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7 Ibid.

8 Richard Beales, “NY Fed Warns on Hedge Fund Risk,” Financial Times, 3 May 2007.

9 James Mackintosh, “Hedge Funds Survey Reveals Lower Gearing,” Financial Times, 1 May 2007.

10 Janet Tavakoli, “Letter: Greater Global Risk Now than at Time of LTCM,” Financial Times, 7 May 2007.

11 Serena Ng and Emily Barrett, “Fed Turns Focus to Derivatives Market,Wants Improved Infrastructure Soon,” Wall Street Journal, 10 June 2008.

12 Everquest Financial Ltd., Form S-1 Registration Statement under the Securities Act of 1933, 9 May 2007.

13 Offering Circular for Octonion I CDO, Ltc. Octonion I CDO Corp., March 16, 2007. Most of Everquest’s assets were priced as of December 31, 2006, but there were some 2007 additions to the portfolio. For example, it owned some of the “first loss” equity risk of a CDO named Octonion I CDO (Octonion), a deal underwritten by Citigroup in March 2007. If the IPO came to market, some of the proceeds from Everquest would pay down Citigroup’s $200 million credit line. Octonion’s prospectus disclosed an inexperienced CDO manager with conflicts of interest with the CDO investors. It used 95 percent credit default swaps referencing BBB rated asset-backed securities including subprime assets.This CDO appeared to be a very risky investment for investors in the AAA or AA rated tranches. The equity, 48 percent of which was owned by Everquest, may have been entitled to the residual cash flow of the deal. Even if they did not, the tranches looked high risk, undeserving of an investment grade rating.Time proved my concerns warranted since Octonion triggered an event of default in February 2008, at which time even the original seniormost AAA tranche was downgraded to CCC by S&P (it was still AAA by Moody’s). By the summer of 2008, the seniormost AAA had been downgraded to Caa3 by Moody’s and CCC- by S&P.

14 The information about the underwriters (UBS, Citigroup, Merrill and others) is not listed in the registration statement, but can be found by cross referencing the listed CDO with the information in each of the prospectuses. Everquest also invested in mezzanine tranches that were problematic as well since the amount of protection underneath them can be too slender for assets backed by risky mortgage loans. These tranches were already trading at wide spreads—lower prices—in the secondary market.

15 Everquest Financial Ltd., Form S-1, p. 48. It is impossible to calculate a precise number without more information, but it can be ball-parked from the S-1. It showed 16.2 percent of non-Parapet (a CDO-squared) assets were ABS/CDOs. There was more subprime exposure in a CDO-squared called Parapet, the initial deal backed by assets coming from the two hedge funds managed by BSAM. Parapet accounted for 53 percent of the CDO assets. Included in Parapet were mezzanine tranches that were 38.6 percent of the CDO assets, of which it appeared that a high percentage were subprime. Furthermore, 42.8 percent of the Parapet equity was backed by ABS/CDOs, most of which according to the S-1 was subprime. As a rough estimation subprime exposure was 40 percent to 50 percent of the collateral. That seemed substantial to me. As for the hedges, the document said that on May 8, 2007, the two hedge funds had transferred their interest on credit default swaps that referenced 48 tranches of ABS securities held by the CDOs with a notional amount of $201 million and stated: “The hedges will not cover all our exposure to RMBS held by our CDOs that are backed primarily by subprime residential mortgage loans. Our CDOs may experience negative credit events relating to RMBS tranches that are not hedged.” The hedges may or may not have done the trick. There was no indication of when the hedges were actually put on, only that they were transferred on May 8, 2007. Single name ABS/CDO credit derivatives had become very expensive and were no longer very good hedges, so the timing was important.

16 Peter Eavis, “Freddie Mac Report Soft-Pedals Thorny Case,” The Street. com, Real Money, 24 July 2003. According