pool Of Subordinated Community Bank Debt?

Tyler Durden's picture




 

It’s no secret that the global hunt for yield is herding investors into riskier and riskier assets fueling demand not only for traditional HY bonds, but for more esoteric paper as well such as auto- and student-loan backed ABS. 

This is the inevitable consequence of seven years of ZIRP and now NIRP. With nowhere to run and an ocean of liquidity at their fingertips, investors search out opportunities in corners of the market where they might not normally have dared to tread. 

Earlier this year, we noted that Goldman was set to resurrect the synthetic CDO with a marketing pitch that included the phrase “bespoke tranche opportunity.” Of course any time Goldman pitches you something as an “opportunity” it’s best to ask: “Yes, but is that for you or for me?” In other words: “Am I about to get muppetized here?”

But the main draw for Goldman (and others) on these deals is that the underwriting fees are higher. What they’re essentially doing is allowing investors to try their hand at picking individual credits to bet on/against and if you’re good at that sort of thing, there might indeed be a chance for you to pick up a nice CDS premium. But if it turns out you aren’t as good as you thought you were when it comes to judging idiosyncratic credit risk in a dicey environment (see the Valeant case for an example of what can go wrong), well then you could get yourself into trouble. 

In any event, the longer investors remain mired in ZIRP, the louder the calls will be for the creation of products that offer some semblance of yield. 

As we said back in February, the Bloomberg piece that announced the Goldman deal was the latest installment in a series of articles that pop up every so often in the financial news media touting the resurgence of structured credit and, more specifically, CDOs. Cue another in this series. Via Bloomberg:

Joshua Siegel is bringing back one of the most toxic financial vehicles ever devised and arguing that this time it’s going to be different.

 

His StoneCastle Financial is among the hedge funds that are reviving the collateralized debt obligation, or CDO.

CDOs stuffed with mortgages and their derivatives caused billions in losses around the world during the 2008 crisis.

 

The CDO that StoneCastle put together is a little different. 

Oh, really? How so?

It’s backed by subordinated debt issued by about 35 community banks, some of them so small they don’t have credit ratings.

Great. A collateral pool full of subordinated community bank debt. Sounds promising.

But don’t worry, Siegel has done this before:

This isn’t the first time Siegel pooled small-bank debt into a structured financial product. At Salomon Smith Barney in the late 1990s, he proposed bundling banks’ trust-preferred securities, a predecessor to subordinated debt, into so-called TruPS CDOs.

 

The trick to doing it right, according to Siegel, is regional diversification.

 

In a 2001 research report, Siegel divided the U.S. into five regions and wrote that the geographic diversity of the banks whose TruPS he used -- picking debt from different areas -- would make the CDOs safer.

Yes, “geographic diversity would make it safer.” 

You see this is just a derivative (no pun intended) of the same old argument everyone used to justify the supposed “safety” of anything backed by a mortgage in the lead up to the crisis. The contention is that while individually, the loans in the collateral pool may be crap, and while crap in isolation is just, well... crap, a bunch of crap pooled becomes “investment grade” and is thus “safer.”

Of course that all fell apart in 2008:

But banks failed all over the country in the 2008 credit crunch, throwing shade on Siegel’s original theory about regional diversification. Larry Cordell, a vice president at the Federal Reserve Bank of Philadelphia, said that’s because too many banks’ portfolios were concentrated in real estate and mortgages. They weren’t diversified enough, he said. The market for TruPS CDO collapsed. Some investors are still waiting to be repaid.

But that’s not going to stop Siegel from doing the exact same thing again: 

TruPS issuance has fallen to zero while publicly traded banks sold $12.3 billion of sub-debt, as it’s called, in 2013, about four times what they issued between 2009 and 2012, according to SNL Financial.

 

Brett Jefferson, president of Hildene Capital Management in Stamford, Connecticut, said that sub-debt CDOs are simply a retooling of TruPS CDOs.

 

“It’s a flavor of the old deals,” Siegel said. 

It sure is, and we won’t blame anyone for whom that flavor has left a bad taste.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 10/20/2015 - 20:04 | 6691918 Midas
Midas's picture

How do I know this is, you know, kosher?

Tue, 10/20/2015 - 20:09 | 6691935 kliguy38
kliguy38's picture

me me me.......pick me pick me

Tue, 10/20/2015 - 20:18 | 6691972 CrazyCooter
CrazyCooter's picture

Only if I can get partial shares via those little plastic cards at check out at the supermarket. I want to collect them all, trade with my friends, and value my collection every month, just like comic books!

Regards,

Cooter

Tue, 10/20/2015 - 20:56 | 6692149 johngaltfla
johngaltfla's picture

I know who will buy it all:

The Fed

(eventually)

Tue, 10/20/2015 - 22:24 | 6692562 azusgm
azusgm's picture

...and my 83 y/o aunt who is in assisted living.

Wed, 10/21/2015 - 07:10 | 6693338 N2OJoe
N2OJoe's picture

I'd be down for a CDS on the above product instead.

Tue, 10/20/2015 - 22:53 | 6692666 sgorem
sgorem's picture

siegel..........nuff said............

Wed, 10/21/2015 - 01:14 | 6693023 Otrader
Otrader's picture

Lead Broker at J.T. Marlin - Main focus on M&A in the Biotech sector. 

Tue, 10/20/2015 - 20:08 | 6691927 max2205
max2205's picture

 

 

^ ^ ^ ^

/       /

/     /

/ /

Tue, 10/20/2015 - 20:08 | 6691929 Kaiser Sousa
Kaiser Sousa's picture

im sorry...

what exactly does anyone not get when i say "kill all bankers..."

 

Wed, 10/21/2015 - 10:35 | 6694080 Chris88
Chris88's picture

When your shift at Denny's is over

Tue, 10/20/2015 - 20:10 | 6691937 Dragon HAwk
Dragon HAwk's picture

Sounds Legit, Sign Me Up.....    /s

Tue, 10/20/2015 - 20:14 | 6691956 agent default
agent default's picture

This is truly the opportunity of a life time. 

JUST SHUT UP AND TAKE MY MONEY ALREADY !!11!ONE!!!

Tue, 10/20/2015 - 20:18 | 6691973 buzzsaw99
buzzsaw99's picture

muppetized is just a nice way of saying fisted up the poop chute

Tue, 10/20/2015 - 20:25 | 6691996 F22
F22's picture

I think that's redundant....

Tue, 10/20/2015 - 20:29 | 6692014 Ralph Spoilsport
Ralph Spoilsport's picture

This is a rare, rare opportunity to get fisted though.

Tue, 10/20/2015 - 20:29 | 6692017 buzzsaw99
buzzsaw99's picture

sans lube

Tue, 10/20/2015 - 20:22 | 6691985 nmewn
nmewn's picture

Better yet, lets create a law forcing the young people who have hardly any money from working at Mickey D's to buy health insurance that they will rarely use, in order to cover the costs of older people who live spartanly on a fixed income and use doctors all the time!

WHAT COULD POSSIBLY GO WRONG!?

Wed, 10/21/2015 - 08:23 | 6693477 Dark Space
Dark Space's picture

In an ironic twist, the young person's insurance company and the retiree's pension plan, are the two most likely buyers of the CDO...

Tue, 10/20/2015 - 20:24 | 6691991 F22
F22's picture

"SNL Financial"....Is that Saturday Night Live Financial?

Tue, 10/20/2015 - 20:27 | 6692002 buzzsaw99
buzzsaw99's picture

buy some unrated SuborDebtTrupsCDOs bitchez

Wed, 10/21/2015 - 10:41 | 6694107 Chris88
Chris88's picture

SNL is actually the greatest financial services data aggregator on earth.  I't a fantastic product.  It's largely used by bank investors and equity analysts, so I see why you made a moron remark.

Tue, 10/20/2015 - 20:26 | 6691998 Joebloinvestor
Joebloinvestor's picture

A SCAM by any other name is still a scam.

Tue, 10/20/2015 - 20:31 | 6692021 Atomizer
Atomizer's picture

Chamber of City Commerce Joker. 

The Lord Is A Monkey Butthole Surfers - YouTube

Tue, 10/20/2015 - 20:57 | 6692157 Atomizer
Atomizer's picture

Why aren't our pheasants resonating to free shit Marxism? What a shocker. It's not free. 

"Buy One, Give OneCompanies Don't Help Anyone - YouTube

Tue, 10/20/2015 - 21:25 | 6692296 Ned Zeppelin
Ned Zeppelin's picture

Old wine in new bottles.

Tue, 10/20/2015 - 21:53 | 6692418 Lmo Mutton
Lmo Mutton's picture

Can I lever it up and hypothicate it to eternity?

Tue, 10/20/2015 - 22:09 | 6692487 DipshitMiddleCl...
DipshitMiddleClassWhiteKid's picture

oy vey

 

this sounds liek a good idea

Tue, 10/20/2015 - 22:21 | 6692531 Ajax_USB_Port_R...
Ajax_USB_Port_Repair_Service_'s picture

"resurrect the synthetic CDO"

Synthetic CDO - A nasty street drug that often makes the users bite off the ears of random hedge fund

                                              managers.

Tue, 10/20/2015 - 22:55 | 6692675 highwaytoserfdom
highwaytoserfdom's picture

yea Beat that Larry Fink and Blackstone   I take your MBS and  MSM any full and relevant information...  Non Gaap and absent FX reporting    What are you nuts we need printed money to collateralize debt stocks and bonds....   Just don't get the Chinese falling for another one...   Maybe the hedge fund guys should trim hedges.....     LOL funny Lloyd   No Cookie Monster  NO MUPPETS

 

"Sweet Caroline"

 

"Sweet Caroline"

 

"Sweet Caroline"

Tue, 10/20/2015 - 23:19 | 6692753 fowlerja
fowlerja's picture

Stonecastle Financial...I like the name...sounds like a solid money institution...look under the drawbridge and what do you see...

Snake oil...a product, policy, etc. of little real worth or value that is promoted as the solution to a problem.

Wed, 10/21/2015 - 05:43 | 6693257 Lucky Leprachaun
Lucky Leprachaun's picture

"sounds like a solid money institution".  Yeah and the guy giving the pitch named Joshua Siegel.  This is a unique opportunity I tell ya.  And if you have cash to spare I have this bridge in London.....

Wed, 10/21/2015 - 10:37 | 6694088 Chris88
Chris88's picture

They actually invest in 3/4 investment grade, safe credits with no issues at all over their entire history of asset quality problems.  Snake oil?  they're mostly level 1 and 2 assets, if your brain worked you could figure it out.

Wed, 10/21/2015 - 00:16 | 6692788 tunetopper
tunetopper's picture

I sold these pools (Trups) they were not bad assets- they just couldn't get a bid during the aftermath of the financial crisis because they were lumped in to the "hard to value" known as Level III assets. Accounting rules changed in March of '09 and this caused their MTM of a VIE (variable interest entity). These equity like securities could not even get a bid - not because of their lack of creditworthiness, but because of the toxic accounting treatment that applied from March 09 onward. These are the untold facts which obscure the real issues of the financial crisis. It was a controlled demolition. GS and JPM knew that the accounting rules like this one FAS 157 and another - the ENRON exception loophole QSPEs owned by Wall St Banks and guaranteed by Synthetic CDSs would drop these others into their lap(s). These along with all other CDS and VIE' s and Interest rate swaps whose counter-parties were the purveyors of mythical streams of unpaid cash flows -all in need of liquidity -were just the tools of the trade used by the two headmasters. The web was spun when the only way out of the trap was to make these things liquid, it was necessary to put a wrapper of a monoline insurance co i.e. AIG or FSA or GE Capital, or risk balance sheet consolidation under FIN 46r by Lehman/Bear/GS/Wamu/Wells/ Citi/BofA/Wachovia/Countrywide/JPM/MLynch/DeutcheBank/ABN/CreditSuisse/RioTinto/ArcelorMittal/and many many other entities... The latter weren't effected by our US GAAP- so they survived, of course along with GS and JPM- and Wells , BofA, through the NY and Richmond Feds. And the only other survivor was Morgan Stanley- forced to swallow gallons of raw sewage in terms of TARP debt and reputational damage. (And only God Himself knows what else they had to accept as punishment to be allowed to survive)! The institutional funds that were bailed out of the SIV's aka QSPEs are truly the assets which should've been allowed to go under. But because these were $US and the US Fed's unstated but primary mission is to protect the life blood of the US banking system known as currency - then of course we couldn't allow those US $ to get extinguished. So instead of allowing the cash balances of Federated, Fidelity, Alliance, ING, CALPERS, Blackrock, Vanguard, etc etc etc that had trusted Citi, Lehman, Bear, etc. etc to firewall their money markets in these off-shore and off-balance sheet SIVs we just let the NY Fed be the sole arbiter of the entire mess. And OUR Congress was too stupid to say "bullshit", TBTF is a lie. It assumes that bad people with evil schemes are OK because they were so numerous that everyone is at fault - with Proportional Blame -- instead it should've been "joint and several" blame!!! Congress passed PSLRA in the twilight hours of 1994 - and Clinton approved it by non-consent - when he knew there wer'e not enough votes left to veto. And we all thought the stock market rose during the nineties because of good governance and mutual admiration between disparate parties-- no it was entirely contrived-- and the mess we have now was due to PSLRA which allowed Arthur Anderson- which allowed Enron- which in turn caused the banks to lobby for the Enron Rule Exception (QSPEs) otherwise known as SIVs. The Chickens have Come Home To Roost my Friends of ZH.

Wed, 10/21/2015 - 03:01 | 6693162 azusgm
azusgm's picture

What I couldn't believe was that banks that were stuck with loans they had originated to sell were not allowed to move those loans to their hold to maturity portfolio and deal with the creditworthiness under the applicable rules. If the banks could not sell the paper for anything close to true value and were going to need to hold the loans anyway, I couldn't understand why those assets needed to be marked down so heavily. How do you mark to market when there is no market?

A friend's father (now deceased) was a banker in East Texas during the 80's and 90's. My friend told me that the regulators came to town and insisted that good loans be marked down and purged from the books. This is a small place with old families. The bankers knew the the quality of their assets and the collateral that backed them. What it amounted to was forced sales on the cheap to big banks. It was either sell or go out of business.

Wed, 10/21/2015 - 10:07 | 6693925 tunetopper
tunetopper's picture

Markit (formerly known as CDS Indexco) still headed by founder Lance Uggla and Bradford Levy has grown exponentially since their days as a Canadian bond pricing service division of a bank.  They were the tools (indeed the smoking gun) behind the controlled collapse of the mortgage market in 2007-2009.

Want proof?

http://www.zerohedge.com/news/2015-10-01/wall-street-banks-admit-they-ri...

 

Tue, 10/20/2015 - 23:37 | 6692805 MEFOBILLS
MEFOBILLS's picture

J or not J?  He seems to have all the markers for a super predator.  It will take me awhile to deconstruct this, and see if it is an elaborate rent scheme, typical of our favorite tribe.  Sometimes their schemes are diabolically complex, as they must be in order to confuse sheeple.

 

CEO and Managing Principal at StoneCastle Partners LLC

In 2003, Joshua Siegel founded StoneCastle... management. Mr.Siegel is widely regarded as a...

Past

Adjunct Professor of Finance and Economics at Columbia Business School

 

Vice President at Salomon Brothers

Wed, 10/21/2015 - 03:10 | 6693171 Colonel Klink
Colonel Klink's picture

When he farts, all you can smell is gefilte fish.

Wed, 10/21/2015 - 05:41 | 6693255 Lucky Leprachaun
Lucky Leprachaun's picture

An offer from a banker named Joshua Siegel. Must be a good safe investment.

Wed, 10/21/2015 - 09:44 | 6693804 tunetopper
tunetopper's picture

I was a bond salesman during that era in Texas.  I can vouch for what you say about your fathers comments regarding good assets being written down by regulators in order to take down good banks.  Why do you think they would d that??? I can tell you: it was because of all the other banks who had problems that were too big for the FDIC to handle.  So the regulatrs/examiners took down solvent institutions with decent loans in order to balance out the bad institutions that needed to go down for certain.  It was criminal, and yet subjective enough that although there were many lawsuits against the Feds, it never got rectified in favor of shareholders or (in the case of mutual S&Ls) other stake holders. 

Wed, 10/21/2015 - 10:34 | 6694068 Chris88
Chris88's picture

You morons have no idea what this transaction is.  It's extraorindarily safe, are are CLOs.  I'm so tired of the clowns here posting on shit they have no idea about.  Maybe you should look into what a TruPS CDO is and look at the waterfall structure of the...oh nevermind, you're too fucking dumb to get it anyway.  FYI that company has had no losses or cash flow impairments since inception.

Wed, 10/21/2015 - 17:44 | 6696049 tunetopper
tunetopper's picture

Agree!

Wed, 10/21/2015 - 17:44 | 6696050 tunetopper
tunetopper's picture

Agree!

Do NOT follow this link or you will be banned from the site!