It was March 2007, and in the Mediterranean resort of Monte Carlo, Matt King was making dire predictions about a collapse of the U.S. subprime housing market-a subject that must have seemed as inconsequential as it was foreign to most of this casino town’s well- heeled visitors. But for Mr. King, head of quantitative credit strategy for Citigroup, the ramifications of rising subprime foreclosure rates were anything but inconsequential. Speaking at Citigroup’s annual credit conference, King emphasized how subprime credit had been repackaged into securities such as collateralized debt obligations (“CDOs”), which now sat in large quantities on banks’ balance sheets. Noting that a “significant proportion of the [asset-backed securities] which has gone into CDOs … has been of the subprime variety,” he warned that subprime losses had already forced several large banks to set aside additional funds to cover subprime losses. These losses, in turn, made him “deeply suspicious” of banks “with exposures in that space who have not declared anything like the same degree of provisioning.”
As it turned out, it was King’s own employer, Citigroup, that ultimately proved especially vulnerable to these concerns.