Credit isnt my area, but id be interested in any comments on this:When subprimes default, who is it that takes the hit?I presume its the equity tranche of a RMB CDO that is the worst hit.Questions:1. Who is the biggest class of investor in these things? (insurers, pension funds, hedge funds??)2. What exposure does the bank retain? 3. What accounting games can banks play to reduce their reported exposures?

1) Article on Marketwatch this morning. The answer to the question is that no one knows. Some say hedge funds, but seems like hedge funds made money betting against the stuff in Feb. Others say Asian investors.2)?3) I hear that according to US GAAP, you don't have to mark this stuff to market on your balance sheet until it is downgraded.

Thanks for that. Good article.Any CDO sales people here that can comment?

QuoteOriginally posted by: bskilton811) Article on Marketwatch this morning. The answer to the question is that no one knows. Some say hedge funds, but seems like hedge funds made money betting against the stuff in Feb. Others say Asian investors.2)?3) I hear that according to US GAAP, you don't have to mark this stuff to market on your balance sheet until it is downgraded.You might not have to put it in the accounts, but you do have to stump up the cash for the collateralisation of the MTM losses on the structure... I think I read somewhere that the current CDO MTM losses were of the order $30bn (can anyone confirm?)... and the risk is that firms cannot pay this to the banks that sold them the packages - a potential liquidity crisis...?

One point on RMBS, although clearly the equity takes the first loss from defaults, that doesn't make them worst hit. The equity pretty much expects to get hit from the start and hence receives a healthy spread for it. The worst "hit" if you like are the mezzanine investors where they see their subordination rapidly evapourating, this can then cause nasty downgrades to happen, which for a bank, SCV or fund could cause a forced sale, particularly if its now spec grade. On top of this of course there will be a big shift in the price.You have to think about both the losses taken and the original expectation.