Blackstone greases the hedge fund world
Prime brokers’ new best friend: Blackstone
Bankers have been reluctant to talk about their three-letter deals recently. While SRTs are all the rage, details of them have been sparse.
US banks have turned to credit risk transfers as a way to reduce the amount of capital they must use to guard against losses on loans they’ve underwritten.
(More recently, these have become known as synthetic risk transfers, or SRTs, because there are never enough acronyms in finance.)
The FT has covered their rise extensively: huge private capital players such as Blackstone have got in on the action, Bank of America is helping regional banks issue them and some regulators have raised concerns.
Now, banks’ prime brokerage businesses, which give leverage to hedge funds, are angling for a foothold in the market.
These are not your run-of-the-mill SRTs. Historically, SRTs have been issued with relatively vanilla corporate and consumer loans serving as collateral.
Instead, these deals are backed by margin loans, the financing that banks give hedge funds to trade with. With those loans, funds buy stocks and bonds or enter into swaps and derivatives transactions on borrowed money, supercharging their returns.
Morgan Stanley last year struck a deal with Blackstone to transfer a portion of the risk on loans made by the bank’s prime brokerage unit to help release capital for more lending, DD’s Eric Platt, Amelia Pollard and Ortenca Aliaj report.
So far, it looks like the deal’s paid off. Prime brokerage desks have been among the most lucrative business units for big banks, and Morgan Stanley even gave the group’s returns a shout-out in its earnings report last week.
But other than Morgan Stanley, banks on Wall Street have mostly struggled to pull off SRTs on margin loans.
One problem is just how opaque these loans are. Hedge funds are famously private, and banks often agree to strict confidentiality terms with clients that don’t let them reveal where the funds are investing their money.
On top of that, those positions can often change rapidly — the collateral that backs the credit risk transfers when they’re first struck may change days or weeks later.
The stakes are high. One SRT investor was blunt: “You are betting on financial infrastructure not crumbling.”