LBO Underwriters Should Bite the Bullet
Breakingviews.com Holy crapballs on a crutch

The big question is what to do about the $330bn or so of debt that banks have promised to stump up for pending buyouts. As demand for leveraged loans has evaporated, the value of these assets has clearly fallen. By how much is not clear.

However, if one assumes the lending institutions sell a chunk of them at a discount, markets others to market prices and hold the remainder on their books, they may be worth 95% of their face value. Even if banks claw back two points of that loss in underwriting fees and interest, this implies a $10bn hit to earnings.

Granted, it may also turn bad when most of the 2/28 loans start resetting next year, but this could have more systemic consequences once lenders are done marking down mortgage exposure. (Also, the resetting risk may be overstated*). After that big charge, the danger is that credit-types at the big banks become irrationally risk-averse, instead of just dumping the most recent excesses of retarded lending structures. That could hinder a recovery.

*Is loan reset risk overblown?
Mortgage Insider Not the most credible website, but interesting factoid...

The folks over at Countrywide Financial, the largest U.S. home lender, said that of the loans the company made in 2005 and 2006 that were set to reset in 2008, about 2/3 have already refinanced. This was, in my opinion, the most interesting thing that came out of the lender’s marathon second-quarter conference call back on July 24, among things mostly overlooked by the media.



EDIT: While it may well be equally (or more) dangerous, I gotta say that "irrationally risk-adverse" doesn't sound as cool as "irrationally exuberant." Just sayin'. - TJ