Saturday, June 30, 2007

The bond market's Enron

I'm not sure if you have read this yet, but it is simply amazing. According to Bloomberg, S&P and Moody's are refusing to downgrade any mortgage bonds even though defaults on the loans backing the bonds are growing. Why are they doing this? If certain bonds fall beneath a certain recommendation level, pension, endowment and mutual funds will be forced to sell them, causing the bottom to fall out of the bond market.

Isn't it better to just suck it up and deal it with now rather than sticking your head in the sand? Won't the problem just get worse and worse? Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. certainly thinks so. Go read the Bloomberg article.

If you don't understand how this impacts the broader market, go read an excerpt from "My life as a quant". It wasn't until I read this book that I finally appreciated the breadth and magnitude of the housing problem.

For more on the Enron comparison check out The Big Picture.

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