More credit crunch…

The equation is simple: banks stop lending, so yield curve arbitrageurs melt. The latest puddle is Peleton, which has to sell $9 billion in high quality mortgage backs.
The FT reports:

In a letter to investors Thursday, Mr Beller and co-founder Geoff Grant said the ABS fund ‘has recently experienced difficulties in the challenging credit markets’ and seen ‘severe’ falls in value.

‘In addition, because of their own well-publicised issues, credit providers 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,’ they wrote.

According to people close to Peloton, the fund was 4-5 times leveraged, normal for a credit fund, with 14 banks owed money, including Goldman Sachs, UBS and Merrill Lynch. The banks are allowing Peloton to lead the sale.

Peleton, like Jerome Kerivel, is another synecdoche for the compound fantasy we’ve woven together… and are now unravelling.