New Infinite Leverage Derivative Products Email Pokes Fun At Derivatives

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Many investors skeptical of highly structured and highly leveraged financial products and frustrated by the recent performance of some of the more highly leveraged hedge funds, got a bit of light-hearted fun in their email box today when a missive arrived announcing a new product: “Constant Obligation Leveraged Originated Structured Oscillating Money Bridged Asset Guarantees, or COLOSTOMY BAGS.”
We could help but think of the aptly named Fixed Income Annual Sporting Clays Outing that Morgan Stanley’s Derivatives Products Group held in the 1990s. The short name was FIASCO, and many of the investment products they sold soon bore out the name.
The Colostomy Bags promise to take advantage of “infinite leverage” and other innovative strategies.
"Its an actively managed, unlimited liability, open ended investment with no maturity date, which pays LIBOR plus 5,000 and has no correlation to traditional investments" said a spokesman for the Investment Dealer who engineered the product. "It's based on a CDO structure, but it's designed to default BEFORE the first coupon payment, which you'll agree has no correlation with stodgy traditional investments and is a perfect fit for portable alpha scams, er, strategies."
We’ve been trying to uncover the authorship of the email. So far no luck. If you know, please drop us an email at tips@dealbreaker.com.
After the jump the full story on the new product.


NEW DERIVATIVE PRODUCT OFFERED

Investment Dealers are excited to announce the newest structured finance product - Constant Obligation Leveraged Originated Structured Oscillating Money Bridged Asset Guarantees, or COLOSTOMY BAGS.
Designed to accommodate the most sophisticated investment strategies, Colostomy Bags contain the equity tranches of Structured High Interest Taxable Derivatives, or SH IT, and are leveraged an infinite amount of times through the innovative use of derivatives.
"Its an actively managed, unlimited liability, open ended investment with no maturity date, which pays LIBOR plus 5,000 and has no correlation to traditional investments" said a spokesman for the Investment Dealer who engineered the product. "It's based on a CDO structure, but it's designed to default BEFORE the first coupon payment, which you'll agree has no correlation with stodgy traditional investments and is a perfect fit for portable alpha scams, er, strategies." Following the default, each month more leverage is added to the structure to pay for the coupon and the Dealer's fees which are set at 80%. "We feel the fees are reasonable, given the adrenaline rush you'll get each month attempting to mark these."
The Colostomy Bags carry a AAAA rating, based on the rating agencies opinion that they are even safer than Treasuries. "You can't use traditional credit analysis to value these babies, no sir-ree" said a spokesman for a rating agency. "Just like Icelandic Banks, we give them the highest rating because you just know that the Fed will bail out all the hedgies who buy these things..remember like Long Term Capital? And the best part is, the beauty of this structure is that the loss given default is NEGATIVE, so by extension we feel that the CDS will trade through Treasuries."
Inhaling deeply on a fatty, he continued "We've been tinkering with our model, which served us well for Enron and the Telecoms in '02, and our stress testing shows that the probability of loss in the senior tranche is close to zero." The model, constructed of wishing well, Joseph Jett's trading blotter, and drawings of Unicorns then collapsed in a heap. "Well, back to the drawing board!" he cackled.
A real money investor, huddled on the windowsill outside his office, said he remained optimistic about holding the Colostomy Bags but was a bit concerned with the 95% decline in value on the first day they traded. "We've taken a bit of a haircut on these but I'm waiting to see the first servicer report, which should arrive in a few months. At first I was annoyed that the dealer who sold them to me refused to make a market in them, but that makes my job easier since I'm not tempted to sell."
We located a hedge fund manager at a due diligence meeting in the VIP room at Score's. He said he was skeptical of the structure at first but was dared into buying it by a fixed income salesman. "He said to me, 'what's wrong with you, its quadruple A rated, just buy it, what are you a pu ssy?' He also said it was going into 'an index', although he didn't say which one, but I felt that I had to buy it. And that was good enough for me, bro'."

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