Kass: Ain't Seen Nothing Yet on Writedowns

With the analyst report this morning that Citigroup could face as much as $30 billion in additional writedowns and might cut its dividend, we wanted to share Doug Kass' post from Tuesday on the writedown dangers facing financial institutions. The post originally appeared on RealMoney Silver.

On Credit

10/30/2007 7:32 AM EDT

I've been discussing lately the recent dichotomy between the performance of equities and of mortgage credit. That is, stocks have continued their ascent, while various subprime mortgage-based ABX indices have dropped precipitously.

[Monday] that trend continued. While stocks forged ahead, even the highest-rated tranches of subprime debt were decimated after a "ratings agency" suggested that the credit ratings on over $20 billion of the highest-rated collateralized debt obligations might be downgraded.

Specifically, the AAA-rated ABX Index (for home loans made in the second half of last year) dropped under 80.0, down almost 3.50 from Friday's close of 83.4. The lesser-rated AA-rated ABX Index traded under 48.0 after closing at over 52.0 on Friday.

The divergence between the equity and mortgage credit markets remains counterintuitive; what troubles me the most is that the mortgage credit issues will not likely be resolved anytime soon. A cut in interest rates won't turn the mortgage debt market around, and based on the maturing economic cycle (among other factors), the worst is probably yet to come -- and with it will be a broader contagion into other areas of the economy.

Should these trends continue -- and I believe they will -- fourth-quarter writedowns in many financial institutions, including American International Group (AIG - Cramer's Take - Stockpickr), Citigroup (C - Cramer's Take - Stockpickr), Merrill Lynch (MER - Cramer's Take - Stockpickr) and so on will be much greater than anticipated.