From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Sat Aug 11 2007 - 21:26:09 EDT
After an exceptionally benign period of virtually universal advances in economic performance-that helped to carry many financial markets into uncharted territory-investors have suddenly become more cautious. Thus, financial market participants appear to be re-assessing their assumptions about the global economic outlook, while trying to find more solid grounds on which to price credit risk. This search for new market ranges may take some time, and it is likely to involve additional volatility. However, the degree of recent market turbulence should not be exaggerated. (...) ...hedge funds at present account for between 2% and 5% of global assets under management. However, they account for a far larger share of turnover in markets because they typically follow active management strategies, facilitated by the new risk transfer instruments. As a result, they at times play the role marginal price setter. In fact, the newer the market-such as those for credit default swaps and structured credit products such as collateralized debt or loan obligations (CDOs and CLOs) -the greater their relative role. (...) The growth of the market for Collateralized Debt Obligations (or CDOs) played a crucial role in providing capital for the sub-prime mortgage market. The total volume of CDOs outstanding from US-based issuers is estimated to be about $900 billion. Of this, about 17 percent has been created out of sub-prime ARM mortgages, with an average credit quality of BBB. Another 30 percent has been created out of leveraged loans in the form of collateralized loan obligations, or CLOs. While $ 900 billion in securities isn't insignificant, CDOs do not comprise a very large share of the aggregate value of marketable US financial assets of about $46 trillion. https://www.imf.org/external/np/speeches/2007/073107a.htm
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