With all those subprime write-downs hitting bank and investment house balance sheets it would be nice for them to off-load some of the LBO debt they have taken on over the last year. No such luck.

According to the FT "the group of banks backing buyers Apollo Management and Texas Pacific Group are having trouble selling on the leveraged buy-out debt to third parties. With the bulk of the debt remaining on their books, the banks are sitting on a sizeable loss." And, that is only the tip of the iceberg. S&P reports that banks are holding $150 billion in syndicated debt.

As the Fed cuts rates, the yield on many LBO bonds falls as well. That makes them less attractive, especially with the risk they carry giving leverage to newly private companies with a potential recession coming.

The carnage is not over yet. Other large deals like BCE (BCE) are still in the wings and there is plenty of debt sitting on bank books from transactions finished last year.

It would not be too outrageous to believe that 20% of the loans for LBOs will have to be written off by financial firms. That is about $30 billion. Most of the money is probably spread over a dozen large banking operations, but that is still $2.5 billion each, on average. Some of the more aggressive LBO lenders are probably sitting on bad money pools which will require write-downs of closer to $5 billion.

Who said the banking crisis was over?

Douglas A. McIntyre

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