Remember the billions of dollars in collateralized mortgage
), collateralized debt securities (CDS) and all of that hand
packaged AAA-rated debt that blew up during the 2008-09 Financial
Crisis? It's back.
This time, Wall Street is pitching bonds backed by rental income
from previously foreclosed homes and songs by pop stars.
Here's a snapshot what's going on:
Google (NasdaqGS: GOOG)
has been snapping up consumer debt
and auto loans
with its $49 billion cash mountain. According to a
Wall Street Journal report
, the company has ventured into auto loans from Honda Motor and
Hyundai Motor. In the past, Google had limited itself to corporate
bonds and U.S. Treasuries.
Goldman Sachs (
) has been shopping a $300 million bond offering backed by royalty
income from music
by Bob Dylan, Neil Diamond, rock band Rush, and jazz artist
Cassandra Wilson. The five-year bonds are expected to yield 5.25%
compared to just 0.70% for Treasuries with similar maturities.
Colony American Homes and Waypoint Homes have been
purchasing foreclosed homes and are considering converting the
into securities. Bankers and debt issuers are trying to get the
highest credit ratings for this new breed of securities to increase
And so it is, another credit boom is upon us.
Wall Street dreaming up more bad ideas is ingrained in its culture
and only part of the problem. Instead of running in the opposite
direction, yield desperate customers - sacrificial lambs - are
buying in. Apparently, they didn't learn their lesson when they got
burned by investing in previous iterations of collateralized
Other risky areas with a boom in asset inflows include master
limited partnerships (NYSEArca: AMJ), high yield municipal bonds
(NYSEArca: HYD), and emerging market debt (NYSEArca: PCY).
Let's not forget another key culprit to the exotic
debt craze: The Federal Reserve Bank's zero interest rate policy
(ZIRP), which encourages reckless investing.
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