Moodys Investor Services described the US subprime marketas a“relaxation of risk management and underwriting standards combined with the growth of little understood debt derivatives, many of them based on US sub-prime mortgages, had proved to be “a dangerous cocktail” yesterday.

You think?

A governor of the Bank of England said that, “there were still troubles ahead in the sub-prime sector and that the losses of large investors made it difficult to decide where borrowing costs should move next due to the volatility it created in financial markets.”

This is why I think that this is heading to an illiquid state. Exotic high risk instruments are coming home to roost, and when they do, prices will drop, because these instruments monitized (drove up the price) of residential real estate.

With people owning highly leveraged homes that are falling in value, they will be under water, owing more than they have in equity, and they will be unable to sell the homes.