Matt Levine’s Money Stuff: People Are Worried About Deleveraging

People are worried about the basis trade

The basic fact of finance is that there are a lot of big important firms whose job is to borrow money to own financial assets. Sometimes the value of the financial assets goes down, a firm has to pay back the money it borrowed, but the assets it owns are now worth less than the loans against them. So the firm has to go sell other, better assets to raise money to pay back the loans against the assets that went down. (This is called “contagion.”) Or, worse, all of the firm’s assets are worth ...