securitization

There’s a lot of The Future Of Banking in the news today and we should talk about it but first a proposition. Where are you more likely to lose money on a mark-to-market basis: buying 5-year PIK-toggle holdco Petco bonds at 8.6%, or buying 30-year UPS bonds at 3.625%? I say your odds of losing on UPS are higher; if you disagree, you take Petco, and we’ll meet here in 30 years to settle up.

Here is a grab-bag of other numbers related to UPS:

Things to think here include:

  • lending money to UPS is not profitable for banks2;
  • underwriting UPS’s 30-year bonds isn’t exactly a bonanza either; and
  • UPS would be nuts to borrow from its banks – so it doesn’t, and borrows more cheaply in the market.3

Bank lending to high-investment-grade companies is (1) a loss leader, (2) used to attract not especially profitable business, and (3) not competitively priced. I feel like other industries do loss leaders better.

While you ponder that, also ponder this IMF working paper on banks and trading. A quick takeaway is “banks shouldn’t trade, urgh, trading bad,” and Mark Gongloff and Felix Salmon take that takeaway away, but as far as I can tell the more interesting bit is this: Read more »

  • 25 Jun 2009 at 12:27 PM

Another Green Shoot For The Securitization Market

There used to be a time when SPVs were nice packaging plants for credit card securitizations and the issuer didn’t think have to think twice about the underlying risk. Now the loss rates are getting high enough to scare a few issuers into buying the junior pieces of their own deals to avoid losing their regular customers to some other cheap drug. The image of banks scrambling around to prevent credit card deals from hitting early redemption coverage triggers must have been on Herb Allison’s mind when he was talking about declining credit market risk.
Banks come to the aid of card securitisation vehicles [FT]