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Post by unlawflcombatnt on Jul 11, 2007 14:25:33 GMT -6
There's a very important consequence to downgrading the ratings of securities. Insurance companies and pension plans are only allowed a certain % of "risky" bonds (non-investment grade bonds). This is usually around 15%. When some of their previously "non-risky" bonds (investment grade bonds) are downgraded to "risky" (non-investment grade) status, insurance companies and pension funds are required (by regulation) to sell those bonds. Thus, these newly downgraded bonds held by insurance companies and pension plans MUST be put on the market for sale, thus greatly increasing the supply of these risky bonds that are on the market available for sale. This mandated increase in the number of risky bonds on the market will suppress prices even further.
Given the additional price-suppressing of this mandated supply increase, it is little wonder the ratings agencies are hesitant to reduce their ratings on these bonds. Such downgrades guarantee a supply-induced decrease in price. This will add to the price suppressing effect of replacing the mathematical model's non-market price with the actual market price.
To restate the major point here- the mandated sale of newly downgraded bonds held by insurance companies and pension plans will further suppress the sale price of these bonds.
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Post by jeffolie on Jul 11, 2007 17:13:29 GMT -6
The AA and BBB derivative got hit again today.
The quantity of bonds downgraded by S&P and Moodys is very small - about 2%. With 98% of the subprime bonds yet to be downgraded, we have only seen the tip of the iceberg.
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Post by jeffolie on Jul 11, 2007 17:23:27 GMT -6
Swap spreads went batshit in Europe this morning; this is likely to continue. "Corporate bond risk soared in Europe by the most in at least three years as debt rating downgrades on U.S. subprime securities triggered a worldwide selloff, according to traders of credit-default swaps." This is absolutely NOT contained. That's general corporate, and guess what - commercial R/E is in there too, although its only mentioned in passing. The problem here for the LBO/PE guys, who have been propping up the markets for more than a year now, is that they can't get the deals priced and out into syndication. That's a problem, because for those deals without a financing contingency it means the banks which provided the bridge financing get stuck with the bag - and they definitely don't want it. market-ticker.denninger.net/
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Post by unlawflcombatnt on Jul 11, 2007 19:50:10 GMT -6
Below are excerpts from a story from the NY Post suggesting that the downgrading of bonds may ultimately lead to a recession worse than the that caused by the bursting of the Dot-com bubble. The title of the article is ROOF CAVES IN By PAUL THARP and RODDY BOYD " July 11, 2007 -- Wall Street is bracing for a nearly $2 trillion washout over the collapse of hollow and shaky mortgage bonds, triggering fears of a recession worse than the dot-com bubble bursting.
A stunning first step in that grim outlook came yesterday when two credit rating agencies - Standard & Poor's and Moody's Investors Service - abruptly pulled the plug for the first time on a protective layer of respectable ratings that have cloaked the underlying, deep weaknesses of mortgage securities awash in the economy.
S&P slammed only a chunk of the half-trillion in mortgage bonds it monitors - about 2.1 percent or $12 billion - but said housing prices could crash by 8 percent this year to make matters worse. Moody's downgraded $5.2 billion of mortgage securities.
It sent shock waves through the market, triggering worry among investors that a domino effect could spread in the coming weeks throughout the nearly $2 trillion in mortgage securities....
Some economists are alarmed that shaky mortgage paper - which could be exposed to be worth barely 60 percent of current purported values - are parked throughout the investment world in mutual funds, hedge funds, financial institutions and other investment pools around the world.
Analysts say that there could be a wholesale stampede to unload any newly tainted securities, causing a scramble for capital and forcing hedge funds to give back billions to rich investors.
"This is a disaster," said Peter Schiff, CEO of Euro-Pacific Capital, who predicted the mortgage meltdown and slowdown a year ago. "I fear that this is going to be worse than the dot-com bubble. That was just a warm-up. This is the main event."..." The entire article can be found at ROOF CAVES IN
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