ogm,
Thanks for the detailed explanation. I hear this stuff and often wonder how much is hype and who really knows and who doesn't.
You know, much of this sounds like investment 101. In the great depression leverage caused massive distruction when it went into reverse. To see all these professional outfits taking on massive risk with apparently little understanding or caution...it's almost unbelievable. But I guess...it's human nature and repeats every so often.
Reaching for yield always gets 'em.
I was taught this in 1987, and I was retaught it in 1990 with the "residual reits". Let me repeat it so anyone who reads this remember it:
NEVER, EVER REACH FOR YIELD!
The prettier it's packaged, and the harder it's sold as "appropriate" for "widows and orphans, or anyone else who needs "competitive" current yields, the harder you should look for a way to short it. Your first early warning will be the regular use of the word, "tranche" among non-debt traders.
Reaching for yield almost ALWAYS blows up in someone's face, and almost always in a fashion that's ugly. It often is some poor retiree, but it's even uglier when it's in a leveraged fund that's supposed to insulate investors.
Mark