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In Bloomberg I read about this idea for a new Hybrid security: it’s called an eBond. It would pay credit default into the corporate debt make even some of the worst debt – AA – investment grade, tier one capital type debt with a stroke of a pen. Furthermore, by trading all of these securities using an exchange where there is a central counter party even much of the liquidity issues are obviated.

What did Mark Twain say? “History does not repeat itself, but it rhymes!”

We just say this fiscal alchemy – (more like mirrors and smoke) by taking iffy mortgage and adding a wrap provided by an insurance company. The insurance company’s pockets were not deep enough to pay off all of the bad debt so they went bust too.

Banks have recently been playing a similar game of “collateral transformation”, fiddling with guarantees to turn assets into collateral quality assets.

Heck, I saw one big bank pull off something that – it was more or less like the old synthetic CDOs.

The investors have flooded into the corporate debt market and even with the flood of investors into bands funds and the like the bonds they are just not that liquid. As long as the economy does not dip into a recession, or a liquidity crisis, the funds will be fine – but a small spike in redemptions could be a problem.

For the short term, these funds will do well as banks deleverage their balance sheets and encourage many clients to shift from deposits to money market obligations and the like.

With these rates investors are assuming large risks for diminished returns. As crazy as this sounds, there are few alternatives – thus opening a path to alchemists to flog their wares.

Run from these and other engineered securities – take real risk for real retunes. The only one making money on these engineered investments are the alchemists.

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