The flight to quality in the credit markets has made pricing in the area a difficult issue, and has brought buyers and sellers of risk instruments to an impasse as to the value of structured products, according to a report by Moody's Investors Service. The ratings agency says, furthermore, that this process of untangling prices could take months to work through. "Before the credit markets can resume normal functioning, the creation of a new price consensus between (and among) buyers and sellers of risk instruments will be required," says the report, which was co-authored by Vice Chairman Christopher Mahoney. This won't happen quickly, according to the report, because many capital market participants are facing inventory problems with structured finance securities such as subprime, Alt-A-related RMBS, CDOs, and certain leveraged loans. The holders of these loans are not willing to dip to bargain basement sales, and meanwhile, on the other side of the fence, the buyers won't touch the offered prices because they think prices are still erratic and could erode further. The report focuses on what's missing from the market, says Mahoney, "which is fluidity, a readiness to engage and trade." As a result, he says, he thinks a more robust secondary market will develop, as levered players will be forced to sell illiquid securities at low prices. The report is called "From Illiquidity to Liquidity: The Path Toward Credit Market Normalization." It is the first in a series of planned reports in which Moody's will discuss systemic problems revealed by the subprime meltdown.

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