Moody's Hammers Subprime - TheStreet

Moody's Hammers Subprime

It threatens to downgrade some more subprime debt.
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After months on the sidelines,


(MCO) - Get Report

has swung into action in a big way on the sinking subprime loan market.

The New York-based ratings agency Wednesday put more debt backed by subprime mortgages on watch. The move came a day after Moody's followed rival S&P by threatening to downgrade billions of dollars in bonds and loans backed by mortgages.

Moody's has put 184 tranches of 91 collateralized debt obligations -- comprised of loans and bonds pooled and sold off as bonds to investors, backed primarily by residential mortgage-backed securities worth some $5 billion -- on review for possible downgrade. The debt was originated between 2005 and 2006.

The Moody's report indicates that the subprime debt being downgraded represents about 0.5% of the total asset-backed CDOs rated by the agency.

One CDO manager told

that these recent downgrades are making for very unsettling times in the CDO market, though brokerage stocks shook off Tuesday's carnage and rose fractionally in Wednesday afternoon action.

The move comes after Moody's and Standard & Poor's took aim at subprime-tainted debt. Standard & Poor's placed about $12 billion worth of residential mortgage-backed securities on watch for a possible downgrade, citing increasing losses tied to subprime mortgages. Moody's downgraded 399 residential mortgage-backed securities.

The agencies have been accused of being late to the game in signaling to investors that there was trouble in subprime. This past spring, troubled mortgages began upending mortgage lenders and investment banks. Many lenders including big subprime issuer

New Century

ended up filing for Chapter 11 bankruptcy. A call to Moody's was not immediately returned.

Subprime troubles have also hit big banks, including

Bear Stearns


, which has become Wall Street's poster child for how insidious subprime slime can be.

Bear has been attempting to bail out its troubled hedge fund High-Grade Structured Credit Strategies Fund with a $1.6 billion credit facility. Another, more highly leveraged hedge fund -- High-Grade Structured Credit Strategies Enhanced Leverage Fund -- also has been languishing, but Bear has made no plans to help that vehicle.

The firm, run by CEO Jimmy Cayne, is also in the midst of unwinding its troubled funds and is in the process of unloading some $450 million in credit tied to subprime debt, as reported earlier Wednesday by


Although the problems with subprime is nothing new to investors, downgrades on a vast number of securities may force the hand of institutional investors, especially big pension plans and insurance firms that cannot own investments whose ratings fall below investment grade.

Yesterday, subprime jitters roiled the broader markets. Today investors appear to still be waiting for the next shoe to drop, with the view that the agencies will cause further pain in the market by continuing to downgrade more debt, pushing managers to retool their portfolios.