So now the FDIC is "taking a look" at hedge funds and other institutions who have loaded up on CDOs. Talk about shutting the door after the horses have left the barn! As these securities fall victim to rating agency downgrades- one by one- they will be dumped at fire sale prices. Even worse, the hedgies that have leveraged against these CDOs (and leveraged how much- 20x, 30x, 50x?) are going to have to start dumping them or coming up with cash to cover margin calls.
Where does it end? Who knows. 4-5 months ago, many denizens of the contingent of doom at my favorite bubble blog were predicting the subprime fallout would possibly the worst financial disaster in US history, dwarfing the S&L crisis and possibly triggering a severe recession. At the time I laughed at these predictions, as they seemed self-serving and hysterical. Now? I'm not so sure.
The crazy thing is, many players in the mortgage game are still serving up the same old slop. I talked with a processor yesterday from a company that has the rep of being a stodgy, conservative player in residential mortgages. What he described to me was anything but conservative: 100% financing for stated income/interest only; no verified reserves; minimum FICO, 680. Sound subprime to you? Well, now this company has a new label for it: Alt-A. I guess you could call it "dumbing up".
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