Morgan Stanley to Turn Junk Loan CDOs Into AAA Treasure

July 9, 2009

(ChattahBox)—According to a Bloomberg report, Morgan Stanley has a plan in the works to magically transform collateralized debt obligations or CDOs backed by loans, downgraded to near rock bottom ratings of Baa2 and bundle them into new instruments with AAA ratings.

This creative financing scheme of Morgan Stanley’s is a first of its kind transaction, using CDOs backed by loans rather than mortgage instruments, as banks are becoming desperate to lower the risk of carrying downgraded commercial mortgage debt.

The rise of CDOs and other structured finance securities forced the largest financial institutions in the world to write down nearly $1.47 trillion in losses, when the financial system crashed last year.

Now, Morgan Stanley and other banks are looking at ways to deal with the massive commercial debt on its books and turning once again to structured finance securities to make junk instruments disappear.

Morgan Stanley’s new securities are based on a popular financing structure known as Re-REMICs, which bundle junk mortgage securities into new AAA bonds that allow investors a layer of protection to avoid the risks associated with downgrades, such as increasing capital.

The banking institution plans to sell $87.1 million of new bundled securities that should receive a top AAA rating along with $42.9 million of notes graded Baa2, which is the second lowest possible rating.

Greywolf CLO I Ltd., a CDO formed in January 2007 by Goldman Sachs Group Inc, which is a type of CDO called a collateralized loan obligation, or CLO, created the new bonds.

As the worst housing slump in decades continues and shows no sign of recovery, other banks are following in the footsteps of Morgan Stanley, by issuing mortgage backed re-REMICs to protect against losses on residential-mortgage securities.


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2 Responses to “Morgan Stanley to Turn Junk Loan CDOs Into AAA Treasure”

  1. Debt Loan – Morgan Stanley to Turn Junk Loan CDOs Into AAA Treasure – Chattahbox.com « Debt Loan on July 9th, 2009 9:03 pm

    […] Morgan Stanley to Turn Junk Loan CDOs Into AAA Treasure – Chattahbox.com(ChattahBox)—According to a Bloomberg report, Morgan Stanley has a plan in the works to magically transform collateralized debt obligations or CDOs backed by loans, downgraded to near rock bottom ratings of Baa2 and bundle them into new instruments […]

  2. Morgan Stanley to Turn Junk Loan CDOs Into AAA Treasure … on July 10th, 2009 10:03 am

    […] here: Morgan Stanley to Turn Junk Loan CDOs Into AAA Treasure … Posted in […]

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