Last week we wrote about Merrill Lynch and how they were in trouble after a $7.9 Billion CDO write-down. At the end of the article I commented,

Since we don't expect to return to the easy financing market of prior years and our credit problems are far from over, it kind of makes you wonder how firms are calculating/estimating their mortgage write downs.

Well, now financial bellwether CitiGroup has reported far greater losses for their mortgage related investments. Investors were looking at a once nice 5.25% dividend that is now frankly in jeopardy after an estimated $1.3 Billion write down.

This was great news for the Bond market and our rate sheets as it pushed investors out of Stocks and into Bonds but it's not so great news for CitiGroup shareholders.

Again, it makes you wonder how firms are estimating their mortgage write downs.

In an article from Financial Times:

"October has been disastrous for CDOs. The value of the leading tracker indices has plummeted as the rating agencies have rushed to downgrade senior debt across the CDO spectrum.

It’s all been part of a subprime chain reaction. First there was all that bearish housing news in September - which markets ignored because the Fed had cut rates, equities were rallying and CDS spreads were tightening.

Second, the rating agencies hit mortgage backed securities. That bad housing news - rising subprime delinquencies and a sector which looked like it was heading for a recession fed into the outlook for MBS.  On October 8 Fitch downgraded $18.4bn of MBS. Then, on the 11th, Moody’s followed suit with $33.4bn in MBS downgrades. Five days later and Standard & Poor’s joined in - cutting ratings on $23.25bn of subprime securities. And again, three days later, on a further $22bn.

And then, predictably, CDOs - chock full of MBS - came in line for downgrades: On October 22 Standard & Poor’s said it could cut ratings on $21bn of CDOs. Moody’s said it would do the same with $33.4bn on October 26, and on October 29, Fitch said it was reviewing ratings on all $300bn of CDOs out there. Moody’s not wanting to be outdone went one further: saying this Wednesday that it could downgrade 500 CDO deals by tomorrow...

Some CDOs themselves are beginning to crack. Moody’s said seven have experience “events of default” on Wednesday. And true to their word, they’ve downgraded tranche after tranche of CDO debt since then. What’s more, since the CDO markets have crashed in the last few weeks, writedowns in banks’ Q3s - only just reported - are likely to be much worse. Citi, for example, reported writedowns totalling $1.3bn on subprime MBS it had warehoused for use in CDOs. That was on October 1." 

As Q3 earnings hit the market, we'll probably see write downs greater than previously estimated. With a lot of subprime delinquencies scheduled well into 2008, this could mean several more downgrades. And the downgrades won't be confined to subprime, they could very well include the Alt-A and Prime paper markets. 

What does all of this really mean? Downgraded ratings could ultimately mean more narrow lending guidelines.