Sinking Feeling for Citi, JPMorgan

The latest buyout debt debacle has left investors in Citi (C Quote) and JPMorgan (JPM Quote) with an unsettling feeling.

The banks failed Wednesday to sell billions of dollars worth of loans to finance Cerberus' buyout of Chrysler Group and Kohlberg Kravis Roberts' buyout of Alliance Boots. The setback stands to load down Citi's and JPMorgan's balance sheets with more risky, unwanted debt securities -- a fact not lost on stock investors who sent the banks' shares down more than 1% Wednesday afternoon.

The black eye comes as the banks and their Wall Street rivals have belatedly sought to rein in their exposure to risky debt. According to sources in the markets, banks have cut back funding to collateralized debt obligations that buy mortgage debt, and increased their collateral requirements for lending to hedge funds.

But it grows clearer by the day that there is not much the investment banks can do to undo the hits they may have to take based on over $200 billion of commitments to finance the leveraged buyouts already announced.

Citi and JPMorgan didn't comment.

The underwriters of the $20 billion of Chrysler debt -- JPMorgan, Citi, Goldman Sachs(GS Quote), Bear Stearns(BSC Quote) and Morgan Stanley(MS Quote) -- could not sell the $12 billion portion of the deal tied directly to the Chrysler auto business, according to a report in The Wall Street Journal.