If the Carina CDO is Liquidated Everyone Has a Price for Their Downgraded Assets

The real problem with the Carina CDO liquidating is now you have a price for securities that other firms may have to use to value their CDO assets (see yesterday’s post). This is potentially the scariest news of the Q4. Text in bold is my emphasis. From the WSJ:

That concern grew Friday after a Standard & Poor's announcement that a collateralized debt obligation managed by State Street Corp.'s State Street Global Advisors is being forced to liquidate its holdings. (Evidently, by the senior note holder according to State Street Corp.)

A fire sale of the assets would establish a price that other investors could be forced to use when valuing similar holdings. Such markdowns have roiled Wall Street as the rapid deterioration of collateral forced Citigroup Inc. and Merrill Lynch & Co. to disclose billions of dollars in paper losses.

S&P said while the trustee of the $1.5 billion CDO -- called Carina CDO Ltd. -- "has not informed us when the collateral will be liquidated, we believe the liquidation process has begun."

Thirteen other CDOs, S&P said, have breached certain ratios intended for the protection of senior investors, but there have been no notices related to liquidation.

The bulk of the Carina CDO is in the senior-most portion, or tranche, known as the A-1 -- meaning that investors in the lower, and riskier portions stand to gain nothing from the sale.

S&P slashed by as many as 18 notches its credit ratings on the CDO managed by State Street.
State Street said it doesn't own any investments in the Carina CDO, but is its manager. The company manages about $6 billion in CDO assets.

S&P cut by 11 notches to junk the triple-A ratings on the $1.05 billion senior-most slice of the CDO made up of asset-backed securities. The second-most-senior slice of $90 million, also rated triple-A, was downgraded 18 notches to triple-C-minus, a rung above securities that default, with the ratings company also leaving room for an additional ratings cut.

The liquidation was triggered when the majority of controlling investors pushed for a sale of the collateral backing their investments.