Bitter infighting has erupted across Wall Street as vanishing returns from Collateralized Loan Obligations prompt investors to search for the colleague who mistakenly tied their guaranteed profits to real-world economic conditions.
For over a decade, bundling low-grade corporate debt into CLOs generated some of the juiciest fixed-income returns on the street, operating on the industry-wide consensus that the underlying loans were irrelevant to the payout. But as the asset class deteriorates and returns evaporate, panic has set in. Firms are now accusing rival managers and internal structurers of gross negligence for allowing the actual financial health of the borrowing companies to impact their quarterly print.
We had a flawless mechanism for turning the debt of distressed software startups into a guaranteed 11 percent yield, and I want to know who let reality breach the perimeter.
The blame game has accelerated a mass exodus from the once-lucrative asset class. Institutional investors, terrified by the sudden introduction of cause and effect into their fixed-income portfolios, are rapidly pulling capital as they search for new vehicles immune to the concept of failure.
In an emergency memo to clients on Thursday, KKR assured its remaining investors that a team of top analysts is working around the clock to sever the portfolio's tragic new connection to the broader U.S. economy.