Market Graphic - Subprime haircuts

Matt King, global head of credit products strategy at Citigroup in London, explains how CDOs of ABS will be vulnerable to forced selling if subprime haircuts rise

The ignominious near-implosion of Bear Stearns' Enhanced Leverage fund has prompted much concern about the vulnerability of other funds with exposure to subprime and CDOs of ABS (collateralised debt obligations of asset-backed securities). Near term, the biggest risk is probably that of forced selling driven by potential margin calls (haircut increases) or investor redemptions.

Although the strategies that Bear employed - buying highly illiquid assets with only short-term investor lock-ins, and