Like some sort of medieval plague, the United States sub-prime debacle ravaged the world's financial markets, spreading far and wide and infecting all those that came into contact with it. The credit crunch that resulted shocked the investment community and, like all financial hiccups, sentiment soon took over and the market began to choke.
Even market veterans were shocked at the extent of the contagion. "It's insanity. We had insanity on the upside and now we have insanity on the downside . this is the first time for 25 years debt stopped trading for over a month and a half," one traumatised manager said last week.
Traditionally conservative fixed income investments took as much of a battering as the riskier high-yield plays.
Take the investment grade loan market as an example. One manager Investor Weekly spoke to had hedged his sub-prime exposure with the highest grade debt on the market, namely corporate loans.
And yet corporate loans were hammered. Investment grade debt that usually traded in the secondary loan market at or above 100 cents in the dollar (known as par) collapsed to as low as between 93 cents to 95 cents in the dollar.
"It's an anomaly. We were not rewarded by our conservative allocations to corporate debt, which was hit harder than distressed and high-yield investors. Some of our loan managers lost between 5 per cent and 15 per cent," fund of hedge funds Infiniti Capital portfolio manager Iain Hamilton said.
Many are asking when this insanity will come to an end. Hamilton is confident. For him the mere fact loan values fell so low provides huge opportunities for investors to buy at the bottom of the market.
As a fund of fund manager he is hearing phrases such as "once in a lifetime opportunity" and "I've never seen credit assets so cheap in my life" being bandied about.
And yet he also urges caution. "We are seeing sanity return. Average loan values are back up to about 98 cents in the dollar, bid offer spreads are coming in and the high-yield market is returning . but we are still on a knife edge. An unforseen event right now would see us right back to where we started," he said.
During the Black Death in fourteenth century Europe handcarts laden with plague victims would trundle along darkened streets, their owners crying "bring out your dead". Like the Black Death, sub-prime did not discriminate in its victims.
The well-heeled Bear Stearns and Basis Capitals of this world suffered in the same way as the rest of the market. Nobody was protected.
