Askin Capital lost $600M on mortgage bonds — and proved leverage can kill in a week

Askin Capital Management ran a complex of hedge funds — Granite Partners LP and Granite Capital — that invested in mortgage-backed securities, specifically collateralized mortgage obligations (CMOs). The funds managed approximately $600-700 million in investor capital.

David Askin, the founder, marketed the funds as low-risk, 'market neutral' investments promising 15% annual returns. The strategy used extreme leverage: borrowing roughly $2.50 for every $1 of investor capital, creating a portfolio of $2.5 billion in securities against $600 million in equity.

When the Federal Reserve began raising interest rates in February 1994, bond prices fell sharply. The CMO securities — particularly principal-only strips — plummeted because higher rates slowed mortgage prepayments. Brokerages including Kidder Peabody and Bear Stearns issued margin calls that Askin could not meet, and they liquidated the holdings at fire-sale prices.

The funds were wiped out in weeks. The SEC later barred Askin from the securities industry for two years for misleading investors about the pricing of the funds' holdings. The case became a classic example of the dangers of leverage in illiquid derivatives markets.