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S&P, Moody's Mask $200 Billion of Subprime Bond Risk

Mark Pittman | New York | June 29

Bloomberg - Standard & Poor's, Moody's Investors Service and Fitch Ratings are masking burgeoning losses in the market for subprime mortgage bonds by failing to cut the credit ratings on about $200 billion of securities backed by home loans.

The highest default rates on home loans in a decade have reduced prices of some bonds backed by mortgages to people with poor or limited credit by more than 50 cents on the dollar and forced New York-based Bear Stearns Cos. to offer $3.2 billion to bail out a money-losing hedge fund. Almost 65 percent of the bonds in indexes that track subprime mortgage debt don't meet the ratings criteria in place when they were sold, according to data compiled by Bloomberg.

That may just be the beginning. Downgrades by S&P, Moody's and Fitch would force hundreds of investors to sell holdings, roiling the $800 billion market for securities backed by subprime mortgages and $1 trillion of collateralized debt obligations, the fastest growing part of the financial markets.

``You'll see massive losses from banks, insurance companies and pension managers,'' said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. in New York and co-author of a study last month that said S&P, Moody's and Fitch understate the risks of subprime mortgage bonds. ``The longer they wait, the worse it's going to be.''


mauberly June 29, 2007 - 8:14pm
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Looks like

we may finally be getting there, Bonddad.

http://mauberly.blogspot.com/

mauberly June 29, 2007 - 8:15pm
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Gross Sees Red Behind The Rouge Of Subprimes

America's bond king warns of mortgage defaults to come.

Wake Up and Smell the Inflation

(snip)

John Williams has made a career out of telling people the truth about inflation and other government statistics. He reckons that if you were to apply the same calculation methodology as in 1980, current U.S. consumer inflation is running close to 10% per annum--very similar to the levels reached around 1980 with the only difference being that the bond market was on high alert then whereas now it appears more relaxed.

(snip)

Unknown to many people, basic food prices have exploded recently. Rice, wheat and corn, three critical food stables, are all up between 45% and 65% over the past two years. Most people in our part of the world haven't really noticed yet because it takes time for price increases in basic food prices to filter through to the end products. But it is starting to happen

Chart of Country Percent Of Disposable Income Spent On Food In The Home

United States 6.1%
United Kingdom 8.3%
Germany 10.9%
Japan 13.4%
China 28.3%
Russia 36.7%
India 39.4%
Indonesia 49.9%

(snip)

Rising food inflation has the potential to kill off the economic boom currently enjoyed in most parts of the world outside Zimbabwe. In India, food inflation is already running at 10%. In China, the latest reported number is in excess of 7%.

The chart that tells you nothing could suddenly tell an altogether different story. If, on the other hand, food inflation can be contained there are good reasons to believe that continued economic growth will force oil prices toward $100 per barrel (and possibly above) with depressing longer term consequences for inflation.

For that reason, we urge you to take the inflation risk seriously. Based on the evidence of recent market behavior, though, equity investors are clearly not worried about these developments. Bond yields, on the other hand, have been creeping up in recent weeks. Do bond investors know something equity investors don't?

canuck June 30, 2007 - 4:00pm
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