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This is a multiple-alarm warning.
Let's quickly review where we stand:
Two weeks ago I wrote that ratings agencies were being accused of purposely covering up, by failing to lower their ratings on CDOs (mortgage-based credit derivatives) on a timely basis. The accused ratings agencies were Standard & Poor's, Moody's Investors Service and Fitch Ratings.
Two days ago, I I listed three current imbalances that are reaching a state so severe that a collapse is possible at any time. Two of the three require investor panic, but one of the -- the revaluation of overpriced CDOs -- is in progress and cannot be stopped.
This morning (Tuesday), Standard & Poors said it will downgrade 612 residential securities backed by subprime mortgage loans.
This immediately triggered a collapse in the ABX-HE-BBB- 07-1 index this morning of over 6 points, to 49 from 55.5.
According to Reuters, a downgrade of that size and magnitude would trigger severe losses as investors who are prevented from holding anything other than investment grade issues would unload their holdings en masse.
To put it another way: Mutual funds, investment trusts, hedge funds, savings banks, pension funds, college endowments, money market funds, insurance companies, and so forth, hold nominally tens or hundreds of trillions of dollars of these securities in their portfolios are going to have to re-evaluate their holdings sharply downward, according to mark-to-market accounting rules. This is real money we're talking about, folks. If your life savings are in one of these vehicles, or if you expect your pension fund to support you, you should be aware that things are changing quickly.
I'll follow up on this subject soon, but I'm posting this right away
as it's an extremely alarming situation.
(10-Jul-07)
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