Ty Andros (Financial Sense, Friday) repeats the point made by Jim Puplava (which we reported earlier this summer), that the credit agencies' re-rating of subprime packages have ignited an explosion inside the banking system, but this may only be the detonator that sets off the main charge:
Whereas the big banks and investment houses can hide behind tier three and pray for a market recovery, the investing community cannot. Pension funds, institutions and money market funds, have fiduciary investment covenants which direct them to sell securities which are below certain ratings levels. Once an investment falls into the lower rungs on the investment scales they are bound by their own investing rules to divest the assets.
Tens of billions of dollars of securities have been downgraded since the beginning of October and this will require that they be sold in a timely manner. Once those securities hit the markets we will know their true value, and it won’t be pretty. The super SIV will quickly become an exercise in wishful thinking as their “high quality” paper becomes junk in the maelstrom of liquidation which increases every time a security is downgraded. The super SIV’s whole reason for being was to prevent fire sales and price discovery.
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