The predicament of primary loan book hedging
WHO WOULD WANT to be a bank credit portfolio manager in the fourth quarter of 2007?
Fear has led to substantial reductions in liquidity in the cash bond, loan and CDS markets, leaving banks scrambling to manage their leveraged loan exposures and assess the damage in their structured credit positions.
Credit portfolio management groups have been preparing themselves for the bad times since banks pulled themselves out of the last recession, which was marked by several high-profile corporate defaults. Having learnt the painful and expensive lessons of Enron, WorldCom and the like, many banks established credit portfolio management practices to hedge their multi-billion dollar and euro corporate loan books and avoid the losses sustained in previous downturns.
Have the lessons been learnt? Are the techniques they have developed robust? Although the art of credit portfolio management isn’t new, it just got much harder as the golden age of credit came to a shuddering halt, hastened by the collapse of the US sub-prime market.
Deutsche Bank, Morgan Stanley, Citi, Bank of America, ABN Amro, UniCredit, Barclays Capital, JPMorgan, Dresdner Kleinwort and Société Générale are among the early adopters of credit portfolio management techniques.