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$7 billion invested without confidence
The $11 billion fund
The firm had raised that fund in 2007 and 2008 because it expected a lot of distress to arrive. Until then, the largest distressed debt fund in history was its own $2.5 billion fund from 2002. Now Lehman was gone, people were predicting the end of the world, and every financial institution looked ready to melt down.
Two outcomes
There was no pattern to recognize for the end of the world, and no data or prior experience to lean on, only supposition. The reasoning came down to two outcomes. If the financial world melted down and Oaktree invested, it would not matter. If Oaktree held back and the world did not melt down, the firm would not have done its job.
The numbers helped too. If the world held together, the firm was buying debt at bargain prices, including companies that private equity buyers had bought out two, three, or four years earlier. Those companies could end up worth a fifth or a fourth of what was paid, and Oaktree would still break even.
Fifteen weeks of buying
Bruce Karsh, who runs those funds, invested an average of $450 million a week for 15 weeks, about $7 billion in all. The firm was absolutely not confident while it did it.
Why did Lehman's failure freeze credit markets?
Lehman Brothers filed for bankruptcy on September 15, 2008, the largest bankruptcy filing in United States history. The next day, the Reserve Primary Fund, a money market fund that held Lehman's debt, announced its shares were worth 97 cents instead of a dollar. Investors pulled large sums out of money market funds in the following days. Those funds were major buyers of the short-term loans companies use to cover payroll and bills, and that lending dried up.
Why do leveraged buyouts wipe out equity so quickly?
A leveraged buyout pays for a company largely with borrowed money, and the debt is placed on the company itself. Lenders are paid before owners, so any drop in the company's value comes out of the owners' stake first. When a purchase is made near a market peak, a modest fall in value can erase the owners' entire investment. In a bankruptcy, creditors are paid ahead of owners from whatever the company's assets bring in.
Why do bonds sell at bargain prices in crises?
Many holders sell in a crisis because they are forced to. Funds facing withdrawals need cash, and rules at banks, insurers, and pension funds often require them to dump bonds once a credit rating falls below investment grade. With so many sellers and so few buyers, prices drop well below what the borrower's assets are likely to repay. The extra yield that high-yield bonds paid over Treasuries, as tracked by the ICE BofA index, climbed above 20 percentage points in December 2008.
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