LIQUIDATING....Earlier this week I was musing about the problem of valuing all the CDOs and SIVs that are at the core of the subprime/credit crisis. It's certainly true that if no one is confident about how to value these instruments the market for commerical paper freezes up, causing the broader financial markets to freeze up in turn. But the reason I was puzzled about this is that CDOs are collections of underlying securities, and if push comes to shove you can always unbundle the CDOs and put the underlying stuff on the market. It's not pretty, but it would be a way to put a value on everything.

Today, via Atrios, we learn what happens if you announce that you're going to do exactly that:

[Standard & Poor's] said it slashed its ratings on Carina CDO Ltd's top tranche of securities by 11 notches to the junk level of BB from the top-notch triple-A after it received a notice on Nov. 1 saying that the controlling noteholders had told the trustee to liquidate.

....The trustee of the Carina CDO has started selling the asset-backed securities — residential-mortgage backed securities and CDOs — making up the CDO at the direction of the structure's noteholders, S&P said.

....The ratings cut on the Carina CDO is more severe than would be justified by the deterioration of the underlying assets because a decision to liquidate would depress prices and affect all notes that were issued, S&P said.

Italics mine. Like Atrios, I don't really understand exactly what's going on here. But it sure sounds like S&P is sending a message to anyone else who might be thinking of liquidating a CDO and thereby revealing what the underlying assets are really worth. Are they really that scared? Any experts care to weigh in on this?