As many people expected, Standard & Poor's downgraded a whole lot of mortgage-backed bonds. Specifically, it cut its ratings on 418 classes of securities backed by home-equity loans originated in 2005, 2006 and early 2007. Most of the lowered ratings were on bonds that previously carried BBB+ or lower. Only three were previously rated AAA. Nearly all the downgrades are second-lien loans. Obviously delinquencies are driving all this. The issue now is whether this will force big investors in hedge funds to reevaluate. I don't think this move in and of itself will have huge consequences. But confidence is getting chipped away everyday. Now if the agencies start downgrading CDO issues, then we might see some more hedge funds grapple with mass redemptions. That is something to watch for.

For more:
- here's an AP article