Crisis of correlation

Cover Story

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The downgrade of Ford and General Motors (GM) to junk status by Standard & Poor's last month was widely anticipated in the credit markets. What was not understood – by most at least – was that the ratings action would prompt an unprecedented period of stress in the single-tranche credit market. Risk managers at some dealers, hedge funds and other investors were left reeling, with commonplace hedging and investment strategies suffering multi-million-dollar mark-to-market losses.

"To be frank,

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