by Calculated Risk on 10/27/2007 03:44:00 PM

From Fleck at MSN: Tech stocks' pain proves they're vulnerable, too. Here is an excerpt on housing and credit:

... the Lord of the Dark Matter, whose postings on the mortgage-paper unwind will be familiar to my regular readers [says] [t]he problems continue to worsen ... But people keep giving him the same silly line, that it's all been discounted, which is a variation of "it's contained." He says that there are more dark-matter downgrades to come and that some of the insurers of credit may find themselves in serious trouble as credits go bad. He points out that if the insurers get into trouble, then all of the credits they insure obviously will worsen.

For those who don't know, there is an absolute mountain of paper that trades where it does only because it has insurance. Sort of like the paper that traded where it did because it was supposedly AAA, and that rating turned out to be worthless. Any AAA, AA, A or whatever rating that's based on insurance may not be worth the paper it's written on.

Barf went the Merrill bull

It's a lesson that hit Merrill Lynch hard. Witness the subprime fallout behind the company's sobering third-quarter earnings report. Merrill wrote down about $5.8 billion of $14.2 billion in what's known as super-senior subprime assets -- the stuff that's supposedly above AAA and bulletproof.

When asked on the conference call if everything was marked where it could be sold, there was no answer, leaving folks with the idea that there was plenty of stuff still marked to model. And you can be sure that if Merrill Lynch has this problem of potentially mismarked paper, so do all of the brokers and probably some of the big banks. This is a huge deal. (Memo to nonbelievers: The problem is spreading, it has not been discounted and it has not been contained.)

Discounted, the new Contained.