more on the current credit environment

with the markets up on today's fed action and some short covering, it's a good time to review where we're at in the current credit environment. c hosted an excellent conference call last friday on the "State of the Global Credit Markets." the topic is all-encompassing, and i don't pretend to understand it all, but here's what i heard.

the ultimate losses in the credit market will be less than the mark-to-market losses and the headlines that blare at us every day would lead us to believe. they, as do i, think that we are 80%-90% of the way through the morass; the biggest issue now is liquidity and not inherent credit quality.

concerns regarding the blight spreading to other consumer-related segments like auto and credit card securitizations are overblown - these markets are much smaller and much less securitized. they note the big problems in the mortgage/subprime areas are in the "securitizations of the securitizations."

it was explained that asset-backed securities (ABS) are one level of securitizations, and they are then gathered and resecuritized into a collateralized debt obligation (CDO); that extra layer of leverage is the issue and where the bulk of the defaults are surfacing.

in english, a subprime mortgage is issued; a bunch of subprime mortgages are gathered together to create a subprime bond. then a bunch of bonds are the gathered to create a CDO. this last layer of resecuritization doesn't exist in the auto and credit card asset-backed securities, but it is in this second tier of leverage that the problems lie.

c's conclusion is that future writedowns will be smaller and more of an earnings event than a capital event that requires big write-offs.

what i think is needed is a stabilization, so buyers and sellers of the ABS's, CDO's or the whatevers can figure out the clearing price and what these things are really worth. it's possible the fed's moves to provide liquidity directly via the term auction, where these collateralized things can be pledged for loans, will go a long way in helping.