The CLO/CDO and derivatives market has been heating up for well over a year now, with CDO issuance alone hitting $40 billion year to date, nearly half of total volume in 2005, according to Lehman Brothers. While this is exciting news, several market sources warn that too many risk managers lack the know-how to anticipate shaky deal structures and they warn that it might take a credit meltdown to get banks to polish their risk teams.

Risk managers with years of experience in the asset securitization market are hard to come by, said market sources, so banks end up recruiting recent business school graduates, or newly minted PhDs, to assess deals and anticipate problems. Sometimes they hire professionals with years of risk management experience from other financial sectors, but with little experience in asset securitization. The trouble with this approach is that such professionals often end up relying on rote mechanical methods, rather than instinct and experience, to sniff out trouble spots in deals.

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