The threat of fire sales of mortgage-backed securities is mounting as rating agency downgrades have pushed complex debt vehicles into technical default. Financial Times

The prospect of forced sales of assets comes as a US Treasury-backed plan for a “super fund” to stabilise troubled credit markets appears to have stalled.

Standard & Poor’s and Moody’s have received default notices for $5bn worth of the vehicles, known as collateralised debt obligations, in recent weeks, giving investors in senior tranches the right to sell. Default notices can be triggered when the portfolio underlying a CDO is downgraded.

Forced sales will drive prices down even more, putting increased pressure on banks with sub-prime related exposure.

The $75bn superfund plan – designed to purchase assets from distressed investments linked to banks and so prevent fire sales in the market – seems to be stalled following the upheaval at Citigroup

“As far as we can see, it appears dead in the water right now,” said one senior Wall Street banker.