June 27, 2007 (LPAC)--Traders in the crisis-hit mortgage-backed securities (MBS) market have begun reporting a freezeup, a near halt in all generation of the securities known as collateralized debt obligations (CDOs), a week after the two collapses of two big Bear Stearns hedge funds trading in CDOs. With paper creation in this $2.6 trillion market having sunk to a couple of billion dollars last week, the vice-chairman of Loomis Sayles in Boston warned, "If investors start dumping them, oh, boy, watch out for some massive credit widening," using market slang for a sharp interest in interest rates, a credit crunch in the market. Interest rate premiums on CDOs jumped 1.5% last week.

The specter of this disintegration of markets based on mortgage securities threatening the whole financial system, raised its head in a Congressional hearing June 26. Rep. Carolyn Maloney (D-NY), waving that morning's Wall Street Journal, asked SEC Chairman Christopher Cox if he agreed that CDOs and related securities are risky, dangerous to the financial system, opaque in value, and should be regulated? With journalists and aides suddenly taking furious notes, Cox said he lacked the authority because these securities are not registered under the 1933 Securities and Exchange Act; but that if Congress changed that, "Absolutely," they should be regulated due to that risk. And he announced that the SEC has opened an investigation of the Bear Stearns hedge funds and 12 other cases that "relate generally to subprime."

JP Morgan analysts issued a report June 27 that "We expect events surrounding warehousing liquidations [in the Bear Stearns and other cases] last week to further slow, if not halt entirely, the new issue market." The Credit Derivatives Research LLC firm reported that a large source of liquidity on global credit markets could be disappearing entirely.

Showing how widely this disintegration is spreading through markets, the large, $670 billion insurance firm MBIA, linked to Bank of America, was reported in Barron's to have its overall credit rating under threat as a result of growing losses in MBS which it insured. "Mortgage Meltdown for MBIA" noted that the company's core capital, and thereby its whole operation, could be threatened by such a credit downgrade.

Housing sales, housing starts, and prices all continued falling in May, and foreclosures continued to rise, at rates double those of a year ago; so the underlying crisis of a household debt bubble collapsing, continues to worsen.