If anyone could find a way to profit on the new bank regulations, it’s the world’s largest and well known private equity firm, Blackstone Group LP. Banks are under new regulations regarding credit risk, which limits the amount they can lend.
Two anonymous sources reported that Blackstone insured Citigroup Inc. for a $1.2 Billion pool of shipping loans. Basically, by doing this Blackstone is essentially freeing up 96% of the capital the bank would typically set aside to cover an inevitable default on a delinquent loan, and still be able to allocate it on their balance sheet.
By freeing up this capital, it allows the bank to lend more to homeowners and remain profitable in a market that can still cripple them again. Although many experts say this doesn’t safe guard the bank and actually shifts the risk into the shadow banking system, which is not regulated.
Shadow banks do not have a banking license and do not take deposits hence their rewards are larger, but risk is higher. Shadow banks include hedge funds, structured investment vehicles, like pensions, and other non-bank financial institutions.
Philippe Bodereau, head of European credit research at Pacific Investment Management Co. in London said, “It’s a form of financial engineering. It was dead but it seems to be coming back as investors scramble for yield. If you saw this on a massive scale, you would certainly question whether this was the best way for regulators to de-risk the system.”
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