Banks selling debt for cheap

As the credit markets seized up over the summer, the private equity firms that were in high gear ran into troubled waters. Gone was the buyout shops' access to cheap loans.

Gone, too, even more suddenly, was investor demand for the loans -- and the price for them fell in step. That left Wall Street banks holding some $400 billion in debt they had promised as financing for purchases private-equity firms had in the works globally.

With the economy slowing and profits weakening, the banks could be stuck holding these hundreds of billions of dollars of loans for months to come -- a big risk
After the Fed rate, the banks have been able to sell off a portion of those debts; examples include $26.4 billion for Kohlberg Kravis Roberts & Co.'s buyout of First Data Corp.

The sales haven't come easily -- or profitably. They have offered only the highest-quality portions of the debt for sale, and that at a loss. To accomplish that they agreed to sell the debt at 96 cents per dollar, locking in losses after their fees were figured into the deal.

The banks have also tried to convince investors by promising 60-day protection on price. Yet many hedge funds decided to sit on the sidelines, assuming that on day 61, when the guarantee expired, they could pick up the debt for less money in the secondary market.

-Subir