Could Wall Street’s coronavirus tsunami get worse?

What could be more searing than Ackman’s wake-up call, I asked the senior Wall Street banker when we spoke first thing this morning. He seemed especially worried about a word I hadn’t heard since the 2008 financial crisis—how “interconnected” the financial system is. It’s why, you may recall, Bear Stearns had to be rescued from filing for bankruptcy and pushed into the arms of JPMorgan Chase. It’s why AIG, the huge insurance company, had to be bailed out to the tune of $185 billion. It’s why trillions of dollars had to be injected into the financial system starting over a decade ago. It’s probably why, in a convoluted way, Lehman Brothers couldn’t be rescued.

Now, apparently, the scourge of interconnectivity is back. Companies are drawing down their lines of credit with abandon. The senior banker seemed to be especially concerned about the portfolios of private equity companies, which are by definition mostly piled with debt and therefore at higher risk of default as the economy contracts. The big worry now among private equity types is that the $1.5 trillion or so of so-called “dry powder”—money that is sitting unused in their coffers or on-call from their limited partners—will now be needed to shore up existing portfolio companies with acute cash needs, rather than for new investments, which would be the preferred course of action in a more normal time, especially with stock prices down around 35% from their February highs. The big worry currently is that the limited partners of private equity funds have enough of their own problems that now they won’t be able to honor their capital calls as they start coming in from the general partners.