Wall Street continues to credit party like it’s 1999

The credit crunch is also hurting commercial mortgages, among other things. But the Street plays ostrich with this, too, pretending that if it ignores the problems long enough, they’ll go away.

Here’s the bottom line on why that won’t work, though:

The downgrading of CDOs has just begun and Wall Street is already in a frenzy over what the effects will be. Once the ratings fall, the banks will be required to increase their reserves to cover the additional risk. For example, “As a recent issue of Grant’s explains, global commercial banks are only required to set aside 56 cents ($0.56) for every $100 worth of triple-A rated securities they hold. That’s roughly 178 to 1 ratio. Drop that down to double-B minus, and the requirement skyrockets to $52 per $100 worth of securities held — a margin increase of more than 9,000 percent.”

In other words, this whole situation is going to make banks a LOT less liquid. Fed chairman Ben Bernanke knows that, so the Fed will NOT be lowering interest rates.