Saturday, June 30, 2007
Lost in the noise and administrative drudgery of quarter end was a remarkable article from Bloomberg that winged its way across the information superhighway yesterday:
S&P, Moody's Mask $200 Billion of Subprime Bond Risk
Among the choice quotes from the article include the following:
``We're taking action as we see it,'' said Brian Clarkson, Moody's global head of the structured products in New York. ``We're not doing knee-jerk responses.'' Hmm. Perhaps they didn't see that subprime foreclosures rose from 3.86% in Q3 of last year to 5.1% in Q1 of 2007.
Fitch is ``deliberate'' in its actions, John Bonfiglio, the firm's head of U.S. structured finance ratings, said in an interview in his New York office. Fitch is a unit of Paris-based Fimalac AS. ``I would not say we were slow.'' Deliberate? You mean deliberately trying to screw investors who rely on your ratings, John? I also wouldn't say that you're slow. "Glacial" is perhaps a more accurate representation of your response time.
S&P abandoned seven-year-old criteria for determining a bond's protection against default in February.
Under the old guidelines, S&P said a bond's ``credit support'' must be twice the rolling 90-day average of the sum of value of mortgages delinquent by three months or in foreclosure plus real estate that has been seized by the lender.
Of the 300 bonds in ABX indexes, the benchmarks for the subprime mortgage debt market, 190 fail to meet the credit support standard, according to data released in May by trustees responsible for funneling interest payments to debt investors.
Most of those, representing about $200 billion, are rated below AAA. Some contain so many defaulted loans that the credit support is outweighed by potential losses. Fifty of the 60 A rated bonds fail the criteria, as do 22 of the 60 AA rated bonds and three of the 60 AAA bonds.
All but five of 120 securities in BBB or BBB- rated portions of the mortgage-backed securities would have failed S&P's criteria, according to data compiled by Bloomberg.
None have been downgraded, though S&P and Moody's have parts of three pools of securities linked to the index under review for a downgrade. Fitch has downgraded parts of three mortgage pools tied to the ABX and put four on watch for downgrade.
``Don't misunderstand me: I'm not saying these others are performing great,'' Robert Pollsen, a director in S&P's residential mortgage surveillance in New York, said in an interview last month. ``And they certainly might warrant our attention several months from now, which obviously we're going to do.''
What can I say? To abandon a credit-standard test just as it starts to bite is the height of irresponsibility. And the comments from Mr. Pollsen are so lame, they need a cane.
It really seems to have come to the point where we need to ask "Who watches the watchers?" It seems relatively clear that the ratings agencies do not have the best interests of investors at heart in their ratings activities.
Macro Man would therefore suggest that we create a new ratings agency to rate the existing ratings agencies. Investors can use the new agency's ratings to gauge the accuracy of the CDO ratings of Fitch, Moody's, and S&P.
After careful consultation with a battery of analysts, Macro Man has derived the following ratings agency ratings via a proprietary quantitative methodology, blah blah blah. To clarify the ratings, they will be assigned in the familiar school-grade format, with a C or better required to pass:Fitch: C- At least they've actually downgraded something.
Moody's: D- Very, very poor.
S&P: F- Abandoning the credit support criterion is just poor. If S&P were a student, it would get left behind to repeat the seventh grade.
As an aside, is anyone else struck by the following coincidence:
The US has $200 billion worth of overvalued CDO junk.
Voldemort has $200 billion to invest in "risky assets".
Are you thinking what I'm thinking?