Speakers voice synthetic credit and capital structure arbitrage fears

A number of speakers at Risk ’s Credit Risk Summit USA 2003 voiced concerns about investments in credit derivatives and capital structure arbitrage yesterday. Sivan Mahdevan, an analyst in Morgan Stanley’s credit derivatives research group, when opening the final day of the New York conference said dealers must work harder to educate investors about credit derivatives options and correlation products.

“In the past, some investors in CDOs [collateralised debt obligations] really didn’t understand the product,” Mahdevan said. He urged investors not to be fooled by the ratings of single-tranche products. “Ratings refer to default risk, but they don’t tell you anything about leverage or volatility,” he added.

Mahdevan said a market for options on credit derivatives is several years away from truly hitting its stride.

Sean Keenan, a vice-president in Citgroup’s risk architecture group, said it was