|I sort of wonder what happens if the mortgage insurer get downgraded from AAA to AA or less. Nobody (except the ratings agencies )believes that MBIA and peers are AAA any more despite the capital infusions.|
If MBIA and peers get downgrades there is going to be an enormous amount of bonds that need to be regraded on a standalone (just based on the value of their underlying assets) basis. Since the amount of bonds is so large it could take weeks and month for the ratings agencies to get through the mess.
So the holders of such bonds won't know what the real rating is going to be like. I think that is a scenario where I can see a disaster in the bond market coming with everybody running to the exits before the other guy does. While some bonds may be find on a standalone base, you as a holder won't know for a long time.
This maybe the reason why the credit agency don't downgrade - they just are not able to handle to work (besides the CDO mess where there are in knee deep also).
from Dr Seuss' " Cat in the hat":
"This mess is so big And so Deep and so tall,
we cannot pick it up. There is no way at all!"
Where is the Cat in the hat when we need it?