LEVERAGED LOANS

Leveraged loans are used by companies often with low credit ratings to raise money, often for buyouts. They are issued by banks and sold to investors like junk bonds. Double digit declines are very unusual and a big problem for many banks right now. There is over $152 Billion yet to be sold and billions sitting in the cue to be sold...

The problem is these yields are tied to Libor and when interest rates fall so does the theoretical yield...thus the decline in principle when risk is going up....which is now... in a slowing economy.

The bigger problem is there is no one left to buy this paper. The derivative market used to create CDO or CLO's and that market has now obviously closed....

So as a friend of ours said last summer when this entire unwinding leverage started..."I'm not sure this is in the market", we too are not sure now.....this was a hidden part of the markets decline yesterday and Monday. The global fast money crowd that put easy equity into the nations money center banks in December may have been premature. There has to be many more multi-billion dollar write downs coming in the next few months....most of today's traders think this is all behind us....it is not.

The key here is lower interest rates don't help...they in fact hurt.

The big leveraged hedge funds and private equity firms are in the very early stages of stress testing their portfolios...this will also slow the economy on top of everything else.

The Math

A 50% decline in values becomes equivalent to a 100% advance to return prices to original levels. An 80% decline becomes a 400% advance to return prices to original levels.

We have not yet capitulated and we won't until the big bad loans are defaulted on and start their reorganizations in bankruptcy courts. Just like in 2001 and 2002. That took two to three years in the last down cycle....we are only six months in this one!

Barkly seen here with mud on his face.....others have a lot of mud on theirs too right now...100% and 400% gains to get back to break even are very hard to come by!