FORTUNE -- On Citigroup's recent conference call, CEO Michael Corbat said he was still worried about the economic recovery and the market.
"Looking ahead, I believe the environment is going to remain challenging," Corbat told his bank's investors. "Europe's issues, as the situation in Cyprus shows, still have the potential to rattle the markets and impact investor confidence."
Hopefully, Citi's clients weren't on the line. Recently, the bank has made good money pushing a type of bond deal that packages together risky loans and sells them off to investors as highly rated investments. In the first quarter of the year, the bank was the biggest underwriter of collateralized loan obligations. Citi (C) is also back in subprime -- earlier this month, it was one of the lead bankers on a $1.1 billion bond deal backed by auto loans to borrowers with low credit scores.
These are not the types of deals that investors buy when they are nervous, or should be, about the global economy. CLOs and subprime loan deals were popular before the financial crisis. They are hot again. Wall Street firms have sold nearly $30 billion in CLOs this year, more than triple what they sold in the same period a year ago, according to Thomson Reuters. Subprime auto loans deals hit $6.3 billion in the first quarter of this year, up nearly 30% from a year ago, according to trade publication Asset Backed Alert. Subprime home loan deals have been coming back as well, though they are still relatively rare. All the deals are part of Wall Street's securitization machine, which packs up loans and then chops them up into bonds to be sold to investors -- a good portion of which ground to a halt after the financial crisis.
But the resurgence of Wall Street's alphabet soup of investment products, which also includes asset-backed securities, or ABS, that are tied to credit cards and other consumer loans, is coming at a time when the banks' top executives are still seemingly worried about the global economy. Caution was the general theme when banks reported their first quarter earnings in mid-April.
"We are very close still to the epicenter of the crisis," Goldman Sachs CFO Harvey Schwartz told investors on his firm's first-quarter conference call. "Macro uncertainty continues to be a meaningful consideration for the global marketplace." And he's not alone in waving the warning flag at Goldman (GS). Earlier this year, Gary Cohn, Goldman's No. 2 executive, warned that investors in bonds should be worried about potential losses when interest rates rise. For its own trading book, Goldman has cut the amount of money it could lose if interest rates were to rise.
Yet, this isn't holding back Goldman's bankers. This year Goldman has sold more debt of companies rated CCC or worse than any other firm on Wall Street, according to research firm Dealogic. That's two notches worse than what typically qualifies as junk. Goldman has sold $2.3 billion of the low-rated corporate debt, or nearly 20% of all similar deals this year. All told, Wall Street firms arranged $12.6 billion in sales of corporate debt rated CCC or lower in the first quarter, about $1.5 billion more than a year ago.
But no corner of "high finance" is rebounding faster these days than the one for CLOs. The debt instruments act like mutual funds, buying up loans and selling off the portfolio to investors as bonds. Analysts say the deals are safer than they were before the financial crisis, because they are made up entirely of loans and not derivatives or other synthetic bets. What's more, they are generally backed by more collateral than past deals.
But nearly all the CLOs being formed these days are invested in loans made to companies with lower credit ratings. What's more, CLO managers have been putting more and more of their money into so-called covenant-lite loans, which have less protections for lenders. Morgan Stanley recently noted that more than half of the loans sold to non-bank lenders were covenant-lite.
In its recent quarterly earnings call with investors, Morgan Stanley CFO Ruth Porat said, "The periodic setbacks as evidenced in markets over the last several weeks is a reminder that the global economic recovery and market healing may not come in a straight line." That, of course, has not kept Morgan Stanley (MS) out of the CLO market. Earlier this month, the bank was the lead underwriter of a $421 million CLO from New Jersey-based Seix Investment Advisors. It was the first CLO issued by Seix since 2007, and another sign that the market for these deals is back.
Goldman Sachs and JPMorgan get the go-ahead from the Federal Reserve for their capital plans - but with conditions.
Correction: March 15, 3:55 PM.
FORTUNE -- The Federal Reserve approved the capital plans of 16 of the nation's 18 largest banks on Thursday as part of the final leg of their required stress tests.
Ally Financial, the former finance arm of General Motors (GM), and BB&T (BBT), a regional bank based in Winston-Salem, MOREStephen Gandel, senior editor - Mar 14, 2013 6:49 PM ET
A year ago CEO Jamie Dimon was still talking growth for his mega-bank.
Update: 2/27/13, 10:30 AM.
FORTUNE -- An encounter with a whale can really change a fella.
A year ago, at JPMorgan's investor day, CEO Jamie Dimon said he believed his mega-bank was still too small. He said his firm would continue hiring and opening branches, even as the economy remained slow.
This year, it appears Dimon's tune has changed.
JPMorgan Chase (JPM) MOREStephen Gandel, senior editor - Feb 26, 2013 12:28 PM ET
Latest proposal calls for board to investigate spinning off units.
FORTUNE -- It's time for parts of Citigroup to be put to sleep.
That's the opinion of a group of shareholders that includes a fund managed for Benedictine nuns and a union pension plan. Recently, the two investment funds along with an asset manager Trillium Asset Management filed a proposal with Citi that calls for the bank to be broken up. The MOREStephen Gandel, senior editor - Nov 15, 2012 2:06 PM ET
After Hurricane Sandy recedes, Corbat should consider a storm of deals for Citi.
FORTUNE -- Citigroup should dump its junk.
That's the advice of Goldman Sachs analyst Richard Ramsden for Citi CEO Michael Corbat, who took over the job two weeks ago. Ramsden says that delinquent home loans and other bad assets left over from the financial crisis have proven to be 10 times more toxic to Citi than to its rivals. MOREStephen Gandel, senior editor - Oct 31, 2012 11:31 AM ET
Michael Corbat is shifting from running Citi's bad bank, to running one that is still in not great shape.
FORTUNE -- Citigroup's new CEO Michael Corbat was an ivy league football star, who turned heads in the Harvard cafeteria.
"He was extremely well rounded," says Andrew Doctoroff, a fellow Harvard student, who wrote about the then All-Ivy offensive lineman in The Harvard Crimson in 1982. "He kept his athletic prowess in perspective."
Even MOREStephen Gandel, senior editor - Oct 16, 2012 4:34 PM ET
Vikram Pandit's surprise departure from Citigroup.
FORTUNE -- Here's the lead from today's NY Post story on Citigroup's third quarter earnings:
After five years of languishing in the doghouse, Citigroup's boss, Vikram Pandit, may be enjoying a stint in the sun.
Maybe they meant he would be riding into the sunset...
Citi (C) this morning announced that Pandit has stepped down as CEO and a member of the Citi board, effective immediately. He will MOREDan Primack - Oct 16, 2012 8:23 AM ET
As the financial system melted down in the fall of 2008, the Treasury Department gave the nation's biggest banks billions in new capital. Was it all necessary? No, says the former FDIC chief in her new book.
By Sheila Bair, contributor
FORTUNE -- Few players had as close a view of the financial crisis as Sheila Bair, chairman of the Federal Deposit Insurance Corp. from June 2006 to July 2011. In MORESep 20, 2012 5:00 AM ET
Bank has paid out or agreed to $2.3 billion in penalties related to the financial crisis in the past year.
FORTUNE -- Citigroup put another piece of its financial crisis clean up bill behind it.
The bank will pay $590 million to investors who bought the company's stock in the run-up to the financial crisis. The payment settles a class action lawsuit in which the bank's shareholders claimed Citi's management misled investors MOREStephen Gandel, senior editor - Aug 29, 2012 3:02 PM ET
Caught up in the Libor scandal, the star investment banker and American CEO of the British bank was forced to resign. His departure represents the end of an era for big banks.
FORTUNE -- By the time the call came, Bob Diamond knew his tenure as CEO of Barclays was at an end. It was 9:30 p.m. on Monday, July 2, and Diamond had just gotten home from the office when MOREShawn Tully, senior editor-at-large - Jul 30, 2012 5:00 AM ET
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