PHOTO: JAAP BUITENDIJK – Hollywood blockbuster The Big Short portrayed what lead to the 2008 financial crisis.
When hedge fund managers from FrontPoint Partners drove through a Florida suburb in the run-up to the financial crisis, they quickly realised the US housing market was built on sand. Anyone could grab a 2,000 sq ft slice of the American dream in the Sunshine State.
These toxic subprime mortgages were then bundled together in collateralised debt obligations (CDOs), given top ratings from credit agencies, and sold on in a neat, explosive package to buyers unaware that the US housing bubble was about to burst. The famed hedge fund depicted in Hollywood blockbuster The Big Short would cash in on the market’s over exuberance.
“The buyers of so-called triple A, double A, triple B, double B tranches in these collateralised loan obligations (CLOs) are making an investment off data that is dubious at best,” says Robin Doumar, founder of credit manager Park Square Capital. Doumar is not casting his eye back to the housing bubble but calling out a new one that could be emerging in the risky leveraged loan market, which fuels private equity buyouts and bankrolls companies with poor credit ratings.
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