The inability to short bank debt effectively was a focal point for participants, who gave views on hedging and managing portfolios. Robert Milam, a v.p. and par loan trader with J.P. Morgan, noted there have been two attempts to short bank debt, but neither has panned out. He said, however, that there are ways to manage portfolios through shorting other instruments, such as bonds, equity and credit default swap products.
He gave an example of a play J.P. Morgan took on Wyndham International following the terrorist attacks on the U.S. He said J.P. Morgan took the position that the credit was overly beaten up so the bank went long on Wyndham and bought credit default swaps against other hotel companies. J.P. Morgan lost money on the hedges, but did well on Wyndham, he explained.
Allan Brown, a portfolio manager and co-head of distressed debt at Concordia Advisors, noted that though the bank market is getting more liquid, you still cannot short effectively. "Guys on the prop desks will do it before they settle," he noted. Instead, Concordia goes long on bank debt and shorts bonds. Howard Tiffen, managing director and senior portfolio manager for Van Kampen Investments, explained his firm is long-only, but they do get calls from market participants asking Van Kampen to lend them loans. He rhetorically asked why he would want to do this, so another investor could take a short position.