Kravis, co-founder of New York-based Kohlberg Kravis Roberts & Co., said on May 29 that there was ``plenty of capital'' to finance acquisitions. Yesterday, Chrysler and Alliance Boots Plc failed to find buyers for $20 billion of loans to pay for their buyouts. Ten banks, including Deutsche Bank AG and JPMorgan Chase & Co., were stuck holding the debt. (bold added)
It is obvious that in recent years major banks became so hubristically spoiled by making fat origination and securitization fees, that the very idea of loaning their "own" money shocks them. They had turned themselves into sausage factories: in came loans of the worst possible quality - "pigs" - and out came mouth-watering AAA link sausages to suit every taste: CLO's, CDO's, CPDO's, hybrid CDO's, CDO squared and cubed... the variety was captivating.
As any sausage maker knows, the trick is to take the cheapest possible meats, mix in a ton of extenders, flavorings, colorings, preservatives and water and turn them into "charcuterie" at ten times the price. Much better looking and smelling than the fat, dirty hog that originally came in. But, just like cheap bacon, all of the above bank products shrink to 1/3 their original size when things get too hot.
Well, the customers are finally realizing that bank sausages are not as healthy and nutritious as advertised and are passing on their latest offerings. The banks are now stuck with a roomful of smelly loans they don't know what to do with. Guess they'll have to swallow the hog whole - hairy ears and all...
With yesterday's drop in global stockmarkets came fresh upward pressure on credit spreads. The spreads for the CDX indexes calculated by Markit are rising very steeply, significantly including the one that follows investment grade bonds.