“We’re talking about massive, massive downgrades here.”
– Rod Dubitsky, Asset Backed Real Estate Debt Analyst, Credit Suisse, ranked #2 last year by Insitutional Investor magazine in his category
“A lot of these should be downgraded sooner rather than later.”
– Jeff Given, Mortgage Bond Portfolio Manager, John Hancock Advisors LLC
“You’ll see massive losses from banks, insurance companies and pension managers.”
– Joshua Rosner, Managing Director, Graham Fisher & Co. – co-author of a study last month that said S&P, Moody’s and Fitch understate the risks of subprime mortgage bonds.
[Downgrades of CDOs] “are inevitable and material [and] could finally force the hand of ratings sensitive holders. Our worry is that this selling would be very unbalanced, with no established taker of risk on the other side, even at current market levels.”
– Morgan Stanley, Thursday June 28
Sooner or later, S&P, Moody’s and Fitch are going to have to downgrade many of the mortgage backed securities they rate. When they do, it will send shock waves through the almost $7 trillion mortgage backed securities market that will ripple through financial markets the world over.
Lehman Brothers sold a $2.43 billion mortgage backed securities offering, Structured Asset Investment Loan Trust bonds, a year ago. More than 15% of the mortgages in these securities are more than 60 days delinquent and an additional 8% are in foreclosure. The lowest tranche of the bonds, those rated BBB-, are trading for 43 cents on the dollar.
Thousands of investors own mortgage backed securities, from hedge funds (like the Bear Stearns hedge funds that are blowing up), to bond managers like PIMCO and pensions like the California Public Employees’ Retirement System.
I highly recommend this wonderful Bloomberg article from Friday (June 29).
When this happens, there will be pain – and it will be widespread.