Editor's letter

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As the markets slide into summer trading, traders will be reflecting on the fallout from the subprime mortgage crisis which has sparked repeated sell-offs this year. The problem, initially caused by mortgage companies' lax lending standards, has been compounded by banks' reduced attention to credit quality, since they now sell on and hedge these risks, and exaggerated by the complex credit structures that reference damaged loans. So far, it's taken down UBS's in-house hedge fund Dillon Read, racked up huge losses at Queen's Walk Investment, and looks likely to cost Bear Stearns dearly in bailout money for two of its stricken funds. And that was before the rating agencies weighed in with downgrades to billions of dollars of mortgage-backed bonds in early July, sparking yet another major sell-off.

As those watching from the sidelines note, Bear Stearns is the biggest player in this market and has the most sophisticated risk management systems. If the market leader is in this much trouble, how many more funds and banks are yet to announce problems?

Another cause for concern, also stemming from looser lending standards, mirrors the subprime hiccup: the phenomenon of covenant-lite loans. Are these loans, which lack the usual guarantees in place to protect lenders, another obstacle looming on credit's rocky road ahead? Influential fund manager Anthony Bolton seems to think so. He's taken pot shots at the risks represented by both cov-lite and CDOs in recent weeks. But others take a different view. Read our interview with Tim Polglase on p. 40 to see why Allen & Overy's leveraged finance head is less concerned about the cov-lite story.

Whatever happens, this summer's 'lull' is likely to be far from boring. In this, my last letter to readers as editor of Credit, I wish all of you the best of luck with the bumpy ride ahead.

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