The Off-Off-Balance Sheet

by Johnny Debacle

A lot of banks have a lot of bad paper in many different forms. Some of it is from ill-advised and underwritten LBOs which top-ticked the buyout market. Some of it is from complicated structured products based on real estate, bank loans, student loans, what have you. Some of it is even financing used to fund a chain of off-balance sheet restaurants to serve the growing off-balance sheet community (as many of you know, this is a space currently under served with respect to basic amenities, more on this in the future).

Regardless, due to the current credit crunch crisis banks are very desirous of (read: being forced to find) a way to unload a lot of debt from their balance sheet. But where to put it? Off-balance sheet locations are coming under increasing scrutiny whether they come in the form of SIVs, super-SIVs, of ultra-megawide–thisonewillwork-SIVs. Under the carpet is where they keep the trillions of derivative exposure, so there’s no room there. If only there was a way to OUTSOURCE the off-balance sheet.

And now there is. The latest credit product is the new OFF-off-balance sheet provided by Private Equity Shop Y and Hedge Fund X (as seen on the internet). In exchange for below market financing, loose structural terms, and a 10-20% down payment, the off-off-balance sheet structure is designed to take an undiversified smorgasborg of the bank’s very own hung deals fresh from the bank’s books. The banks liked it so much, they underwrote it at par, so it must be a steal at 89!

Recommendation: Being that off-off is a double negative, we think that maybe, just maybe, that selling loan assets to highly leveraged entities to which you provide the financing is more of a shell game than a credible solution.

Haha, gotcha! That’s crazy talk, this time it’s different. Between the new Citibank (NYSE: C) reality distortion field and the new non-SAAP acounting measure Earning Before Everything, the bottom has been put in.

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  1. Juan
    April 29th, 2008 | 2:21 pm

    Johnny, I think we’ve all had about enough of your anti-party sentiments. If you would please desist immediately and return to buying consumer home products on your personal credit cards we could turn this thing around yet.

  2. April 29th, 2008 | 2:40 pm

    Is it too soon to finance LBOs of the the highly leveraged entities?

  3. my2cents
    April 29th, 2008 | 3:19 pm

    where is the giant squid angle on all of this- for the love of god?

  4. To The Hilt
    April 29th, 2008 | 3:25 pm

    I love it. the solution to too much leverage is to add more leverage. that’s called innovation.

  5. Juan
    April 29th, 2008 | 3:31 pm

    “Their tentacles also lack the swivelling barbed clubs that make Mesonychoteuthis a potent warrior and hunter”


    “Once thawed and examined, the squid will be embalmed and preserved.”

    Has anyone notified Stevie Cohen?

  6. jasper
    April 29th, 2008 | 4:00 pm

    what is “top-tipped” ?

  7. April 29th, 2008 | 4:07 pm

    A top ticking brain fart. Our only hope for catching a giant squid is an off-balance sheet net.

  8. born to lose
    April 29th, 2008 | 5:28 pm

    Bank A: Would you hold this portfolio for a second, I gotta tie my shoes.

    Bank B: Sure, no problem.

    Bank A: (runs away) HAHAHA! You touched it last, you own it!

    Bank C (AKA “C”): Why didn’t I think of that?!

  9. T Double
    April 29th, 2008 | 5:30 pm

    To get the Giant we now realise the off-balance sheet net cannot reach deep enough. An off-balance sheet off-balance sheet net would surely get that sucker! As long as we keep away from any distortion fields on the high seas.

  10. KOPI
    April 29th, 2008 | 6:08 pm

    Old wisdom: Repo treasuries to the Fed to free up cash.

    New wisdom: Put to the Fed complex securities where the underlying collateral is made up of unsold LBO debt, condos in Newark, and Superman comic books!

    Problem solved. (See “Thanks” post)

  11. KOPI
    April 29th, 2008 | 6:11 pm

    Old wisdom: Repo treasuries to the Fed to free up cash.

    New wisdom: Put to the Fed complex securities where the underlying collateral is made up of unsold LBO debt, condos in Newark, and Superman comic books!

    Problem solved. (See earlier “Thanks” thread about future Americans’ amazing generosity)

  12. Rich
    April 29th, 2008 | 9:56 pm

    To increase the investment merit of the idea, you could add a rolling 2% of interest reinvested in powerball lottery tickets. Though a win could make securitization difficult as it would create an unstable cash flow.

  13. April 30th, 2008 | 12:25 am

    @ Rich

    You’re clearly not thinking off-box on this one, but your heart was in the right place. Any good securitization banker knows that any/most lottery winnings could easily be securitized into a cash flow CLO (collateralized lottery obligation) and if stable is your goal, made into an annuity stream for holders.

    Of course this cut & dry approach is simply no fun, and inevitably the “demand” would demand more complex structures, but thats a conversation for another time…

  14. Platinumfinger
    April 30th, 2008 | 5:34 am

    I can’t stand plain-vanilla products – I feel much better if I can’t calculate how much I was screwed