Bloomberg.com just posted an article "JPMorgan Poised to Lead CLO Comeback After Record Loan Rally". I must say I know there has been some nice "inside talk" that I have been privy to that banks would LOVE to start the CLO (Collateralized Loan Obligation) "machine" again. Lord knows it made them a lot of money at one point.
The problem is still going to be.......who is gonna buy the new stuff? These CLOs are made up of a bundle of high yield loans. (There is a reason these got the name "junk" way back in the day.) They are also given ratings by our old friends the rating agencies! (Does anyone trust them anymore?) The article says the CLO machine might start up as soon as the 1st quarter of 2010. Let me be the first to tell you, if that does go down, you will see me talking a MUCH different game about bank stocks. As in, I won't be short stocks like Goldman Sachs (ticker: GS), like I am now (making a nice little profit on that by the way still). Because that will mean the big banks have once again figured a different way to skin the cat (technical term).
Now let me put my "Wall Street guy" hat on. All of these "funky derivative products" served a very good purpose when they were invented, hatched, etc. Trust me. This whole Credit Default Swap product came from JP Morgan trying to make their risk SMALLER, so that they could--get this--LEND more money to different companies. Thats a good thing people. Then it got into the hands of "Dr. Evils" all over the place who had NO clue how to manage risk and nearly blew the whole world up. These CLOs also served a really good purpose back in the day and allowed a lot of smaller to mid size companies to raise capital and HIRE workers to deploy that capital. Then, to paraphrase our man Mr Walz from the Godfather I, "those Johnny Fontaines came along with their olive oil skin and their guinea charm and they ruined it."
If the banks can figure out a way to not crush everyone in the process of rebuilding this CLO market (as in, rape and pillage for profits) and just get "their beaks wet a little", they might be able to pull it off. Who in the hell knows how they get investors to believe the ratings on the bonds that they buy? But hey, if they say they want to get it going, I'm sure they have a plan. It might even be a worthwhile investment for those who get in early. Hopefully, they dont get greedy again. Cause the guys who got into Madoff's "thang" early, made money too.
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