SAN FRANCISCO (MarketWatch) -- The shakeout in the subprime-mortgage business is inexorably worming its way through the credit markets that fueled the sector's rapid growth.
As delinquencies and foreclosures rise, losses will likely hit some of the riskiest parts, or tranches, of subprime mortgage-backed securities, or MBS, experts say. Then collateralized debt obligations, which invested in some of the lowest-rated subprime MBS tranches, will feel the pain.
But who holds these securities?
Hedge funds have become big credit-market players in recent years, and many firms trade the riskiest bits of subprime MBS and CDOs.
So who ultimately holds the risk?
Most experts say it's almost impossible to know. Sales teams at investment banks and other firms that offered CDOs won't talk and no one else contacted by MarketWatch has kept track. The Federal Deposit Insurance Corporation, which monitors risk in the banking system, tracks holdings of MBS, but not the different tranches. It has no information on who holds CDOs.
"It's pathetic, but it's almost impossible to find out, which is no good for the system or anyone really," Josh Rosner, a managing director at research firm Graham Fisher & Co., said. "On the CDO side we know even less and regulators know even less because there aren't very clear reporting requirements."
