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Wednesday, July 18, 2007


first downgrades of alt-a-backed securities

moody's is warning and fitch is acting. things are moving faster than i thought they would here, but the ratings agencies suddenly seem semiserious about their integrity after years of complicity.

the effect of these downgrades may well be devastating. bear sterns surprised optimists on wall street last night by revealing the extent of the damage to their problematic hendge funds -- they're completely destroyed. and as the cdo's of rmbs's that they levered into are finally marked to reality, bear becomes the cue ball in a chain of collisions.

"This could force a wide variety of other holders of subprime mortgage securities and CDOs to meaningfully revalue their holdings," Richard Bove, an analyst at Punk Ziegel, said in an interview. "That would cause significant declines in book value and stock prices."

the market is down this morning, and the investment banks are being knocked down severely -- merrill off 4%, goldman off 3%, lehman off 3%, credit suisse off 2%, ubs off, bear off again. an important thing to note about this body of charts is how many of them peaked in the first quarter of this year and have been trading down since. as go the financials, so goes the market in time.

there's decaying pretense of containment in fed chairman ben bernanke's testimony this morning. the spillover into further credit markets beyond subprime has finally become undeniable, and poor consumer strength is contributing to the change in zeitgeist. so is a sharply decreased investor appetite for the leveraged buyout financing that has fuelled the private equity world to unprecedented heights this year.

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