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

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

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, with a combined value of $270bn The total list can be viewed here.

An end, perhaps to ABX hopefulls?

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

The RMBS rating action 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.

Perhaps more wave than ripple: last night’s rating action means banks will have to double predicted losses, say S&P – increasing them from $130bn to $265bn. Banks have so far announced only around $70bn of writedowns.

Consider also the impact these downgrades will have on the monolines. MBIA announced massive losses on the back of its CDO business today. There will now be even more pain to come. The same goes for all the other bond insurers deep in the CDO mire – not least ACA.

All this announced after the close of US markets – which even on news of a 50bp cut from the Fed, finished marginally down on the day.

As Yves Smith at Naked Capitalism wryly points out, “the Fed is running out of firepower”