Lou Barnes (subscription) is only slightly less oblique than the post below on CDO’s but in Lou’s case it’s because of his writing skills.

Nevertheless, Lou is a lot more entertaining.

Legend Number One:

Loosened standards in late 2005 and 2006 are responsible for the subprime damage, which will be limited to those loans.

This is nonsense.

We (and all other retailers) were offered the first suicide loans back in 2000, which then and now fall into two generic groups:

  • 100 percent loan-to-value ratio in any form, with or without borrower documentation, and
  • adjustable-rate mortgages with last-cigarette adjustment structure.

The roll-out of these loans coincided exactly with Wall Street’s discovery of “credit derivatives.”

The ultimate foreclosure damage was masked by a decline in interest rates to a 50-year low, and a roaring, self-reinforcing run-up in home prices.

And he is a lot more excitable too.

The next canary to hit the iceberg: S&P and Moody’s are soon to be exposed in the worst systemic rating error ever. They are going to have to re-rate hundreds of billions of new-age mortgage paper, forcing institutions to acknowledge losses beyond estimation, and in doing so will admit their own fiduciary failure: fee for blindness.