Surging Windstream Spreads Remind Wall Street Why Synthetic CDO’s Are A Bad Idea

Just a couple of weeks ago, we wrote a post about Citibank and the 35 year old they recently put in charge of once again making the bank into a powerhouse in the Synthetic CDO market. Less than a decade after being forced to take a taxpayer funded bailout to avoid an embarrassing bankruptcy filing, it seemed as though Citi had learned precisely the wrong lesson from the 2009 financial collapse, namely that their bad behavior would forever be backstopped by the American taxpayer. But please don’t lose too much sleep over the risk to your tax bills because this time Citi says they’re positive they’re building the business in a “way that insulates them from any losses.”

Now, fast forward just a couple of weeks and it seems that the serial high-yield issuer, Windstream Communications, is suddenly reminding wall street why it’s a bad idea to package up a bunch of synthetic securities referencing risky credits, lever it 10x and then tranche it up and pretend there is no risk.

As Bloomberg points out today, in the beginning of August, Windstream’s 2-year credit spreads were historically tight to 5-year risk, a phenomenon partially attributable to a surge in Synthetic CDO demand for short-dated contracts. But that all changed in a matter of weeks after Windstream missed earnings, cut its dividend and got slapped with lawsuit from a hedge fund alleging that one of the company’s spinoffs amounted to a default.

The telecommunications company features in an estimated $3.5 billion of complex wagers — known as synthetic CDOs — that the global credit boom will keep America’s heavily indebted companies out of trouble for a while longer. Junk-rated Windstream, along with the magic of financial engineering, helped Wall Street turbocharge yields and breathe new life into an exotic …read more

Source:: Zerohedge.com

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