Dow -315 Plunge Due to Peloton Partners ABS Fund Liquidation
The Dow industrials' 315-point plunge Friday was triggered by a margin call,
when lenders to London's Peloton Partners ABS hedge fund asked for more collateral or cash forcing a sell off of the assets in the fund.
Peloton Partners suspended client redemptions in its other fund, the $1.7 billion Multi-Strategy Fund,
which has $700 million of its assets invested in the ABS fund that it is shutting.
The surprise, says MSN Money's Jim Jubak, was that the fund suddenly decided to liquidate all of its $9 billion in leveraged assets.
The Nattering One muses...
the market for highly rated mortgage securities on which the Peloton ABS Fund focused has been a recent casualty of the credit markets dysfunction.
Since the end of January, the triple-A section of the ABX index, which tracks the performance of such securities,
has fallen some 15% for securities issued in the second half of 2006 and the first half of 2007.
Caught with their shorts down... Since the ABS fund was highly leveraged with borrowed money, as the values of the securities fell,
the bankers who lent the money demanded more collateral to guarantee that Peloton could pay back the money it had borrowed.
For a lack of options to resolve the margin call, Peloton were forced to shut the fund down and liquidate its $9 billion in leveraged assets.
Peloton's management stated in a letter to investors that credit providers such as banks:
"have been severely tightening terms without regard to the creditworthiness or track record of individual firms,
which has compounded our difficulties and made it impossible to meet margin calls."
when lenders to London's Peloton Partners ABS hedge fund asked for more collateral or cash forcing a sell off of the assets in the fund.
Peloton Partners suspended client redemptions in its other fund, the $1.7 billion Multi-Strategy Fund,
which has $700 million of its assets invested in the ABS fund that it is shutting.
The surprise, says MSN Money's Jim Jubak, was that the fund suddenly decided to liquidate all of its $9 billion in leveraged assets.
The Nattering One muses...
the market for highly rated mortgage securities on which the Peloton ABS Fund focused has been a recent casualty of the credit markets dysfunction.
Since the end of January, the triple-A section of the ABX index, which tracks the performance of such securities,
has fallen some 15% for securities issued in the second half of 2006 and the first half of 2007.
Caught with their shorts down... Since the ABS fund was highly leveraged with borrowed money, as the values of the securities fell,
the bankers who lent the money demanded more collateral to guarantee that Peloton could pay back the money it had borrowed.
For a lack of options to resolve the margin call, Peloton were forced to shut the fund down and liquidate its $9 billion in leveraged assets.
Peloton's management stated in a letter to investors that credit providers such as banks:
"have been severely tightening terms without regard to the creditworthiness or track record of individual firms,
which has compounded our difficulties and made it impossible to meet margin calls."
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