Wolf Richter: Wall Street 'Craziness' Is Back

Monday, 01 Apr 2013 08:01 AM

By Michael Kling

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The Wall Street “craziness” that caused the financial crisis is back, declares Wolf Richter, a financial writer and former business executive, in his blog, Testosterone Pit.

A sure sign of the craziness is the “synthetic” securities based on credit derivatives Citigroup has created.

“Soon, similar synthetic securities will be offered to the treasurers of small towns in Norway,” writes Richter, who previously worked in private equity and venture capital funding.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

Citigroup wanted to protect itself against default of shipping loans on its books by off-loading risk to investors who in return receive yields of 13 to 15 percent.

Shipping loans are extremely dicey, Richter warns. In fact, Andreas Dombret, a member of the Bundesbank Executive Board, called it one of the four risks to overall financial stability to Germany.

The shipping industry collapsed amid falling shipping rates during the financial crisis and has yet to recover. Ship overbuilding continues, fueled by cheap financing.

The shipping collapse caused a bloodbath in Germany. Retail funds went under and banks suffered heavy hits. The largest ship-financing bank in the world, HSH Nordbank, which was bailed out in 2008, was just bailed out again by its two main owners, the states of Hamburg and Schleswig-Holstein, according to Richter.

If hedge funds buy the synthetic securities, fine, says Richter, as they should understand the risks.

“But these products may end up in funds favored by state and municipal retirement systems,” he says. “They’re starved for yield and are chasing it every chance they get in this zero-yield environment. And ‘alternative investments’ are hot. So, banking crap would be shifted once again to retirees — with a satisfied nod from the Fed.”

So far this year, banks have sold approximately $1 billion of synthetic collateralized debt obligations (CDOs), Bloomberg Businessweek reports.

“History is repeating itself on a minor scale,” Neil Barofsky, former inspector general of the Treasury Department’s Troubled Asset Relief Program, tells Bloomberg, warning that the products may implode again, just as they did in the financial crisis.

“Synthetic CDOs are sort of the natural evolution, and in many respects the final frontier, of investors’ search for yield against a backdrop of historically low interest rates,” Richard Hill, an analyst at RBS Securities, tells Bloomberg.

“I think the big takeaway here is, ironically, the Fed and regulators are forcing investors to the darkest corners of the structured finance market and the structured credit market to find yield.”

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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