Intelligentguess

First there was Carina

Now, Adams Square Funding I Ltd - A Credit Suisse managed hybrid CDO has gone into liquidation recently (Bloomberg Report).

Further discussions at FT Alphaville and Calculated Risk show that even holders of AAA securities under the said CDO received nothing. Notable is the fact that this CDO was originated just a year ago.

So, it took all of one year for the highest rated securities to go into default. This must be one of the fastest moves from AAA to D. (though S&P had been putting such structures on rating watch - that’s no solace however for investors who believed in the ability of the rating folks to assess credit risk)

Soundly illustrates the power that rating agencies had begun to command and the lack of homework or due diligence being done by investors.

A lesson in all this is - if you can’t understand it do not invest in it. Did someone say Caveat Emptor.

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The Reserve Bank of India has released guidelines, for banks, related to stress testing as part of its focus on improvement in risk management practices.

The relevant notification lists

a) the utility of stress testing,

b) framework requirements, and

c) relevant remedial actions to be taken.

Banks have been advised to put in place appropriate stress test policies and relevant stress test framework for various risk factors by September 30, 2007. Formal stress testing frameworks in accordance with the guidelines are operational from March 31, 2008.

RBI has also released a document (PDF document) which gives illustrative examples of different kinds of stress tests.

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