It's fashionable now for leading economists and financial wizards to claim that they saw the credit crunch coming and the kind of dislocation it would create. But how many have predicted where the next implosion will occur?

bad-building1Dr Andrew Lo, founder of hedge fund firm AlphaSimplex, and director of the MIT laboratory for financial engineering, has spent his career studying market behaviour, publishing papers examining why quant funds imploded in August 2007, and trying to reconcile behavioural economics with efficient market theory.

He sees the next big meltdown in commercial mortgages, but this time it's pensions funds that will bear the brunt of the losses rather than banks. Lo points out that commercial mortgages have been packed and sold in the same way as residential mortgages - different levels of risk exposure sliced and diced and wrapped up together in one package with a triple A rating slapped on top.

But commercial mortgage backed securities (CMBS) are facing the same liquidity problems as RMBS following the sub-prime meltdown. When mortgages start to reset at higher rates this year the defaults will pile up and the losses will hit the end-investor - in this case, large pension funds in the US, Europe and Japan, says Lo.

"We are likely to see a number of pension funds having a hard time meeting their liabilities, and the government may have to step in and help out some of these insolvent funds," he says.