Monday, February 8, 2010

Choose Your Own Adventure

In good times anything is possible. Second class managers can raise capital for new funds; corporate debt managers suddenly become experts in structured finance; and trust proliferates.

In good times risk-averse pension funds invest in ABS CDO equity and traditional managers go for the exotics, be they weather derivatives, airline securitizations or bonds secured by the future royalties from David Bowie’s music. In good times small managers win bids to manage multi-layered complex CDO-squared portfolios supported by actively-managed leveraged loan funds, ABS CDOs, CDOs supported by commercial real estate, bond funds, trust preferred CDOs and other CDO-squareds, collectively; and structurers can sell anything, everything. Oh, in good times

… anything is possible. And if it shouldn’t be possible, it can be hidden away behind all the growth that we are seeing -- and we can be easily distracted by, and forgiving due to, all the peripheral positives.


In bad times everything is illiquid. Those same managers no longer have the experts around who made them believe their forays into alternative exotics would pay off. Those exotics lie in side pockets, either unanalyzed or constantly scrutinized -- but no longer ignored.

Oh in bad times the too-big-to-fail become too-big-to-succeed and have to be trimmed to take advantage of overlaps and economies of scales.

... in good times we overcome our animalistic instincts to preserve. Utility theory trumps our innate loss aversion and for a short while the concept of risk leaves the dictionary.

Then we blink, take a good look around and troubled times have come
to My Hometown.

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