Subprime contagion explained

Important piece of writing today by Bill Gross, the Pimco bond king, explaining why the subprime meltdown is causing a credit squeeze. It's not the collapse of the Bear Stearns funds. It's not Countrywide's warning that prime loans are turning sour. It's not  the rising foreclosures. So what is it? Gross say it's the troubling truth that the bond-rating houses did not see this coming and did nothing to warn investors:

"To be blunt, (investors) seem to be thinking that if Moody’s and Standard & Poor’s have done such a lousy job of rating subprime structures, how can the market have confidence that they’re not repeating the same structural, formulaic mistake with CLOs and CDOs? That growing lack of confidence –- more so than the defaults of two Bear Stearns hedge funds and the threat of more to come –- has frozen future lending and backed up the market for high-yield new issues such that it resembles a constipated owl: absolutely nothing is moving."

So there you have it -- the credit markets are backed up like a constipated owl. Or, if you prefer a golf analogy, like Rancho Park Golf Club on a Saturday afternoon.

Photo Credit: Reuters