Tuesday, July 10, 2007


As I was saying last night... this CDO thing is not about to go away. Moody's downgraded 399 mortgage-backed securities today and 612 US subprime RMBS (residential mortgage backed securities) classes were placed on negative watch by S&P.

Remember, the "C" part of highly levered (20x or more) Collateralized Debt Obligations (CDOs) are RMBS which is largely supposed to be investment grade. Remember too, that most of this stuff is priced at the 'let pretend' mark to model par value - 100-cents on the dollar, which means the downgrades to below investment grade could spur an exodus out by investors who can't hold sub investment grade paper and lead to sales at real market value which would lead to big losses for those investors. We'll have to see if this has a cascade effect of forcing liquidation of certain CDOs. Not a purdy picture folks.

This has all the trappings of some sort of novel, or made for HBO movie.

Meantime, the ABX index slid further as the price for insuring against default of subprime credit skyrockets. This picture would be the financial definition of 'going to hell in a hand basket':
Not reflected here and scarier than the slide was the ABX bid to offer spreads widening to 3 points. Life over the last several years has been about massive LIQUIDITY in the markets, or narrow bid/ask spreads - meaning an assurance that a seller could be quickly matched with a buyer for just about anything. If large liquidation results in the RMBS, CDO realm etc, it sure is clear that there will be no floor under the bid. For the stock market, we would again be looking at a 500 to 1000 point down day.

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