Ratings Actions

http://www.moodys.com/moodys/cust/research/MDCdocs/17/2007400000619506.asp?namedEntity=Rating+Action&doc_id=2007400000619506&frameOfRef=structured

Moody's downgraded a large Credit Suisse structure. Some securities went all the way from Aaa to below investment grade. Ouch.

Last week, Fitch hammered several tranches in a similar fashion: AAA to below investment grade.

http://www.fitchratings.com/corporate/sectors/rmbs_rtng_actn_rpt.cfm?sector_flag=3&marketsector=2&detail=&body_content=rtng_actn

Tread lightly if you want to buy financial stocks.

Alphabet Soup: ABS CDS

Quick review:

Credit default swaps (CDS) function as insurance policies for certain securities. If a bond defaults, a buyer's loss can be mitigated from the profit generated by the CDS.

CMBX: protection on commercial mortgage backed securities

ABX: protection on residential mortgage baked securities

At this point in the cycle, it is safe to say that the lower rated trances, (single A, triple BBB, triple B-) won't recover. Therefore, the prices will stay pinned at their current levels. The killer here is the higher rated tranches. To attain these higher ratings, these securities have the most stable cash flows in the deal structure. The lower rated tranches get stuck with the initial losses, an attempt to shield the higher rated tranches from diminished cashflow.

It is not working. Whether it's Fitch, S&P or Moody's issuing downgrade notices and warnings or you just take a look at the above graphs, more losses are on the way.

Update: Structured Finance CDS

ABX: These residential mortgage backed indices, for the most part, are basically stuck at all time lows. The lower rated tranches have little chance of ever recovering value, reflecting the worthlessness of sub-prime loans and the like. The higher rated tranches are still under pressure, although off their lows.

CMBX: These commercial mortgage backed indices have recovered since the announcement that CMBS would be TALF eligible. However, recent ratings agency actions have prompted a wave of profit taking.