Markets
Supercharged Debt Bets Unravel and Expose Wall Street Risks
- Low rates spurred bond sales to buyers eager to juice returns
- ‘You have junkier and junkier debt, and it’s super levered up’
A pedestrian wearing a protective mask walks along Wall Street in New York.
Photographer: Michael Nagle/BloombergThis article is for subscribers only.
For years, regulators have tried to make the financial system safer by blocking banks from taking on the extreme leverage that almost toppled the industry in 2008. Turns out, the risks just moved.
In a matter of days, a slew of trades unraveled to expose various forms of soured levered bets at their heart. Michael Hintze’s flagship hedge fund scrambled to contain losses on a structured credit trade gone awry. Banks including Citigroup Inc. tried to sell $1.3 billion of risky loans to unwind clients’ leveraged wagers. Funds that borrow to load up on mortgage bonds fed a flood of liquidations. A similar situation played out at municipal-bond funds.