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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