The Market Ticker

So why was it again that Bank America wanted to buy Countrywide?  Was it this?

"The Illinois attorney general's office, which began an investigation into the business practices of Countrywide Financial Corp. last fall, says it has found enough evidence of wrongdoing that it plans to file a civil suit against the mortgage lender and its chief executive, Angelo Mozilo.

....

In an interview, Illinois Attorney General Lisa Madigan said Countrywide "broke the law and we plan to hold them accountable for that." She added that Countrywide's actions have led to widespread foreclosures in her state and have wrecked havoc around the world. "The impact on individual homeowners and communities and the country and the global economy is unbelievable.""

Oh that's rich.  And Bank of America is still going to proceed with their acquisition?

Now remember folks, this acquisition is voluntary.  Bank America could repudiate this deal.  By deciding to proceed while they are now on notice that the firm is going to be sued they are effectively ratifying the practices of the firm and making the public statement that they believe that the actions of this company are and were defensible.

Oh by the way, the relief requested is that Countrywide be forced to repurchase all of the unfair and deceptive loans. 

Is Lewis really crazy enough to acquire Countrywide under that threat?  How many tens (or hundreds) of billions of dollars of forced repurchases could be involved here?

Late update (10:18 CT) - looks like California may be joining the party; there was a flash on them suing as well.  This could quickly turn into a "pile on" and make consummation of the deal entirely untenable.

Oh, and both Fannie and Freddie's "expanded balance sheets"?  They haven't done jack to promote what Congress told them to do:

"Instead of using powers granted by Congress to buy jumbo loans for the first time, Freddie Mac and Fannie Mae are purchasing their own mortgage-backed securities, helping reduce losses, company filings show. The large loans, above $417,000, made up almost a third of the U.S. market last year, according to the Mortgage Bankers Association."

Told 'ya so.  $500 says that Congress won't grow a pair and rescind the increase.  In fact, the $300 billion boondoggle bill that The Senate has passed by a veto-proof majority will make those changes (that Freddie and Fannie aren't using to do what Congress told them to do) permanent.

Is there a Friends of Fannie in the House and Senate somewhere?

By the way, if you think this mess is/was limited to Countrywide, I have a bridge to sell you.  In fact, it would likely be possible to list the lenders without similar problems over the last few years using your fingers - if both of your arms had been blown off.

Enjoy the FOMC today - I'm going to chuckle watching Bernanke dance on the head of a pin while juggling jars of nitroglycerin.

Couldn't happen to a nicer guy.

So this morning NY and Chicago wake up to the news that DOWn Chemical has decided that due to the incessant (and insane) cost-push pressure coming from feed stocks, they will increase prices (another) 25%.

That would be a 45% increase (if you failed math) in the last two months, or a roughly 50% increase if you passed.

Yeah.

This, of course, resulted in an immediate reaction in the futures, as well it should.  This sort of "pricing pressure" has no way to be spun as a "positive" by anyone. 

And let's not kid ourselves about why these feed stocks have increased in price - it is simply too much liquidity chasing the goods out there in the market, and that is Bernanke's responsibility.

Ben claims to have a dual mandate to protect both the economy and price stability, but in fact he has intentionally abused that mandate to protect not the economy but rather his banking buddies on Wall Street, who made bad bets and instead of having to eat them, are being allowed to foist them off on you and I.

See, Bernanke thinks he's immune from all of the laws of economics, not to mention the securities marketplace.  In the case of the latter, he is - The Fed "trades" on inside, undisclosed information literally on a daily basis.

But in the case of the former, nobody is immune from the laws of economics.

Unfortunately the damage done from Ben's "reliquification campaign" is now quickly snowballing.  The banks which allegedly have a "backstop" are finding that the money flow for their secondary offerings are starting to close, as people get real tired of buying stock at $10 only to see the price fall to $5 a week later.  That's a real 50% loss!

You can fool some of the people some of the time, but eventually, if they lose enough money, you get the middle finger in response to your entreaties to come play in the sandbox once again.

The down payment assistance game is getting more heat, as well it should. Have a peek at the results of these games:

Source: WSJ

Gee, you think that might be a problem?  We more than double the rate of default based on whether the buyer cheats on his down payment?

Of course the firms involved in this are beating shoe leather in a desperate attempt to prevent the rug from being pulled out from under them.  Never mind that the entire concept of a "non profit" that simply washes someone else's money is one of the more "interesting" uses of the 501 section of the IRS code that I've managed to come across in my years.

The other problem with these "down payment assistance" programs is that they are really a scam to hide the actual selling price, and therefore they distort the market in other ways - all of them bad.

If you have a $100,000 house (for example) but the seller of the house finances the down payment of 3%, then the real selling price is not $100,000, its $97,000.  But it is reported in the MLS as a $100,000 sale, even though the seller doesn't really get $100,000 for the house, as they kick back $3,000 to the buyer.

I call this fraud but apparently HUD calls the practice acceptable and allows these "adjustments."  I guess when the entire housing finance industry has become steeped in gamesmanship and BS "a little more" doesn't bother anyone.

Nobody really expects The Fed to drain the swamp tomorrow or, for that matter, at any time in the reasonable future, but they sure as hell should.  Bloomberg picked up on the box Ben finds himself in though (gee, you're only a few months late guys) today:

"Raising rates may exacerbate the economic slowdown and roil banks whose losses sent their stocks down the most in a decade this month. Forgoing a rate boost next quarter risks damaging the Fed's credibility and deepening its divisions. Already this year, three officials have dissented on rate decisions."

Oh what a tangled web we weave when we practice to deceive.

Congress needs to get involved in putting a sock in this crap, but being an election year and all, the best we can probably expect is more BS partisan rhetoric. 

Of course being a "Friend of Angelo" might have something to do with that, along with being a Friend of Fannie and Freddie.  Speaking of which, do you think we'll ever see any sort of meaningful disclosure of all of these "special deals"?

IRA calls it "legalized bribery."

I agree, and its time for this garbage to stop.

'Yall remember how I (and others) were talking about the monolines and their balance sheets - and that downgrades would lead to forced capital postings?

Guess what - here 'ya go:

"June 21 (Bloomberg) -- MBIA Inc.'s five-level downgrade by Moody's Investors Service probably will force it to make $7.4 billion of payments and collateral postings.

MBIA has $15.2 billion of assets available to satisfy the requirements, the company said yesterday in a statement. That includes $4 billion in cash and short-term investments, $1 billion of unpledged collateral and $10.2 billion of other securities, MBIA said."

There is a little problem here.  Only $4 billion is in cash, and they need $7.4 billion.  Oh, and they can't hit the Fed window.  They will thus be forced to sell off a significant part of their security portfolio - it will be interesting to see how much they fetch in such a forced sale environment.

They won't be alone in this.

This remains a radically-unappreciated problem in the markets.  It is not just that all of these firms are at risk of going under (although that's a risk in its own right) - it is that when they blow up the ratings downgrades on everything they wrote wraps on - the "underlying credit quality" - threatens to sink the holders of that debt.

For most funds and holders its a nasty capital loss, but for banks and others who have a reserve requirement this sort of ratings change can literally force immediate insolvency, as in some cases the reserve requirements can expand by ten or even one hundred times, depending on the severity of the downgrade.

Oh, if you think this is a "WTF?" moment, you ain't seen nothing yet.  Check this out:

"NEW YORK, June 22 (Reuters) - Bond insurers such as Ambac Financial Group, MBIA Inc and FGIC are talking to banks about wiping out $125 billion of insurance on risky debt securities to limit the damage to the insurers from the credit crisis, the Financial Times reported on its website on Sunday.

Discussions about "commuting" these insurance contracts, which were sold by the bond insurers to banks in the form of credit default swaps (CDS), have taken on a renewed sense of urgency amid a rash of rating downgrades in the bond insurance sector, the report said."

Hahahahaha....

In some of my discussions I have noted that one of the likely outcomes is that these contracts would simply be repudiated - whether voluntarily or not.

The effect of this is to force the underlying credit quality of these instruments to immediately "shine through" and show up on the institution's books.  Now is this good or bad?  Its bad in all instances, but it basically is a gambit to save the business of these insurers, who are probably bankrupt otherwise.

So why not force them into bankruptcy?  Because you still don't get anything if they go under!

So from the standpoint of the buyer of the protection, they lose either way.  This is somewhat akin to feeding someone a poison-laced dinner, then asking them not to shoot you for doing it because they're going to die anyway.  They might, or they might not, but either way the outcome for them is not going to change.

Interesting strategy.

Oh, supposedly the The Fed and SEC are "near" to finalizing an agreement on "greater regulatory transparency":

"The agreement, which could be announced this week, aims to fill gaps in regulatory oversight and will increase cooperation between the central bank and the SEC in the wake of the near-collapse of Bear Stearns Cos, the report said.

....

Under the agreement, the Fed would be able to see an investment bank's trading positions, its leverage and its capital requirements, the Journal said."

That'll be nice. 

Anyone else see a problem with this?

Note that Jamie Dimon is on the board of the NY Fed.  How do you solve the conflict of interest problem that naturally arises from JP Morgan's CEO potentially having access to the trading positions, leverage and capital requirements of its competitors? 

Oh probably by not solving it at all.

So now we're going to create a "superclass" of people who have access to their competitors positions and leverage ratios, and can then engage in raids on them any time they'd like?

For obvious reasons I do not believe that any alleged "Chinese Walls" that might be erected would be worth the paper they're printed on.

This sort of thing would be funny, if it wasn't so obviously stupid.  Why would anyone be willing to play Poker in a casino where certain parties at the table had access to mirrors behind your head and could see your hole cards?

There is only one way out of this mess folks and that is for everyone to be forced to follow the same rules that I and you are forced to when we invest in the markets:

At 4:15 PM ET every day (when the futures market closes) all positions are marked to the market.  If there is no bid for an asset on that day, then its market value is zero.  My books must balance and my margin requirements must be met each and every day at the close of business.

If an asset that was worthless subsequently receives a bid on a later date, then I mark it back up to whatever that bid might be - but on the day it goes "no bid", it is marked at zero.

I, you, and every other "mortal" who plays in the markets is forced to live under these rules.  We are in this mess because we have anointed certain "Supertraders" who are allowed to play by different rules - they are allowed to make up values for assets which have no bid, putting them in "Level 3" buckets and inventing out of whole cloth a valuation simply because they don't like what the market says they are worth on a given day, week, month or year.

I, you, and every other "mortal" who plays in the markets is not allowed to take losing positions and stick them in "bankruptcy remote" vehicles like SIVs and VIEs.  Our brokerages will not allow us to trade in a vehicle that has no tie back to us beyond the level of actual, marked-to-market assets in that vehicle.  We can't "lend" our credit rating to someone else, except by literally taking on the risk of default ourselves (e.g. co-signing a loan), unlike these "Supertraders" who are allowed to "lend" their credit ratings with impunity - and without risk.

What has gone on the last few years is fraud on a massive scale folks.  It continues to this day precisely because you, collectively, allow it.

As the economy deteriorates around you it will become more and more clear how foolish you were to sit at home or in your offices and say "oh its not going to get that bad" instead of showing up in Washington DC or your closest major city and literally shutting down commerce by "sitting in the streets" - en-masse.  Yes, if you alone do this, you will be simply run over or arrested for being delusional (or suicidal), but if you and 100,000 others in your town all show up and do the same thing, reform will come and the crooks will be charged and prosecuted.

Who should eat these losses folks?  Should you, the taxpayer, eat whatever is bad in the $80 billion that is sitting on Countrywide's balance sheet right now?  Bank of America seems to think so, if the document referenced in The Ticker over the weekend is accurate.

Or should Mozilo eat it?  Should he be forced to forfeit all of the $500 million he took out of that company in option grants over the last few years, with us calling that "a good start", then forcing the bond and stockholders of both CFC and BAC to eat the rest?

Should the bad bets that Bear Stearns made be forced to be eaten by the bond and stockholders, or should JP Morgan get a $29 billion guarantee from The Fed to "take them over", when their CEO sits on the board of the organization that yanked their funding in the first place?

Should the other investment and commercial banks be able to re-write all their bad mortgages and dump them on the government (that is, you) via Ginnie Mae and the FHA, as the bill now under debate (which looks suspiciously like BAC's "suggestion") would do, or should they be forced to eat that bad paper, without ketchup?

These games will continue until you and 9,999 of your best friends and neighbors show up in the downtown business district of the nearest major city to you and you literally shut it down by sitting down in the middle of the street and refusing to move until the crooked practices that got us into this mess result in indictments, not bailouts.

If decisive action by "we the people" does not happen soon a few trillion worth of this bad debt is going to end up on the taxpayer's balance sheet, where it will result in permanent and significant moves higher in borrowing costs for all consumer and commercial debt.

That means mortgages, credit cards, auto loans, commercial and industrial loans, and of course government loans.  This transfer to "the people's" balance sheet, once done, cannot be un-done.  It will mark a permanent structural change in what you pay to finance everything you buy, and the time to stop it is running out.

Lack of action is a decision, and at this juncture, one you, your children and grandchildren are going to pay for.

If you're interested in "what sort of payment might be extracted" by market forces, look at what happened with Gold and Oil this morning.

There was a monstrous spike downward in gold prices at about 7:15AM.  There's no official news on what caused it, but the rumor is that there was a forced liquidation of a hedge fund.  They sold their gold but held the oil.

Why is this important?  Because it tends to ratify what I have been saying, which is that oil has turned into a currency.  Why?  Because it has utility value - it is stored energy and cannot be debased.

Bernnake and Paulson can bleat all they want about the dollar, but in the end there is exactly one thing that matters, and that is the opinion of market participants.  You can't take $300 billion worth of Treasuries - money good - and exchange them for crap unmarketable paper that in fact may be worthless (nobody knows, since Ben won't let us know what's really on that balance sheet or where it came from) and expect people to believe a "trust me."

Time to choose America.

I'm not even sure where to start with this.

National Review Online has broken a story in which they state:

"National Review Online has obtained an internal Bank of America "discussion document" (pdf here) on the subject of the FHA Housing Stabilization and Homeownership Retention Act of 2008, a.k.a. the Dodd-Shelby mortgage-lender bailout bill.

Yesterday, Tim Carney reported that the prevailing sentiment on Capitol Hill is that the Dodd-Shelby bill "is exactly what Bank of America and Countrywide wanted." BofA is in the process of acquiring Countrywide. Countrywide is currently embroiled in a scandal over its V.I.P. program, under which several powerful politicians, including Sen. Chris Dodd, got preferential loan rates.

This discussion document (dated March 11, 2008) would appear to support the contention that BofA essentially wrote the bailout section of the bill. Almost all of BofA's preferences are mirrored in the Dodd-Shelby legislation. The BofA document even offers PR tips, such as "We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bail-out of the bond market."

This is an outrage.  Senator Dodd was discovered to have gotten a "special" mortgage from Countrywide Financial (they are being "acquired" by BofA) as I wrote about in "Where's the FBI".  Senators and Reps have since declined to do anything more than allow an "ethics investigation" to take place.

Now we find out that it appear that Bank Of America wrote the damn bill that he and Shelby introduced!

Now why is this important?  Because it stinks to high hell, that's why.  And more importantly, if you read that linked document closely you will find that GNMA, otherwise known as "Ginnie Mae", should be the issuer of the bailed out loans.

This is an absolute ticking nuclear weapon folks.

You are about to get robbed to the tune of $300 billion dollars.  Ginnie Mae is the ONLY issuer that has an EXPLICIT government backstop.  That is, if this plan fails you will be be on the hook for every penny of defaulted loan as a taxpayer.

Now I do not know if the actual final bill that will come out and be sent to the President (who has said he'll veto it, by the way) will contain the GNMA underwriting or not. 

But for Bank of America to "propose" that the government step in and rewrite, then guarantee hundreds of billions of dollars of retained mortgages that Countrywide Financial (and others) have on its books, while they are supposedly "buying" Countrywide Financial, is an absolute outrage. 

This is corporate welfare at its worst - Countrywide is being investigated by virtually every 3-letter agency of the government that exists for the possibility of violating both civil and criminal law, and now Bank Of America, who agreed to buy them around the turn of the year, three months later essentially writes a bill that would remove some of the risk that they are buying something that has more liabilities than assets by shifting a good part of those liabilities to the taxpayer?!

If we the people allow this bill to pass, even if it is vetoed, it appears that there is a veto-proof majority in Congress and the veto will get overridden.  That is, we must stop this in Congress and we must stop it NOW.

Mark my words folks.  If you do not pass this Ticker around to everyone you know on Monday, and manage to get the Capitol Hill switchboard flooded with calls and faxes demanding that this bill be killed, you will get billed for the entirety of the housing bailout.  All of it.

Lenders will receive a windfall in that their potential losses in the bad paper on their books will be transferred to you.

This will be only the first.  Using this bill as a template Fannie and Freddie will be next.  The mortgage insurers are drowning, with one of them being forced into runoff this last week.  The others will likely follow.  If and when they fail, Fannie and Freddie's credit book will be forced to trade on its underlying credit quality - that is, it will be exposed as toilet paper and full of fraudulently-sold loans (to them) that contain material misrepresentations as to the credit quality of the property and/or borrower. 

This bill will then be extended to cover those losses.

How much loss will you, the taxpayer, eat?

As I have said, my total estimated loss in this party is going to be between $2.5 and $3 trillion dollars, which is roughly equal to one third of the entire public debt of the United States.

That's right folks, Bank Of America's "proposal", which will become law unless you stand up and stop it right now, will ultimately end up costing you, the taxpayer, $3 trillion dollars, and $300 billion of that cost is contained in the bill "as written."

To fund that treasury bonds and bills will have to be issued, and that will drive borrowing costs much higher.

If there was ever a time that you HAD to get off your butt to save yourself, this is it.  Congress must hear not only from you today and Monday, but from every one of your friends, and they must tell their friends.

Well its supposed to be "Quad Witching", the expiration of all the index and commodity options and futures.

But today its "Wicked Witch" instead, and if you were a bad boy and didn't pay your taxes, its also a day when you are likely sweating bullets:

"Both men were accused of creating bogus trusts and sham offshore entities to hide some $20 billion in offshore assets owned by wealthy American clients. UBS is in talks with the Justice Department and Swiss authorities about turning over the names of up to 20,000 American clients.

Mr. Birkenfeld’s work concerned offshore undeclared assets held for wealthy Americans. In his statement of facts, he said that he and other unidentified UBS private bankers urged their American clients to destroy all offshore private banking records held in the United States; to use Swiss credit cards that could not be discovered by American tax authorities; and to falsely characterize money pulled out of Swiss accounts as loans from UBS. The entire business brought in $200 million a year in revenues to UBS."

So much for "honorable" bankers eh? 

Oh, the allegation is that this is not a "rogue employee" thing either - it was a widespread effort by UBS to flout United States tax laws.

Now now, we know that nobody would do anything like that, right?

How do these guys manage to keep their US banking charter?

More to the point, however, is that 20,000 Rich Americans have to be crapping in their pants about right now.  About all they can do is get on their horn with their lawyers and negotiate a surrender and payment - plus interest and penalties - with the IRS.  That's no guarantee they won't get indicted either, but it reduces their risk.

Trying to "go silent" is unlikely to work, as banks keep records.

This kind of thing pisses me off.  I pay my taxes every year, on time.  I don't like it but its the price of being an American.  Putting diamonds in a toothpaste tube (one of the allegations in the article above) as a means of moving money around without the government finding out about it is just plain wrong.

Then there's the Bear Hedgie Indictment.

Who ought to be crapping in their pants over this one? 

Every Wall Street Bank executive, that's who.

Why? Because what is alleged in that indictment is exactly the sort of crap that every Street Bank has been running for the last three to six months, claiming that the markets were ok, that they didn't need to raise capital, and on and on and on - and those statements turned out to be lies:

"Convictions will depend on showing that the managers "were communicating to the public they were in possession of information that conclusively demonstrates that their statements were false and that they would've known that," said Michael McGovern, a former prosecutor and partner at the New York law firm Ropes & Gray LLC."

You mean like all the lying we've seen over the last four months about "kitchen sink" quarters, not needing to raise capital and having no intention of doing so (followed three days later by doing exactly that), and quarterly results that, when the 10Q is filed, don't match the earnings release or conference call?

Yeah, that sort of lying, I'd think.

Or how about what BB&T said yesterday?

"The market extended its gains after regional bank BB&T Corp. said it expects to increase its dividend this year, countering speculation it will slash the payout."

Expects?  Based on what?  Plenty of capital to pay dividends with?  If they don't have it, should their execs be indicted?  I think so, unless they can show that there was a genuine path and means available today to do so that was thwarted by unforeseen market conditions.

If the recession doesn't lift, for example, that's not "unforeseen".  And what's "some increase"?  One penny?

This bit of mouth-moving was apparently the bank's reaction to an analyst note yesterday in which it was noted that they might even require recapitalization.

Quite the catfight there..... but should you be free to pump your stock price without a reasonable basis in reality?  Or should the standard be that your statement has to have some rational basis in fact at the time you make it, based upon actual current market conditions?

I say you should have to demonstrate a reasonable underlying set of beliefs, otherwise firms are free to lie outright, and it sure looks like there's been a lot of that going on in the financial sector in the last year.

The cute part of the Bear Hedgie deal is that this is not limited to them.

The FBI has been rounding up mortgage brokers - about 300 of them so far.  Hope springs eternal that this continues and that thousands of these scum-suckers find themselves in Federal Prison, and even better, that they "roll over" on their buddies in the business above them.

Oh, you may remember that I have made comments about all the GSEs being potential zeros, right?  A big part of that was predicated on the mortgage insurers starting to blow up, which I fully expected to start happening.

It is:

"June 19 (Bloomberg) -- Triad Guaranty Inc. became the first mortgage insurer to stop selling new policies after the collapse of talks with Lightyear Capital LLC to form a new company with Triad employees. The insurer plunged 40 percent in Nasdaq Stock Market trading.

The decision to halt sales was prompted in part by Freddie Mac's suspension of the company as an approved insurer, Winston- Salem, North Carolina-based Triad said today in a statement. Freddie Mac, the second-largest buyer of U.S. home loans, refused an appeal of that decision, the company said."

This sounds like Freddie "covered their own ass." 

Nothing could be further from the truth.  In fact they're refusing to take more risk, but the existing risk they took from these people is still there.

The good news is that Triad is a relatively small fry in the game. 

The bad news is the bigger fish, Radian, MGIC, and PMI are likely not far behind these guys. I believe they are all in significant capital trouble, and there is no assurance that they will be able to pull their fat out of the fire any better than Triad did.

The reason this threatens the GSEs is that a good part of their credit book is "safe" as a consequence of these guarantees - that is, for any loan that was originated over 80% LTV there is theoretically supposed to be mortgage insurance to guarantee that the principal will get paid if there is a default.

The problem with this theory is that if the insurer goes bankrupt you're screwed, as now the underlying credit quality becomes exposed. 

Sound familiar?

It should, because its the same problem that is hitting the monolines and CDOs.

The entire GSE house of cards is swaying in a freshening breeze; one good puff and......

Psst - you know that fraud putback stuff I was talking about last spring?  Look for it coming from a pissed-off bond investor near you...... that's gonna start ramping soon.

The chainsaw catchers who went after these deals "early" - the Wilbur Ross' of the world - are in deep doo-doo.  They are taking it long and hard, having been unable to do any sort of real due diligence, or, in some cases, still operating in the early 00's world where you could take a deal with a cursory look and a handshake!  It will be very interesting to see how many of those "early" folks come back with lawyers and try to unwind their deals via lawsuit, claiming they were misled (at best.)

Oh, and Dicky Bove?  You're not going to believe this:

June 20 (Reuters) - Ladenburg Thalmann analyst Richard Bove widened his 2008 loss estimate for Citigroup Inc and cut his price target on the stock, after the largest U.S. bank said it could have substantial subprime write-downs in the second quarter.

Bove widened his 2008 loss estimate for the company to 36 cents a share from 19 cents and lowered his price target on the stock to $25 from $31.

But I thought it was a "generational buy" Dick?  That we were going to see a 5-bagger?  Now "C" is back below the close on the day you made your call, and if I bought then, I'd be underwater.

As you know my response to your original call was this:

So no, I didn't buy "C".  What I should have done (but didn't) was short the spike you induced.  Ah well, missed opportunities, but the laughing kitty is still good, right?

MBIA and Ambac lost their last AAA ratings yesterday when Moody's stripped them.  That's that.  The ugly here is that this is likely to trigger somewhere between 70 and 200 billion more in writedowns and/or forced asset sales.  This, of course, has not been reserved for by the banks:

"The downgrades end more than seven months of speculation about whether the bond insurers would keep their top ratings at all three firms. Five of seven companies lost their top ratings as projections for losses on securities backed by home loans surged and confidence in the companies collapsed, causing municipalities to shun their insurance. The downgrades span more than $2 trillion of debt sold by issuers ranging from school districts and sewer authorities to Wall Street firms."

That's gonna leave a mark (on your balance sheet!)

The true ugly hits if these downgrades continue and sends the insurers below investment grade.  Such a downgrade threatens to bankrupt virtually any bank that holds covered assets, as the impact would be a reserve requirement that jumps to more than 100 times what it is for AAA paper.  This, obviously, isn't going to be allowed to happen - banks will unload this paper now rather than take the risk of instantaneous insolvency.

I believe that continued downgrades to below investment grade (if these firms survive at all) are inevitable - as such, it is my view that this is a storm that cannot be avoided, and those who have made investment decisions believing that the "credit crunch" was in the 7th or 8th inning are going to be destroyed.