Blackstone, the US private equity giant, emerged yesterday as the first major Wall Street buyer of the toxic debt that triggered this summer’s credit crisis.

The group said it had just raised a $1.3 billion (£600 million) fund to invest in a range of debt securities including collateralised debt obligations (CDOs), bonds that are backed by mortgages.

As the US property market sank into a recession over the last two years, many holders of those sub-prime mortgages defaulted on their loans, leaving the bonds untradeable and effectively worthless.

Wall Street's biggest banks - which bought billions of dollars’ worth of the bonds – have been forced to write off substantial chunks of their portfolios and had hoped that they might have been able to sell the CDOs to a new $90 billion fund led by Citigroup.

The future of that fund is now under question, leaving Blackstone’s new Credit Liquidity Fund as one of the biggest potential buyers of the troublesome debt.

In a statement yesterday, Blackstone said: “The fund was created to capitalise on the recent dislocations in the credit markets by investing in a broad range of debt and debt-related securities and instruments including bank debt, publicly traded debt securities, bridge financings, securities issued by CDOs and other debt instruments, all on a global basis." Blackstone is already a big player in distressed debt. It has a distressed debt hedge fund and another business which advises on restructuring companies. It is hoping to use its expertise to buy some of the distressed debt that Wall Street banks are desperate to extract some value for.

Hamilton James, President of Blackstone, said: “Our objective is to generate superior risk-adjusted returns from a combination of current income and capital appreciation.

“We are confident that we can benefit our new fund’s investors by capitalising on current conditions in the credit markets.“

Blackstone already manages 11 pools of sub-prime-backed mortgage bonds and two private investment partnerships thought to be worth more than $11 billion. They include seven US bond pools worth $4.7 billion, four European ones estimated at $2.9 billion and two private mezzanine funds valued at $2.1 billion.

Efforts by other buyers of distressed assets since the credit crisis unfolded have met with limited success. Bank of America has lost hundreds of millions of dollars since it bought a $2 billion stake in US mortgage lender Countrywide three months ago.

Since that purchase Countrywide shares have lost about two thirds of their value. The British-born billionaire Joe Lewis raised his stake in troubled investment bank Bear Stearns this week, taking his holding to more than 8 per cent. In mid-September he took an initial 7 per cent stake, on which he has lost about $100 million.

Yesterday, it also emerged that plans to launch the new SIV fund have lost even more momentum amid reports that America’s three biggest banks have formally started talks with other financial groups to drum up capital for the bailout fund.

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts