Winter (Economic & Market) Watch » Money for Nothin’ and Your Chicks for Free: "The fees for arranging loans are as alluring for the commercial banks as they were for subprime lenders. “It’s like crack cocaine for them,” says the unnamed private equity partner. In LBO deals, “the banks don’t care any more about the [quality of] credit. As long as they can sell it all, they’re fine.
Why do bond investors put up with this? “They don’t really have much choice…..if you’re managing a high-yield bond fund, there’s really not an option of going to 25 per cent cash. So you have to invest in the best deals that you can find. And because there’s so much money out there, the issuers can say, ‘You want to argue about covenants? The deal’s oversubscribed 3 to 1. See you on the next one”…..
If that strategy explodes in their faces because they end up holding some worthless junk debt, so be it. For as long as it lasts, it’s an easy route to profits. Hedge funds get into trouble and are forced to close shop all the time, but no one ever asks them to return their fees. “Why would you not just take the highest possible risk with other people’s money? If there’s literally no downside, it’s the rational thing for you to do…"
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