Kass: First Data Aside, Banks Are Still Traps

These blog posts originally appeared on RealMoney Silver on Oct. 1.

First Data Deal Equals More Credit Crunch -- at 7:42 a.m. EDT

On Thursday the credit and equity markets were relieved to learn that the First Data loan deal went through with a better-than-expected price of $96 from Credit Suisse (CS) and Citigroup (NYSE).

That news item seemed to confirm that the Fed was successful in reversing some of the seizure in the credit markets, and that, in general, the improvement in equities was rational and, in particular, the improvement in financial stocks was justified.

By contrast, I believe that there is less than meets the eye to the "tell" associated with the First Data transaction, and I shorted Citigroup and expanded my short book further after learning the information that follows.

According to conversations I have had with several buyers of the First Data loans, it appears that the investment banks were only able to sell the merchandise at the $96 price by offering very attractive financing terms to a number of hedge funds that bought the loans (read: lower interest charges). I suppose those hedge funds will mark the loans "to model," ensuring a positive carry and levered returns.

In other words, Credit Suisse and Citigroup essentially transferred or laid off a portion of their First Data liabilities from KKR Financial Holdings (KFN) to the participating hedge funds.

Although the world's equity markets are signaling a substantive improvement in the fluidity and liquidity of the credit markets, that optimism appears to be overstated -- at least based on the structure of the First Data loan offering.

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