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May 7, 2014

Borrowing Cash to Buy Complex Assets Is In Vogue Again

“Banks again are doling out money to hedge funds and other investors to finance purchases of complex debt securities, returning to a practice that helped fuel the debt boom ahead of the financial crisis.

“RBC Capital Markets, Société Générale SA and Wells Fargo & Co. are among the banks offering to let investors borrow money, also known as providing leverage, to buy collateralized loan obligations, say investors and bankers. CLOs are bonds typically backed by pools of low-rated corporate loans.

“Borrowing programs for such esoteric securities have been only selectively available in the years since the crisis. While banks have lent to a handful of investors, the practice picked up late last year when funding costs began to fall. Even now, the use of leverage is relatively nascent for these securities.

“Banks’ increased willingness to lend follows new rules weighing on the $300 billion U.S. CLO market. Many banks own CLOs themselves, holding about $130 billion on their books. New regulations may mean some banks will be forced to sell some CLOs in the next few years.”

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Read full Wall Street Journal article here

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