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Published on September 4, 2007

He is referring to the US sub-prime mortgage fiasco and more particularly to collateralised debt obligations (CDOs), the high-return financial instruments upon whose stability the whole "crisis" tends to be poised - and what he says seems fair enough.

But ratings agencies have been taking plenty of flak lately. Fortune quotes Jim Chanos, head of Kynikos Associates, as saying, "If the ratings agencies will downgrade only when we can all see the losses, then why do we need the ratings agencies?" So Chanos has taken a short position on Moody shares.

Marshall said consequences from sub-prime defaults in the US had been widespread in Asia, with only a handful of large exposures. BankThai leads the pack with 21 per cent of its equity.  Bank of China has 17 per cent.

He said there was little understanding in Asia of sub-prime mortgages, and the distinction between prime and sub-prime was not always clear. Sub-prime debts are loans to US borrowers with poor credit histories. In the US, Vector models and scorecards are used to gauge such risks, but the recent "cash is trash" mentality has gone unbridled. Marshall said that six to 12 months ago, everyone was interested in high-return assets.

Dipesh Patel, a Fitch derivatives director, outlined three risks with CDOs: management, collateral and structure or cash flow. Problems in just one area can spark a chain of illiquidity.

"People are not buying right now. That's the whole problem," said Marshall. "The market is seized up. There is no liquidity, and investors are very wary of any additional risks."

But there are structured securities whose value has fallen but whose underlying assets are sound. Cash-rich investors are  waiting to pounce.

Ki Nan Tsui

 The Nation