Defaulting banks - where will it stop?

[Jan Klimkowski]

Karl Denninger on form:

We'll Scam You Until Forced To Stop

The banks just never do quit, do they?

July 8 (Bloomberg) -- Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.

Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf Capital Management LP, an investment firm based in Purchase, New York.

Let's translate this into english for the less-financially-literate.

We're going to take this trash that was originally rated "AAA" by all the major ratings agencies that we bought the rating from (and paid for it too - booya!), got downgraded, and cost investors millions, and wave our arms around.

Through the magic of re-securitization (while extracting a few more basis points in a second set of fees for ourselves!) we will make this Baa2 (nearly junk) debt back into pristine "AAA" credit once again, according to the bought-and-paid for (again) ratings agencies, and then we will sell it to the same suckers that got ripped off the first time!

The sad part is that they will probably find people who are dumb enough to get screwed not once, but twice, even though the bank has managed to extract a second set of fees from the original credit margin in the deal.

Back to basics folks - when a set of loans are made the true risk-adjusted return is a fixed amount. Every person who touches the deal demands something for their trouble, as nobody works for free.

Therefore the more levels of indirection and complexity are layered on the lower the total return of the deal has to be, because the fees have to come out of the total income stream.

It cannot be any other way; you cannot create more value than was originally there (claims otherwise are equivalent to claiming to have discovered perpetual motion) and as such there is no possible way in aggregate for anyone except the bank that does the securitizing to benefit from securitization, and in fact everyone who owns that "stuff" is giving up some of what they could otherwise obtain by buying this crap.

P.T. Barnum was right.

http://market-ticker.org/archives/1190-W...-Stop.html