Rather than roll over and play dead in the wake of massive downgrades, market pundits are biting back. Efforts to put a leash on correlation, evidentially the beast with the longest teeth, made headway last week with the release of a new rating tool from Fitch Ratings and a new research paper from Nomura Securities aimed at alerting the market to overlooked dangers.
Accounting for why a wide spectrum of sectors - from airplanes to meatpacking - will all move together during particular credit crunches does not necessarily follow intuition. For CDOs, one would have thought pooling together McDonald's and Boeing debt, along with paper from other non-related industries, would have achieved a comfortable level of diversification. Yet one of the most jarring results of the soured CDO environment has been that diversification, as a defense against credit risk, stumbled in the end zone.