Barclays' Massive Loan Pool Eludes Notice

Since the crisis began, buyers for these instruments are scarce to non-existent. However, some banks have created so-called balance-sheet CLOs like Newfoundland in order to use their troubled loans as collateral to obtain short-term financing from central banks. The best-known example of such a transaction is a $2.8 billion CLO, known as Freedom, issued last year by Lehman Brothers.

How many other banks are creating balance-sheet CLOs to borrow from central banks is difficult to know. Morgan Stanley analyst Vishwanath Tirupattur says there are others, though he is not aware of any that rival even Freedom in size, much less a $30 billion giant like Newfoundland. Such information is hard to come by, however. Even though he specializes in CLOs, Tirupattur was unaware of the second $16 billion issue from Newfoundland last month.

"Some of these balance-sheet deals are not broadly distributed. I mean they're not distributed at all," Tirupattur says.

That's because investors are too spooked to buy them, for now. Whether they will ever return to the market for such highly complex products remains to be seen. It is ironic, however, that banks are now creating new structured securities like Newfoundland to extract themselves from the very mess such securities created in the first place.

The Moody's report explaining the triple-A rating given to Newfoundland last month is highly technical, referring to a "Correlated Binomial Expansion Technique," and a "weighted-average rating factor of 1040."

While there may not yet be a market for these securities, the fact that banks are still producing them is an ominous sign to people like John Kanas, a consultant to private equity investors and the former CEO of North Fork bank, bought by Capital One Financial Corp. (COF) in 2006.

"There should be a loud and clear voice demanding us to go back to simplicity and away from these esoteric products, but frankly I may be a lone voice in the wind because the creation and sale of these products is a very profitable business," Kanas says.

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