The first major signal of the coming 2008 collapse of mortgage-backed securities (MBS) and their derivatives was given, when two Bear Stearns investment bank hedge funds—the “High-Grade Structured Credit Strategies Fund” and the “High-Grade Structured Credit Strategies Enhanced Leverage Fund”—failed in June-July 2007 (although EIR’s famous March 17, 2007 cover story had raised such a crash of real estate finance months earlier). Those failures exposed ALL $11 trillion MBS and credit derivatives-based funds as not worth nearly what their investors, managers, and bankers valued them at.
Today’s “private credit,” so called, also brings millions of individual investors, and banks with money to lend, into thousands of non-bank funds which in turn are making loans not traded on markets, to companies, the creditworthiness of many of which is unknown.
Reuters reported March 12 that Morgan Stanley had become the first major bank to limit or “gate” withdrawals from its own private credit funds, after many non-banks had done so in recent months, following collapse of two auto sector companies of dubious credit. Investors had tried to redeem 11% of the Morgan Stanley private credit shares yesterday.
More significantly, JPMorgan Chase announced that it had cut the collateral value of shares in its own affiliated private credit funds, cutting the leverage in the fund, meaning that investors can borrow less against their assets, now worth less. That action looks like the start of the June 2007 “signal.”
The major difference is that in 2007-08, combined MBS and their credit derivatives started collapsing from a claimed “value” of nearly $20 trillion; “private credit” funds today are reportedly holding assets claimed to be worth between $2-3 trillion. They can, however, be the trigger for a rolling collapse. There are abroad much larger bubbles of debt which can’t be “extinguished,” in Hamilton’s phrase, including the U.S. Federal debt market.
