New York traders were jolted awake early Thursday by the unthinkable news that their highest-risk financial instruments were capable of losing money.
New York fund manager Ivelina Green was jolted awake at 5 a.m. on Thursday by a panicked message from a colleague confirming the unthinkable: the financial instruments they had specifically purchased because they were classified as the market's riskiest debt were, in fact, experiencing a total meltdown.
The early-morning shockwaves unnerved the wider credit market, as traders scrambled to understand how a portfolio built exclusively from sub-investment grade, highly leveraged corporate junk could possibly fail to perform flawlessly. Analysts noted the steep losses were completely unforeseen by anyone who had not read the name of the asset class out loud.
When the prospectus explicitly warned of a high probability of total loss, we naturally assumed that was just a regulatory synonym for a guaranteed fourteen percent annual return.
The unexpected presence of risk in the highest-risk debt tranche prompted a massive sell-off, as portfolio managers across the city realized that words have meanings. By Thursday afternoon, frantic memos were circulating at BlackRock and KKR advising clients that their "distressed toxic liabilities" might actually be distressed, and urging managers to double-check whether any other heavily leveraged bets were secretly harboring downsides.
Seeking a safe haven from the volatility, Green reportedly spent the remainder of the morning rotating her clients' remaining capital into a new asset class clearly labeled "imminent catastrophic default," which she expects will provide a solid tailwind for the third quarter.