The big news here is what this will mean as far as spreading the pain. If a credit contraction ensues then the whole house of cards starts to come down.
This will strike CDO/CDS investors (including pension funds, which is a whole different can of worms to be opened) first and then trigger a whole slew of peripheral, but just as important, follow on actions.
There will be a massive amount of scrutiny paid to everything connected to this market and Fannie/Freddie will be right back in the hot seat. They both hold major positions in the market and, while not officially a government agency, they give the impression that the “full faith” of the goverment is behind them. If they have to unwind their position and are forced to substantially withdraw from purchasing any more MBS products of any stripe, then this will literally have the same effect as a credit contraction, in that the single largest player in the game will be sidelined.
