from Follow the Money

Felix Salmon, matchmaker …

July 1, 2007

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Large, opaque financial institution with a long time horizon and lots of cash to invest in anything that yields more than Treasuries, please meet an opaque, hard-to-value (and sometimes hard-to-sell) financial instrument that now looking for new (and perhaps less-leveraged) suitors ....

Felix writes:

I think that the move from public and transparent markets to private and opaque markets is more than a blip. CDOs are in the middle: they're public and opaque. Where do they move from here? One possibility is that they snap chaotically back to being public and transparent. But the other possibility is that they move in the other direction, and become private and opaque: that would involve being snapped up by pools of private capital which don't mark to market and which can invest with a long time horizon. Those pools are already being formed, and they could prove to be very popular.

Felix appears to be talking about truely private pools of capital with long time horizons.   But the really big money with long time horizons often in state not private hands these days. Felix, Macroman and Steve Waldman ((interfluidity) have all suggested that China might help the Street out by buying up CDOs stuffed with various tranches of securities created out of subprime loans..  

After all, a lot of of folks in the market got pushed into riskier products when China bid up the price of all sorts of less risky assets.  If those riskier products don't turn out to be a great bet, it is only fair that China should come to the rescue ... 

I doubt Macro man and Steve Waldman thinks this really makes sense -- even if China's State Investment Company might be able to buy some structures a decent discount.  Felix, on the other hand, seems inclined to think it might be a good match. 

Then again, Felix has always had a bit of a crush on the structured credit market.  He generally thinks CDOs, synthetic CDOs, CPDOs and similar instruments that seem to be marked-to-model more often than naught (for good reason, according to Felix; why should the value of something as complex and beautiful as a bespoke CDO tranche be based on the last trade?) are a wee bit misunderstood.     

Sort of like China's state investment company.    

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