When The Music Stops

CDO Market Is Almost Frozen, JPMorgan, Merrill Say

For some reason this headline made me think of a brutal game of musical chairs where the music stops and the players are left with the option of jumping on a bed of nails or being kicked teeth first into the curb on the Street.

The never-ending slew of headlines on the deteriorating credit quality of these instruments only makes it more starkly obvious that the credit ratings placed on billions of these things were absolutely worthless.

Moody's virtually acknowledged as much today (see this article) by suggesting that it might adopt a set of "warning labels" for their ratings! The fact that their rating methodology is so suspect that they have to create the equivalent of a skull and crossbones would be laughable if it weren't so scary in its implications. In other words, Moody's is saying "you know those $billions of securities we said were 'AAA'...well...we didn't reallly mean it".

If the CDO market already froze up before such an acknowledgement, where do we go from here? What is the next market to freeze?

Maybe the murmurs in the leveraged loan markets will become full-fledged wails when the buyers in that market start to question the promise for their exit alternatives in a drying liquidity environment. What about CDS markets that actually have to consider counter-party credit risk? Probably not as easy to trade this stuff willy-nilly once you realize your insurer may not exist tomorrow.

Life is beautiful, but it sure does have a bad hair day sometimes.