Deutsche Bank (NYSE: DB) is in the process of selling $20 billion of LBO loans. If the financial firm thought its earnings were OK and that its balance sheet would allow it to do business as usual going forward, it is not likely that it would be in the market for buyers.
In all likelihood Deutsche Bank will have to take the kind of haircut that Citigroup (C) took last week when the company said it would sell $12 billion of corporate leveraged paper to private equity firms. Citi will even loan them some of the money for the purchases.
Many Wall Street experts think that the fact that these loans sell at all is a sign that the market is becoming more liquid and will open up to more and more transactions which will help troubled financial companies get bad assets off of their balance sheets. That may be true. Gamblers at private equity firms may be out in force betting that they can buy paper at $.90 on the dollar and ride its value up as the economy gets better. But, that is only a series of transactions for corporate bonds
None of that addresses whether the swaps market could face a crisis or whether the $4 trillion in home equity ARMs will start to show cracks and major default rates. It does not address the write-downs coming in consumer credit and car loans. It will also not be likely to offset further write-downs in mortgage instruments if subprime homeowners continue to go through foreclosures.
Selling leveraged corporate debt is a sign that the market has found some liquidly, but it is not a sign that problems are over. The size of the future peril is likely to be greater than what is already in the past.
Douglas A. McIntyre
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