Thursday, January 31, 2008

Is the Fed running out of firepower? S&P’s half a trillion downgrade

From FT Alphaville:

The latest structured finance bombshell from Standard & Poor’s has struck. Around $534bn of mortgage backed debt has been downgraded or put on negative watch by the rating agency, according to a report released late on Wednesday.

For those who have been following MBS ratings closely, this has been on the cards for a few weeks. As reported by FT Alphaville, S&P quietly adjusted its RMBS risk models on January 16th.

In all, S&P’s rating action covers 6,389 RMBS. The total list can be viewed here.

An end, perhaps to the ABX rally?

Certainly more disasters ahead for CDOs, and with them, banks and the monolines.

The RMBS rating action also works through to a negative rating watch slapped on 572 CDOs - with a value in total of $263bn. The likelihood being that they too will realise big downgrades to their paper over the next few weeks. The full list of CDOs affected is available here.

If these numbers are too abstract, then S&P have also been kind enough to put a concrete figure on the impact for banks. The rating agency foresees a “ripple impact” from yesterdays action....MORE