I would guess that most of the holders of investment-grade MBS tranches are going to be fine, depending obviously on the financial engineering employed in carving up the original pool. I do think it’s prudent to be mindful of the possibility of the defaults eating their way up into the highest rated tranches.
The fallout from wiped-out non-rated tranches has the potential to fantastically exceed the value of the original MBS tranch. This is where the most imminent problem lay. With each successive generation of derivatives, the risk increases greatly. This is why we must look beyond the market segment of the original MBS tranches that are in trouble.
It is an unbelievably thick wicket. Even street insiders don’t know who is holding CDO’s and how many generations of derivatives are out there. The behind the scenes manuevering has got to be incredible. Hopefully we’ll get a good book on this stuff down the road.
