new instruments
[making the rounds on Wall St]
Investment Dealers are excited to announce the newest structured
finance product
- Constant Obligation Leveraged Originated Structured Oscillating
Money Bridged Asset Guarantees, or COLOSTOMY BAGS. Designed to
accommodate the most sophisticated investment strategies, Colostomy
Bags contain the equity tranches of Structured High Interest Taxable
Derivatives, or SH IT-D, and are leveraged an infinite amount of
times through the innovative use of derivatives.
“Its an actively managed, unlimited liability, open ended investment
with no maturity date, which pays LIBOR plus 5,000 and has no
correlation to traditional investments” said a spokesman for the
Investment Dealer who engineered the product. “It’s based on a CDO
structure, but it’s designed to default BEFORE the first coupon
payment, which you’ll agree has no correlation with stodgy
traditional investments and is a perfect fit for portable alpha
strategies.” Following the default, each month more leverage is
added to the structure to pay for the coupon and the Dealer’s fees
which are set at 80%. “We feel the fees are reasonable, given the
adrenaline rush you’ll get each month attempting to value the tranches.”
The Colostomy Bags carry a AAA+ rating, based on the rating agencies
opinion that they are even safer than Treasuries. “You can’t use
traditional credit analysis to value these babies, no sir-ree” said a
spokesman for a rating agency. “Just like Icelandic Banks, we give
them the highest rating because you just know that the Fed will bail
out all the hedge funds who buy these things..remember like Long Term
Capital? And the best part is these structures contain NEGATIVE loss
given default assumptions, so by extension we feel that the CDS will
trade through Treasuries.”
“We’ve been tinkering with our model, which served us well for Enron
and the Telecoms in ‘02, and our stress testing shows that the
probability of loss in the senior tranche is basically zero.” The
model, constructed of a wishing well, Joseph Jett’s trading blotter,
and drawings of Unicorns then collapsed in a heap. “Well, back to
the drawing board!” he cackled.
A real money investor, huddled on the windowsill outside his office,
said he remained optimistic about holding the Colostomy Bags but was
a bit concerned with the 95% decline in value on the first day they
traded. “We’ve taken a bit of a haircut on these but I’m waiting to
see the first servicer report, which should arrive in a few months.
At first I was annoyed that the dealer who sold them to me refused to
make a market in them, but that makes my job easier since I’m not
tempted to sell.”
We located a hedge fund manager at a due diligence meeting in the VIP
room at Score’s. He said he was skeptical of the structure at first
but was dared into buying it by a fixed income salesman. “He said to
me, ‘what’s wrong with you, its quadruple A rated, just buy it.’ He
also said it was going into ‘an index’, although he didn’t say which
one, but I felt that I had to buy it. And that was good enough for me.”