Top German Regulator Warns of Financial "Bloodbath"

May 15 (EIRNS)--Jochen Sanio, head of the German financial regulatory agency BAFIN, chose blunt language yesterday to warn of a "bloodbath" caused by the over-leveraged locust funds, according to today's German newswires. "I hope those who are playing with fire there, know what they are doing before their fingers get burned." There is absolutely no transparency; no one knows how big the risks really are,-- apparently including those who are directly exposed to them. Proof is the fact that risk premiums are extremely low, which just boosts the explosive growth of credit derivatives. BAFIN is extremely alarmed over these developments, Sanio said, and he supported the initiative for fund transparency which the German government is trying to get through the Group of Eight over British opposition.

On the closely-related question of junk bonds, Dan Fuss of Loomis Sayles Bond Fund told Bloomberg today that "I haven't felt this nervous about a market ever." He said that high-risk securities are showing unmistakable signs of a bubble, with sales of the riskiest bonds increasing 39% from last year.

More than half of the junk bonds sold this year were used to pay for leveraged buyouts and mergers and acquisitions, according to Barclays Capital. A new development is that some contracts allow borrowers to choose to make their interest payments in additional junk bonds, instead of cash! "This is fantasy land for corporate treasurers," said Edward Altman, a professor of finance at NYU's Stern School of Business.

There have been 10 sales of such so-called toggle bonds this year, amounting to $5.14 billion. There were five sales totaling $4.05 billion last November and December. Only one such issue was ever sold before November, 2006.