The Alarm Isn't False

Sat., Mar 15 - Alpha Magazine [excerpt]

The Alarm Isn't False

By Dave Simons
Alpha Magazine
March 2008

...Indeed, the failure of Sowood was one of the first indicators of a major shift in the risk tolerance of the markets, as uncertainty over the U.S. housing market raised fears among investors holding collateralized debt obligations, a hodgepodge of securitized consumer loans parsed into investment - and subinvestment-grade tranches, including, among other products, subprime mortgages...

The future promises similar turmoil unless transparency in hedge fund pricing becomes the norm, says Craig Asche, executive director of the Chartered Alternative Investment Analyst Association, an Amherst, Massachusetts-based trade group.  For instance, all the trouble with CDOs was exacerbated because there were no market prices to serve as benchmarks and no way to determine the value of the various risk tranches.

The question is, "What is appropriate?" Asche says.  "How does someone mark to market something that at one point may have been trading on a fairly regular basis but is no longer?"