So what’s the dumb money doing right now?

By Finance Addict

My eyes started to bleed when they fell upon the following Bloomberg piece:

Sales of bonds backed by everything from timeshare rentals to shipping containers to entertainment royalties are poised to rise this year as investors seek to boost returns with interest rates at about record lows.

So-called esoteric asset-backed securities issuance may soar 12.9 percent to $35 billion, compared with debt linked to more traditional collateral such as auto and credit-card loans, which will grow 8.75 percent to $87 billion, according to a forecast from Credit Suisse Group AG.

Barclays Capital, Citigroup Inc. and Wells Fargo & Co. are directing investors toward the debt[…].

“The ability to pick up incremental yield while not taking additional risk makes esoteric ABS attractive,” [Cory] Wishengrad, [Barclays Capital] co- head of securitized products origination, said in a telephone interview.

Again: “The ability to pick up incremental yield while not taking additional risk makes esoteric ABS attractive.”

You know how Baruch Spinoza said that “Nature abhors a vacuum”? Well, markets abhor those who have money but are ignorant of history. I’m not saying that there’s no merit to these deals; I simply don’t have enough information on a specific deal to say one way or the other. But I’m pretty sure that there’s no investment fairy flying from asset manager to asset manager sprinkling higher yields on the undeserving. No matter what the ratings agencies tell you.

All I want to know is: who’s buying this stuff in size? I might like the other side of that one.

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  1. Jardinero1 says

    No, there is not any additional risk.  They have cut up these offerings into tranches according to risk.  Then they took the bad risk part and sprinkled it equally amongst the good risk part so that you are not exposed overly much to the bad risk part anymore.  Wait a minute, I think they tried this once before.  Oh yeah, it’s different this time.

    1. Anonymous says

      Like you I do not see this ending well. I wonder if these are all AAA rated bonds? This will end badly but when will be another matter. Clearly our leaders and regulators have learned nothing. 

  2. frank r says

    Things sometimes are different. ABS’s for credit card debt sounds pretty flaky too. At least from my perspective, anyone who has a credit card balance is a financially irresponsible, and anyone who lends to financially irresponsible people is a fool. And yet all the corporate money-market and bond funds I’ve owned over the years have held credit-card debt ABS’s. So am I a fool?

    The devil is in the details. What percentage of the debt is held by the equity tranche? Is the originator keeping the equity tranche? Are the originator fools? Banks were mostly run by fools back in 2007, but the current managers are neither fools nor without skin in the game, or such is my impression. “Without additional risk” is laughable, but then I’d be much more suspicious if Wall Street (or Madison Ave or politicians) said something truthful-sounding–it would be out of character for these compulsive liars.

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