Banks: Selling Debt To Lose More Money

Banks that claim they are off-loading risk may be making a case which is a bit overblown.

Recently, Citigroup (C) and RBS (RBS) dumped loans to private equity firms including Blackstone (BX). The LBO debt went for about $.85 for each dollar.

What is baffling about the deals is that the banks loaned most of the money for the private equity firms to pick up the assets.

According to the FT, If the old loans drop in value, the deals are structured so that the private equity firms take the first losses, up to about 20 cents on the dollar. If the old loans fall further – as could be the case in a severe economic downturn – the banks could suffer additional losses on the loans they “sold”.

The banks have not had enough of leveraged risk. It has clearly become an addiction. The "Twelve Steps" of write-offs have not gotten them off the booze. They appear to think that taking on a new form of risk will mitigate the one that came before it.

Lessons which last a quarter or two are no lessons at all.

Douglas A. McIntyre