Derivatives that helped inflate the 2007 credit bubble are beingremade for a new generation.

JPMorgan Chase & Co. is offering a swap contract tied to aspeculative-grade loan index that makes it easier for investors towager on the debt. Goldman Sachs Group Inc. is planning as much as10 billion euros ($13.4 billion) of structured investments thatbundle debt into top-rated securities, while ProShares last weekstarted offering exchange-traded funds backed by credit-defaultswaps on company debt.

Wall Street is starting to return to the financial innovationthat helped extend the debt rally seven years ago beforeexacerbating the worst financial crisis since the Great Depression.The instruments are springing back to life as investors seek newways to boost returns that are being suppressed by central bankstimulus. At the same time, they're allowing hedge funds and otherinvestors to bet more cheaply on a plunge after a 145 percent rallyin junk bonds since 2008.

“The true sign of a top is when you have these new structurespiling up,” said Lawrence McDonald, a chief strategist at NewedgeUSA LLC, and author of the book “A Colossal Failure of CommonSense” about the 2008 demise of Lehman Brothers Holdings Inc. “Atthe top of the market in 2007, there were these types of innovationand many investors didn't realize about it at that time. Theseproducts are a clear risk indicator.”

The new products are also a reflection of investor confidence inthe economic outlook. U.S. gross domestic product is forecast toexpand at an annualized rate of 3.10 percent this quarter and nextas the labor market strengthens, according to the median estimateof about 75 economists surveyed by Bloomberg.

JPMorgan is marketing total-return swaps that are tied toMarkit's iBoxx USD Liquid Leverage Loan index, a benchmark for the$750 billion leveraged loan market, according to a July 11 MorganStanley report. The swaps allow an investor to pay a fee inexchange for receiving the total return on the index at theexpiration of the trade. If the measure posts a loss, the investorcompensates the counter-party to the trade.

Total-return swaps allow investors to amplify gains because theycan wager on a large pool of debt while setting aside a relativelysmaller amount of collateral to back the trade. While thederivatives have been around for years, these are the first to betied to the index, providing investors a benchmark that can fuelfaster and easier trading similar to how the credit- default swapsmarket ballooned in the years before the financial crisis.

Jessica Francisco, a spokeswoman for JPMorgan, declined tocomment.

Future 'Problems'

“Some funds have to use more leverage to get the sort of returnsthat their investors expect, Peter Tchir, Brean Capital LLC's headof macro strategy in New York, said in a telephone interview. ''Weare moving into a phase where there will be more esoteric products.It does start setting up more problems for the future.''

The Federal Reserve's extraordinary stimulus measures unleashedafter the credit crisis to spur growth, have pushed investors tosacrifice safeguards in their search for returns as benchmarkinterest rates remain close to zero for a sixth year. PacificInvestment Management Co. popularized the term ''new normal'' todescribe an era of below-average economic growth and low interestrates following the financial crisis.

The new swaps will also feed a growing appetite to hedge againstlosses in leveraged loans, Sivan Mahadevan, a strategist at MorganStanley, wrote in the report.

Investors withdrew $1.5 billion from U.S. funds that buyleveraged loans in the week ended Aug. 6, the largest weeklyoutflow in about three years, according to data providerLipper.

Goldman Sachs plans to sell its first structured bonds with a 1billion euros offering, according to a June 24 report from Standard& Poor's. The notes, which may be sold in September, are backedby a revolving pool of fixed-income assets, including asset-backedsecurities.

The proposed financings have been compared by analysts atSociete Generale SA to collateralized debt obligations, that fueledthe housing boom by packaging risky loans into securities that weresold to investors, often with top AAA ratings.

The securities, the first of their kind, also use a total returnswap and have features similar to covered bonds, a type of securednote backed by mortgages and public sector borrowings. Thefinancing, backed by Goldman Sachs and Japan's Mitsui SumitomoInsurance Co., would be rated AAA, according to to S&P.

Swaps ETF

''The current state of play where yields are very low and thereare more redemptions than issuance in certain assets, such ascovered bonds, leave investors looking for innovative investmentopportunities, so long as they pay up,” said Cristina Costa, asenior covered bond analyst at Societe Generale in Paris.

Sophie Ramsay, a spokeswoman for Goldman Sachs in London,declined to comment on the notes.

ProShares started trading an exchange-traded fund last week thatallows individual investors to bet against junk bonds withcredit-default swaps. Credit-default swaps allow buyers to wager onthe credit market or hedge their exposure.

The ProShares CDS Short North American High Yield Credit ETF,which is listed on BATS Exchange Inc. under the ticker WYDE, willinvest at least 80 percent of its assets in credit swaps tied to abenchmark index, according to a July 23 filing.

IntercontinentalExchange Group Inc. was pitching derivativescontracts that would allow investors to wager on U.S. homeownerdefaults, Bloomberg News reported in May.

The emergence of new derivatives is reminiscent to the periodleading up to the crisis, said Stephen Blumenthal, the chiefexecutive officer of investment firm CMG Capital Management.

“Wall Street has always had a habit of piling on products whenthere's an appetite for the asset class,” Blumenthal, who oversees$600 million in assets, said in a telephone interview. “That'sunder the Code Red category.”

'Frothy Environment'

The riskiest kind of derivatives added to losses for investorsduring the credit crisis. The investments included so-calledsynthetic CDOs that during 2006 and 2007 loaded their holdings withcredit swaps linked to the debt of financial companies includingLehman, Washington Mutual Inc. and bond insurer Ambac FinancialGroup Inc., all of which collapsed amid the 2008 marketseizure.

“You didn't know the depths of the risk you really had,”Blumenthal said of the subprime paper rolled up into AAA-ratedproducts. “We might not be there yet but we are in a frothyenvironment today.”

Former Fed Chairman Paul Volcker has blamed credit swaps andCDOs for taking the financial system “to the brink ofdisaster.”

“You can be near certain that some big funds are going to a bankright now and saying I want to go short and how can we create avehicle that allows us to put on a big-sized trade,” Newedge'sMcDonald said. “The genesis of the next crisis will not be on thesell side. Likely, it will come at us from where there's not enoughliquidity, for many parts of the buy side.”

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