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Moody's announced Tuesday that it will downgrade hundreds of securities backed by subprime mortgages, and S&P will likely do the same. S&P said it might cut the ratings of up to 612 such bonds, worth $12 billion, and will revise its ratings methodology. It is also planning to review the "global universe'' of CDOs that are based on subprime loans, threatening CDO investors with a potential loss of up to $250 billion. Moody's is downgrading 399 mortgage-backed bonds issued in 2006 and reviewing 32 more, amounting to $5.2 billion. It also slashed the ratings of 52 bonds issued in 2005. "When a ratings agency puts a whole class on watch, it will force all the credit officers to get off their butts and reevaluate everything," said risk analyst Christopher Whalen. The downgrades -- believed by many to be long overdue -- reflect surging mortgage delinquencies, sluggish home prices, and poor underwriting standards for loans. In related news, U.S. officials charged 26 people Tuesday, including real estate appraisers and mortgage brokers, with criminal conspiracy and fraud. They are alleged to have invented buyers, stolen identities and falsified appraisals to acquire subprime mortgages on over $200 million in property. Moody's shares shed 1.8% to close at $60.39 and shares of McGraw-Hill, which owns S&P, were off 4.4% at $64.24.

Sources: Wall Street Journal, Bloomberg I, II, MarketWatch I, II, Dow Jones, TheStreet.com, Financial Times
Commentary: Rating Agencies Could be Liable for Investor Losses -- StudyMoody's Concerned About Lending Standards SlideCredit Rating Companies: The Subprime Debacle's Latest CasualtiesS&P finally says subprime is mostly junk [MarketWatch]
Stocks/ETFs to watch: Moody's Corp. (NYSE:MCO), Thomson Corp. (TOC), The McGraw-Hill Companies, Inc. [owner of Standard & Poor's] (MHP). ETFs: iShares Lehman 1-3 YR Treasury Bond (NYSEARCA:SHY), iShares Lehman 7-10 YR Treasury Bond (NYSEARCA:IEF), iShares Lehman 20+ YR Treasury Bond (NYSEARCA:TLT)

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