Lehman Brother's ABS strategists are cautious on aggregate U.S. consumer credit quality in 2002, which is likely to challenge ABS CDO managers this year, writes the firm's head of CDO research, Sunita Ganapati and Philip Ha.

The consumer credit cycle tends to lag the corporate cycle, as seen in the historical relationships seen between the unemployment rate and GDP growth. For the ABS market, the implications are that subordinates of subprime credit product are vulnerable to detioration. Standard & Poor's announced last Thursday that the ratio of downgrades to upgrades initiated during 2001 was three-to-one, the same as 2000. However, the ratio of downgrades to upgrades increased to eight-to-one during the fourth quarter.

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