$1.2T in risky corporate debt showing similar warning signs to subprime crisis
A lot of the problem isn't in the debt as such, it is in the collateralization. When you bundle the debt and sell it on in slices with different risk profiles (i.e. separating out who gets paid first (least risky) to last (most risky) then it becomes really hard to understand how risky the debt slices are (which dictates how much they are worth).<p>People assume that the least risky debt (sometimes called super-senior) is worth its face value. The problem is that when things go wrong, investors lose confidence in the valuation of the debt. And suddenly a bank with say $1T of super-senior debt finds it is only worth $100B on the open market. And that means that the bank doesn't have the assets to back the loans it has made - so has to raise money by selling things. Selling things when you are in trouble is never a good idea, as you are forced to accept a discount. So you now have the market flooding with cheap assets (say securities), which then drops the value of the securities that other banks hold - which gives them problems in backing the loans they have made. Then they have to start selling.<p>And that's how a financial earthquake begins...