S&P finally says subprime is mostly junk

Standard & Poor's just drove a huge harpoon into the heart of the mortgage credit bubble, and it's going to take a long time to clean up the mess once the beast finally dies. S&P, one of the three main credit-rating agencies that served as enablers of the subprime-mortgage boom, announced Tuesday [10 Jul 2007] that it would lower its ratings on 612 bonds, a small portion of the mortgage-backed securities it had given its seal of approval to. See full story.

S&P said it would change its methodology for rating hundreds of billions of dollars in residential-mortgage-backed securities. And it would review its ratings on hundreds of billions of dollars in the more complex collateralized debt obligations based on those subprime loans. A lot of debt will be downgraded to junk status. A lot of pension funds and hedge funds that once thrived on the high returns they could get from investing in subprime junk will now lose a lot of money.

theoildrum.com -> bloomberg.com :

Prices of some bonds backed by subprime mortgages have declined by more than 50 cents on the dollar in the past few months while their credit ratings haven't changed. A downgrade would be S&P's biggest reduction of subprime ratings. Insurers and pension funds may be among investors required to sell their bonds if they are downgraded, potentially driving down prices of $800 billion in subprime mortgages and $1 trillion of collateralized debt obligations, which package mortgage bonds into new securities. S&P said it is also reviewing the "global universe" of CDOs that contain subprime mortgages. Investors in CDOs alone stand to lose as much as $250 billion, according to Institutional Risk Analytics.

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