October 5, 2007 (LPAC)--The large banks are packaging deals with the vulture funds, offering discounted loans if they agree to use the money to buy back junk held by the lender bank itself, according to the Financial Times. This is a desperate measure to get rid of the estimated $400 billion in loans provided to the hedge funds for leveraged buyouts (LBOs) by the major banks, just as the credit system froze up. The banks have been unable to pass this junk off, even at a discount. By running it through the bottom-sucker hedge funds, they hide these discounts, which would otherwise force them to further write down the rest of their junk.

The FT names Citi, Barclays, UBS, and Credit Suisse as banks involved in this scheme.

The FT quotes a Private Equity Intelligence report that says 32 "distressed debt" (vulture) funds are trying to raise $26 billion, which, with leverage, would provide $100 billion to buy up some of this junk. However, the FT's James Mackintosh reports, "If the amount raised falls far short of the overhang, as many believe it will, and the U.S. falls into recession, bank loans could turn out to be worth far less than today."