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Lloyds On Hook For External Bank Loans


Risk exposure a cause for concern.


My firm, Investment Management Associates, sold Lloyds TSB Group (LYG) a couple of weeks ago. I still think it's one of the best run banks in the world, but its exposure to loans underwritten by other banks gave us pause and forced us to rethink our thesis.

Lloyds has a securitization conduit called Cancara it uses to securitize some of the loans it generates. No problem there. The company has proven very conservative in its underwriting and that's why it sports a very rare AAA rating by Standard & Poor's.

However, approximately two thirds of the $25 billion held in Cancara are loans that have been generated by other banks.

For a fee, Lloyds allowed other banks to fold their loans into Cancara and insured those loans with its own balance sheet. Call me paranoid, but with Lloyds on the hook, other banks have little incentive to care about the quality of the loans.

This was my firm's reasoning for selling the company I praised for a very long time. Again, there's a good chance this may end up being nothing. We'll monitor the performance of Cancara loans for a while and may buy it back at some point in the future.

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No positions in stocks mentioned.

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