Profiting From The Meltdown

A consortium of the nation's leading investment banks have quietly created an index that is not only protecting them against the recent market meltdown but also promising to make them bundles of money in the process.

The index, known as LCDX, was created just weeks before the meltdown began by shrewd financial operatives like JPMorgan Chase (nyse: JPM - news - people ) and Goldman Sachs (nyse: GS - news - people ), which suspected trouble was brewing in the leveraged loan market and needed a way to protect themselves and their hedge fund clients.

This was just-in-time financial engineering. On May 23, LCDX, a credit derivatives contract covering the potential default of 100 large corporate names, made its debut at 100.5. Rising interest rates, widespread fear about the fallout from the subprime mortgage fiasco, and an overhang of $250 billion in private equity loans that had to be refinanced triggered a vicious tumble in the stock market.

By late June, as fears about the extent of the subprime mortgage fiasco spread, the LCDX began to weaken, and those who'd shorted it began making money. Hedge funds loaded to the gills with leveraged buyout loans saw it as a way of hedging their positions, as the cash market in those loans was relatively illiquid.

Goldman Sachs has hedged a large percentage of its $72 billion in obligations, including private equity commitments. Bear Stearns (nyse: BSC - news - people ) reported last Friday it was "making money on hedges related to some large leveraged buyout loans ... or has been selling at lower prices than anticipated."

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http://www.forbes.com/home/opinions/2007/08/06/croesus-chronicles-indexes-oped-cz_rl_0807croesus.html