Hi, Is this how the story goes... A mortgage company issues mortgages to Alt A and sub prime borrowers. They then sell these mortgages as a packgage via investment bank to a hedge fund. The rating agent gives this package a AAA+. I think this is the CDO = package. The hedge fund the borrows 20 times this asset from banks and invests the funds in the markets ( stocks, bonds, commodities). So ...when the defaults of the Alt A and sub prime mortgages rise the packaged mortgage asset reduces in returns. Either hedge fund tries to sell this package or they have put in more cash to reduce the 20 times gearing, like a margin call from the lending banks. So risks that have been showed up by the Bear Sterns example are.. 1) Illiquid market for packaged mortgage assets means valulation is unclear 2) Rising defaults on mortgages reduces AAA+ and value of these packages. 3) Massive gearing on these assets means that margin calls on these type of funds is more likely. 4) Each quarter when these hedge funds must disclose there books how will they value there base assets. SEC is interested in valuations of asset to market NOT asset to book. 5) If the mortgage asset is suffering defaults, what happens when the market eventually has a 10% correction with the massive gearing involved. Housing getting worse, mortgage rates rising, consumer is debt ridden. Mortgage defaults means interest rates rise further. More Bear Sterns to come ! So have I got the CDO/CLO story correct ?