Many Wall Street and global commercial banks and investment banks are currently sitting on billions of dollars of “loans” they never had an intention to keep on their books. Such firms act as the bridge lender between a private equity firm in getting a new deal financed and the ultimate purchaser of the loans, such as hedge funds, retirement funds, wealthy individuals, insurance companies, etc. Many of these ultimate debt buyers are currently telling major banks “Thanks but no thanks…we don’t want any more.” Nobody wants the hot potato.
The ripple in financial markets? The sharp drop in the Dow last week comes to mind. The Dow had its worst week in four years. Scared money goes in search of safety and liquidity. Hence, the sharp rise in U.S. Treasuries last week, with bond prices having their largest gain in 10 months.