Subprime losses total approximately $500 billion to date - a staggering number, to be sure, but merely the first act in an epic horror show. The next series of acts, featuring many different asset classes, may dwarf the subprime drama.

They include (but are not limited to):

Alt-A Mortgages

Over the past month, nearly 10,000 Alt-A mortgage CDO tranches have been downgraded by Moody’s and S&P, with a notional value of close to $1 trillion. What concerns me most is the fact that many of the tranches were downgraded from AAA to CCC without a stop in between, otherwise known as a “ratings change gap."

When bonds are being downgraded from AAA to CCC instantaneously, it makes one wonder how a reasonable price for such a security could be established. Such is the problem with a good bank/bad bank scenario. The price for a AAA-rated security could be $0.70 on the dollar, while a AAA-rated bond on its way to CCC or even D might be worth $0.07 on the dollar.

Now, I doubt the ratings agencies ever had a handle on these esoteric securities. And this raises the urgent question: How much are the securities which have already been put on the Fed’s and Treasury’s balance sheet worth now? Though they were rated AAA, my guess is that they were never worth what the Treasury paid for them. If it tried to sell them today, “We The People” would suffer very large losses.

This also brings into question valuations made by hedge funds, money-market funds, mutual funds and even ordinary investment managers (though my firm has never owned, and doesn't plan to own, anything but agency-backed securities).

CMBS (Commercial Mortgage-Backed Securities)

On February 5, Moody’s announced a ratings review of all CMBS transactions rated during the period from 2006 to 2008. They're also evaluating all large-loan and single-borrower transactions, regardless of vintage.

According to Moody’s, their review would reflect 2 key inputs into its CMBS ratings model: stressed capitalization rates and property cash flows. Over $300 billion of securities are under review, or over 50% off all outstanding CMBS rated by Moody’s.

Furthermore, Moody’s cautioned that downgrades could be as much as 4 to 6 ratings levels - or down to junk or near-junk for many securities. Moody’s stated that “property values declined sharply in 2008, and we anticipate further declines over the next 12 to 24 months.” Furthermore, “delinquencies on CMBS loans are also on the rise, and we expect the pace to accelerate as macroeconomic pressures take a toll on property cash flows.”

It's worth noting that the cuts and downgrades are in a broad arena - hotels, vacation properties, shopping malls, etc. It shows just how deep this deleveraging is, and why it will take more than a quickly cobbled-together bailout plan and what's left of TARP to cure it.

Unfortunately, it will take both pain and time. Perhaps a great deal of both.