Securitized loans :
There is now a developing market for securitized bank loans as a way to avoid the capital loss to a bond portfolio while reaching for slightly higher interest rates.
This market was very small and confined to a few closed end funds and very large insitutional investors (insurance companies, giant college endoments) for a long time.
Many of the securitized loans adjust with interest rates - 1.75% over LIBOR or some other benchmark. So as interest rates rise, you get more interest, and the NAV will not drop as it will with bonds with fixed interest.
If Wall Street follows the usuall pattern, the first few years for this relatively new product will feature carefully selected loans with low default rates, and the customers will be the larger and more sophisticated institutions. Big players whose business is needed by the i-banks. In a few years, as the product becomes more accepted, and your mainstream averae pension fund, regional bank, small charity endowment, and rich individual starts buying - then we will see the crappy stuff get pushed....
The other concern would be where these loans are in terms of claims on assests.
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The banks often retain a profitable loan service activity, and can then loan the same money again.
>>>This can also allow a bank to reduce their net exposure to an industry or geographical area, while remaining the bank that has the expertise and makes the most loans to that industry.
My Speculating - the new Basel II capital adequacy requirements look at stress testing due to correlated events. So if 155 of your loans are to the widget industry, you have to have more capital. By securitizing, your bank can make 15% of the loans, lay off 2/3 so you don't get hit by Basel II, and still get the loan fees, lock box business, payroll buisiness, and all the other lucrative fee based goodies.
Plus you retain the best widget business loan team , who know who to loan to and who to avoid, and understand the widget business cycle.
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This is similar to bundling mortgages. See the book "Liar's Poker" by Michael Lewis for insight.
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This will actually a net good thing for the economy, with a few bumps along the way. |
