First it was this from S&P: [More here from HousingWire]
S&P, one of the three main credit-rating agencies that served as enablers of the subprime-mortgage boom, announced Tuesday that it would lower its ratings on 612 bonds, a small portion of the mortgage-backed securities it had given its seal of approval to.
Then at closing bell, there was this announcement from Moody’s:
Moody’s Investors Service said late Tuesday that it downgraded 399 residential mortgage-backed securities because of higher-than-expected delinquencies on the underlying home loans. The rating agency also said it put 32 other residential mortgage-backed securities (RMBS) under review for possible downgrades for the same reason. The RMBS were sold in 2006 and are backed mainly by first lien adjustable- and fixed-rate subprime mortgage loans, Moody’s added.
And if you figure that’s the end of it, check out today’s ABX- here’s AAA and AA [and this isn't subprime folks].
Marketwatch had this "cheery" assessment after S&P’s announcement:
A lot of debt will be downgraded to junk status. A lot of that debt will have to be sold at fire-sale prices. A lot of pension funds and hedge funds that once thrived on the high returns they could get from investing in subprime junk will now lose a lot of money.S&P’s announcement is a death warrant for the subprime industry.
The market took a pounding today and this AA and AAA degrading was not a primary factor sited by the MSM they gave Sears and Home Depot most of the credit. S&P downgrade was like reason #3 for the drop. Now we have Moody’s down grade, I assume S&P rates 1/3 of the market bonds that Moody must rate another 1/3 of the bonds. I wonder if there is a final 1/3 market bond rater if they are going to mark these bonds down.
I guess now we’ll see how “contained” the whole subprime mess is.
Wow and to think this is only the beginning. With at least two more years of toxic sub-prime loans due to reset it’s hard to imagine how bad it’s going to get. Let’s throw in heloc’s with arm’s that are going to reset also. One thing for sure the day’s of easy credit are gone and for that I am grateful. The housing market is already toast will the stock market be next?
Richcinaz -
The M&A bubble that’s been driving the DOW, etc. is fueled by the CMBS and junk bond people. It’s the bubble blogosphere’s consensus, for what it’s worth, is that those markets only have a couple of weeks to live and a lot of announced deals just won’t find investors over the next few months.
RogerSmith-
I’m assuming that S&P and Moodys downgraded today based on the poor performance of these particular securities, [which was what they indicated] so the AAA and AA degradation shouldn’t have been factors.
I did however, think it was an indication of just how far these downgrades are likely to spread. “Containment” isn’t happening.
Twist, thanks for the hat tip. You rock.
Moody’s actually downgraded, S&P did not (although S&P was first to drop the bombshell). Which means we’re not talking phantom losses here — we’re talking real dollars now.
You’re correct, too, that the downgrades hit primarily the mezzanine and the equity tranches (BB and below)….but keep in mind that the loss of BB and BBB and BBB- means that AAA and AA aren’t exactly looking like the bullet-proof investments they once appeared to be, which is likely what is driving the downward price pressure in those particular securities.
And let’s face it — we haven’t really yet seen the mark-to-market effect yet.
Can I nominate ‘contagion’ as the housing word of the year?
The MSM are wrong.
We all “invest” a lot of cash in (e.g.) pension plans, who have to put it work in order to fund future liabilities. In order to do so they need the highest return they can get without taking to much risk (jargon: “chasing yield”).
Because too much risk would be extremely irresponsible for a pension fund, most pensions funds are allowed to ONLY invest in NON-subprime securities.
The problem with CDOs (basically a security consisting of slices of different bags of mortgages) is that they are designed NOT to be traded, but to be HELD TO MATURITY, earning a nice yield (i.e. return) in the meantime. This is because they are extremely illiquid (i.e. difficult to sell). As every product is different and very opaque it is almost impossible to be sure you can realise the stated value on your books.
As long as you don’t have to sell, there’s no problem as you can continue “guesstimating” the true value (i.e. the value you should keep on your books) by “marking-to-model” instead of “marking-to-market”.
1. Once you are FORCED to liquidate a CDO position, because of investors bailing out of a highly-leveraged fund or margin calls from third parties, the trouble starts. You don’t want to sell at a much lower (true) market price because that would imply your “model” has been completely wrong all the time. This would mean revising ALL CDO’s values down, again leading to more margin calls and investors bailing out.
2. And more specifically for pension funds: Once S&P, Moody’s, etc. decide to downgrade certain CDO’s to below-investment grade status you want to liquidate these holdings BEFORE everybody else does. This, again, will lead to more cases of (1.) as well as serious ACTUAL losses for those pension funds.
Basically, you don’t want to be the last one out of the very small door. That is what is happening lately, and especially the last few days as the rating companies start “re-evaluating” (i.e. admitting their models were wrong before) “certain CDOs”.
From here on, it can only get worse.