As long as the ratings agencies muse about downgrading rather than doing any actual downgrading, Portfolio Managers of large CDO pools will continue to rake in management fees on significantly overvalued assets.
Sure, these fees may be low in industry terms, meaning around 50bps, but 50bps on a few billion dollars of assets (that really isn’t worth anything close to that, as the Bear fiasco is proving) amounts to well over $10 million.
The Portfolio Managers are shrewdly aware of this. Here’s a conversation that one of our readers had with a PM of a $2.2 billion CDO pool.
Asked how he is doing, he says “nothing.” I ask, “What do you mean nothing, I hear all these stories about CDOs and losses (Bear Stearns for example)?” He shrugs and says nothing will happen until the rating agencies do something. Asked about losses, he says they are there but he doesn't have to mark to market his portfolio until someone discovers it or the rating agencies force his hand. So his plan is to lie low and collect the management fees (and bonus) and pretend as if there are no losses.
The PM has four colleagues that split the nice $10 million collected on the 50bps management fee. All this for just hanging out, from the convo:
He says he has the best job in the world and says there is really no work to do every day. Just wait and hope that the rating agencies don't downgrade his CDO pool and voila, at the end of the year, he and his partners can split the $10 million spoils (minus the expenses for one Park Avenue office, and a secretary).
Posted by Anonymous, Jul 12, 2007 10:12AM
Most PMs have to buy equity in their CDOs in order to market the deal. Some of the new entrants sometimes have to buy 100% of the equity. If cashflows start deteriorating they would also lose their sub management fee which is paid after interest is paid on the notes and only, sometimes, if certain collateralization tests are passed. Not sure they are chilling in their offices right now.