Friday, November 2, 2007

Prepare for the credit drama sequel

Gillian Tett at the Financial Times has some "Market Insight":

This week, a banking friend made a startling confession. In recent weeks he has been furtively unwinding some large investment portfolios linked to subprime securities.

But as he has embarked on this sordid task, he has discovered that the only effective way to get rid of these distressed assets is to avoid putting any tangible price on the trade.

...Never mind the fact that the risky tranches of subprime-linked debt (the so-called BBB ABX series) have fallen 80 per cent since the start of the year; in a sense, such declines are only natural for risky assets in a credit storm.

Instead, what is really alarming is that the assets which were supposed to be ultra-safe – namely AAA and AA rated tranches of debt – have collapsed in value by 20 per cent and 50 per cent odd respectively.

This is dangerous, given that financial institutions of all stripes have been merrily leveraging up AAA and AA paper in recent years, precisely because it was supposed to be ultra-safe and thus, er, never lose value....MORE

HT: Yves Smith

David Gaffen at the WSJ's MarketBeat blog says:

The single-A ABX index has steadily deteriorated. (Source: Markit)

One measure of this has been the steady deterioration in the ABX indexes, benchmarks that track different subprime mortgage-backed securities. The decline has been notable in the highest-rated securities; according to Markit, the triple-A index was lately traded at around 79.9 cents on the dollar, compared with about about 95 cents on the dollar in late September. The double-A and single-A tranches showed even more severe fractures on concerns about the worth of those securities thanks to steady (and likely impending) downgrades from credit agencies. The single-A-rated index was traded at around 30 cents on the dollar, down from 58 cents a month ago.