Wall Street's Lucrative Leveraged-Debt Machine Is Breaking Down

One of the most lucrative money-making machines in the world of finance is all clogged up, threatening a year of pain for Wall Street banks and private-equity barons as a decade-long deal boom goes bust.

After driving a flurry of mega buyouts that contributed to a $1 trillion profit haul in the good times, some of the world’s largest banks have been forced to take big writedowns on debt-fueled mergers and acquisitions underwritten late in the cheap-money era. Elon Musk’s chaotic takeover of Twitter Inc. is proving especially painful, saddling a Morgan Stanley-led cohort with around $4 billion in estimated paper losses, according to industry experts and Bloomberg calculations.

The easy days aren’t coming back anytime soon for the fee-rich business of leveraged lending as a much-anticipated recession looms. Cue oncoming cuts to bonuses and jobs across the investment-banking industry as firms from Goldman Sachs Group Inc. to Credit Suisse Group AG contend with a slump in revenue.

Few have dodged the fallout. But Bank of America Corp., Barclays Plc and Morgan Stanley are among the most exposed to around $40 billion of risky loans and bonds still stuck on bank balance sheets — whose value has fallen dramatically as institutional buyers vanish.

“The dislocation is more pronounced and longer lasting than anything since the Great Financial Crisis,” said Richard Zogheb, global head of debt capital markets at Citigroup Inc. “Investors have no appetite for cyclical businesses."

The most sophisticated players, paid to know when the music stops, were doling out risky corporate loans at what now looks like ludicrously generous terms as recently as last April — effectively betting that the easy-money days would live on even as inflation raged. Now the Federal Reserve’s resolve to tighten monetary policy at the fastest pace in the modern era has left them blindsided, cooling the M&A boom that’s enriched a generation of bankers and buyout executives over the past decade.