Love Affair with Exotic Debt Returns

by ETFguide | August 10, 2012 10:06 am

Remember the billions of dollars in collateralized mortgage obligations (CMO), 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 (NASDAQ:GOOG[1]) has been snapping up consumer debt and auto loans with its $49 billion cash mountain[2]. According to a Wall Street Journal report, the company has ventured into auto loans from Honda Motor (NYSE:HMC[3]) and Hyundai Motor. In the past, Google had limited itself to corporate bonds and U.S. Treasuries.

• Goldman Sachs (NYSE:GS[4]) 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 rental income into securities. Bankers and debt issuers are trying to get the highest credit ratings for this new breed of securities to increase potential sales.

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 rubbish.

Other risky areas with a boom in asset inflows include master limited partnerships (NYSE:AMJ[5]), high yield municipal bonds (NYSE:HYD[6]), and emerging market debt (NYSE:PCY[7]).

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.


  1. GOOG:
  2. $49 billion cash mountain:
  3. HMC:
  4. GS:
  5. AMJ:
  6. HYD:
  7. PCY:

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