Watch out; Wall Street is finding new ways to slice and dice loans

livemint.com:

Subscribe to enjoy similar stories. Wall Street is cranking up its complex bond machine again. Goldman Sachs this month sold $475 million of public asset-backed securitization, or ABS, bonds backed by loans the bank makes to fund managers that tide them over until cash from investors comes in.

The first-of-its-kind deal is a lucrative byproduct of the New York bank’s push into loans to investment firms, such as these so-called capital-call lines. Goldman’s new deal reflects two trends transforming financial markets. Increasingly large managers of private-debt and private-equity funds are moving up in the Wall Street pecking order, but they often need money fast.

Banks, once again, are reinventing themselves to adapt. Bankers say the capital-call ABS and similar innovations help them safely serve clients while bringing in rich fees. But such efforts have preceded market excess in the past, to put it mildly.

Skeptics see parallels between CDOs (the collateralized debt obligations that helped fuel the financial crisis in 2008) and the growing use of SRTs (synthetic risk transfers), NAV loans (based on net asset values) and more. The transactions are relatively small for now. Still, they are intertwining banks (in Wall Street parlance, the sell side) with investors (the buy side) in ways that are new and difficult to parse for analysts, regulators and others.

“There’s a lot of scrutiny on the potential for spillover of exposure from private credit into the broader banking system," said Roy Choudhury, a managing director at Boston Consulting Group who advises banks on business with private-fund managers. Capital-call loans function like credit cards for private-fund managers. The funds borrow money to invest quickly in