What I have read suggests that many institutions have not remarked their positions on their books, the logic being something like “Yes, we know the price is wrong, but we don’t have a better price, so let’s not do anything till we have to.”

But as you point out, for many institutions, a rating going below BBB- (the bottom of investment grade) will force them to sell. For others, a serious downgrade requires the to hold more capital against it.

Big downgradings like this will force sale, which will force price discovery for at least some paper.

I think the rating agencies are trying to walk a fine line between trying to restore the credibility of their ratings vs. downgrading so much so fast that they put the markets into a tailspin.

But even one rerating of this magnitude calls everything they have done into question. Which begs another question: let’s say they rerate other paper not this far down, but say 4-5 rating grades, rather than the usual one or at most 2. That too would raise serious doubts about all the paper they haven’t re-examined yet. But will they have credibility if they don’t change the ratings very much?

You can see what a complete mess this is…

The market-value repricing of only a few securities should bring down ratings of other bonds, whose prices are still determined only by mark-to-model valuation.

It seems this market-price discovery, by even a trickle of market exposure, would cause more sales, followed by still further revaluation to mark-to-market prices.

Doesn’t this scenario seem likely?

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