Half a Trillion Should Just About Do It...

Moody's Had $174 Billion in CDOs on Downgrade Review (Update1): “More than $174 billion of collateralized debt obligations tied to U.S. mortgages were under review for downgrades by Moody's Investors Service at the start of this month, according to the ratings company, suggesting the subprime crisis may deepen.

Moody's downgraded $50.9 billion of CDOs made up of structured-finance securities in November, or about 9.4 percent of the total, the New York-based company said in a statement today. Standard & Poor's, which today lowered ratings on $6.7 billion of the debt, has so far downgraded or placed under review $57 billion of the debt.

Moody's, S&P and Fitch Ratings issued a record 2,007 downgrades on CDOs last month, mainly because of the surging defaults among U.S. homeowners with poor credit or high debt, according to a report Dec. 9 by Morgan Stanley. CDOs have been the biggest source of losses at the world's largest banks and brokerages as subprime investments have soured.

Moody's, which has broadened its review of CDO ratings to those created before last year, said it expects “more negative rating actions” in coming months. At the end of November, 32 percent of structured-finance CDOs, based on original balances, that Moody's has rated were under review. Bondholders may be forced to sell or write down debt that's been downgraded.”

Well, the good news is they’re finally getting serious about rating this things appropriately. The bad news is they’ve only started looking into 32% of them. Expect more bad news in the new few weeks and months.

Morgan Stanley Reports Worse-Than-Estimated Loss (Update1): “Morgan Stanley, the second-biggest U.S. securities firm, reported a fourth-quarter loss of $3.56 billion, the first in the company's history, after $9.4 billion of writedowns on mortgage-related investments.

Chief Executive Officer John Mack is forgoing a bonus for the year and called the results “deeply disappointing.” Morgan Stanley obtained a $5 billion investment from China Investment Corp., the nation's sovereign wealth fund, the New York-based company said today in a statement.

Mack's strategy of expanding in home loans and making bigger trading bets backfired as the firm's losses from securities linked to home loans more than doubled in November. He ousted Co-President Zoe Cruz, who had overseen the fixed- income unit responsible for the mortgage holdings, last month and promoted James Gorman and Walid Chammah, who previously ran wealth management and the firm's European operations.”

The losses were so big that Morgan Stanley needed $5 billion in additional capital… from none other than China Investment Corp.

“The loss of $3.61 a share in the three months ended Nov. 30 compares with net income of $1.98 billion, or $1.87 a year earlier. Analysts were estimating a loss of 39 cents, according to a survey by Bloomberg.”

To put it in perspective, the losses were so large they’ve wiped out a quite a few quarters of profits in a single swipe.

U.S. MBA's Mortgage Applications Index Fell 20% Last Week: “Mortgage applications in the U.S. fell last week by the most since 2004 as a jump in interest rates caused purchases and refinancing to decline, a private survey showed.

The Mortgage Bankers Association's index decreased 20 percent to 653.8 from 881.8 the prior week. The group's purchase index fell 11 percent and its refinancing gauge plunged 27 percent.

Loan restrictions and a glut of unsold homes on the market are prompting buyers to wait for even bigger price discounts, economists said. Higher borrowing costs and more foreclosures suggest the real-estate slump will continue to hurt economic growth well into 2008.

The refinancing index decreased to 2093.6 from 2879.8 and the group's purchase gauge fell to 422.2 from 472.

The average rate on a 30-year fixed loan rose to 6.18 percent, from 6.07 percent the prior week, the report showed. At that rate, monthly borrowing costs for each $100,000 of a loan would be about $611, compared with $566 when the rate was 5.47 percent in June 2005 as sales approached a record.”

There you have it.

Trichet Signals No Room to Cut Rates; German Confidence Drops: “European Central Bank President Jean- Claude Trichet signaled faster inflation will prevent a cut in borrowing costs as German business confidence fell to the lowest in almost two years.

The Munich-based Ifo research institute's business climate index, based on a survey of 7,000 executives, declined to 103 from 104.2 in November. Economists expected a reading of 103.8, the median of 38 forecasts in a Bloomberg News survey showed.

Waning sentiment underscores the bind facing central bankers as an economic expansion fades. In testimony today to lawmakers in Brussels, Trichet said the euro-area economy faces a “more protracted” period of elevated inflation than previously expected, indicating no imminent plan to reduce interest rates.”

With deep rate cuts off the table, the only real policy tool left is the continued massive injections of liquidity…

Money Market Rates Fall for Second Day on ECB Action (Update2): “Money market rates fell for a second day, adding to evidence that central banks are making headway in their attempts to counter turmoil in money markets.

The three-month euro interbank offered rate, or Euribor, dropped 7 basis points to 4.81 percent, the lowest since Nov. 30, the European Banking Federation said today. The three-month rate for pounds declined 18 basis points to 6.21 percent, the lowest in four months, the British Bankers' Association said.

The European Central Bank, which injected a record $500 billion into the banking system yesterday, “stands ready to act” again, council member Klaus Liebscher said today. The cost of three-month cash remained 81 basis points higher than the main refinancing rate. ECB President Jean-Claude Trichet said the coming weeks may be “challenging” for financial markets.”

Looks like $500 billion dollars is having some effect… and one would hope so. Mish discusses the ECB’s action and its possible consequences in more detail here.

“$500 billion is an enormous amount of money. To put it into perspective, $500 bln is 5% of total US banking system assets. My eyes are on LIBOR. If $500 bln doesn't move the rate...

Furthermore, everyone should remember that the $500 bln is funding just through year end. Come January this will need to be refinanced or rolled over.”

Central Banks the world over are praying right now that ‘half a trillion should do it.’. Cuz if it doesn’t, they’ve got nothing.