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Monday, July 16, 2007

Stunned But Not Surprised

by Tanta on 7/16/2007 11:00:00 AM

You can't make stuff like this up. Well, OK, you can make stuff like this up, but you can't keep from snorting coffee through your nasal passages when you read it. From, "Subprime Downgrades Sideline ABS Issuance":

The asset securitization market usually does not stop issuing new deals for any reason, except perhaps the usual holiday breaks. After enduring several days of downgrades on subprime MBS by Moody's Investors Service, and warnings of more from Standard & Poor's, however, the ABS market largely decided to hold back from issuing new debt last week.

Except for our occasional visits to our second homes on Martha's Vinyard, we've never seen a good reason to stop issuing new deals. It took downgrades from the rating agencies to make us quit for a minute.
Initially stunned by the news, the ABS market drove the ABX indices to new lows and pushed spreads wider, according to market observers. Prices on the double-A tranche of ABX 2006-2 and 2007-1 fell three and four basis points, respectively, according to Credit Suisse. The triple-B prices had already dropped around two and three basis points over the past two weeks, respectively, and Wednesday's news only forced them to trade down further. The ABX 2007-1's triple-B-minus tranche breached the $50 point, when it traded at $49, said Credit Suisse.

Stunned, I tell you. We were totally blindsided here. We've never had to stop doing deals before.
"No one is surprised by it," one sell-side professional said. "People are very upset at the rating agencies, that they misjudged things as badly as they did."

OK, well, you see, "stunned" isn't the same thing as "surprised." See, us insiders knew a long time ago that this stuff was pretty squirrelly, but by God we weren't going to stop issuing more of it until the rating agencies told us what we already knew. It's not like we're going to do anything based on our own analysis.
Frequent MBS issuer C-BASS was planning to come to market with a $433 million transaction, but the latest news from the rating agencies appeared to have affected pricing on those bonds already. The triple-A rated tranches were getting price talk at 12 basis points over the one-month Libor for the bonds with two-year durations. Pricing was as wide as 34 basis points on the six-year triple-As. As for the deal's four-year triple-B tranches, pricing talk ranged from 300 basis points to 750 basis points.

"We're guessing that the mortgage guys are sitting on their hands," said one market source, noting that most deals that were expected to price last week would probably come from overseas.

I'm more inclined to think that there are a couple of "mortgage guys" who are sitting on some uncomfortable chairs in some upper-floor conference rooms across from some accounting guys who have that look on their sour little faces, myself, but by all means let them claim to be sitting on their hands if that's what they have to do to reassure their little account-holders.

How can you recognize a major market shift? Nobody can quite get their stories straight. Everybody was shocked by the rating agencies, but everybody is mad at them because everybody knew all along that this was coming. Everybody knows that the stuff hasn't even been downgraded enough, but everybody's shocked over the spreads on new deals of the same caliber. Clearly it's going to take a while before we figure out how to reconcile our wounded innocence with our seasoned vigilance. Stay tuned.