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Moody's and S & P rating agencies are a joke

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DejaVu
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« on: August 05, 2011, 08:23:18 pm »

Rating Subprime Investment Grade Made `Joke' of Credit Experts

December 20, 200

Dec. 20 (Bloomberg) -- As storm clouds gathered over New York on July 10, Standard & Poor's started a 10 a.m. conference call to discuss why the credit rating company was about to take its most dramatic action in more than two years.

S&P analysts said they might cut ratings on $12 billion of the world's worst-performing subprime mortgage bonds, some of them less than a year after they had been given investment-grade designations. Not since 2005, when it downgraded Ford Motor Co. and General Motors Corp., had S&P generated so much attention.

S&P Chief Economist David Wyss, 63, and Managing Director Thomas Warrack, 45, made a 20-minute presentation and then opened the line for questions from investors and analysts.

``I'd like to understand why now, when you could have made this move many, many months ago,'' said Steven Eisman, 45, who manages the $1.5 billion FrontPoint Financial Services hedge fund for Morgan Stanley in Greenwich, Connecticut. ``The paper just deteriorates every single month.''

Warrack and Managing Director Susan Barnes, 42, explained S&P's view of the time needed to accurately judge the performance of securities. Eisman cut them off. ``You need to have a better answer,'' he said.

As the five-year real estate boom approached its peak in 2005, Wall Street marketed a new type of security backed by high-interest subprime mortgages issued to the least credit- worthy homebuyers. Blessed by the biggest credit rating companies as safe investments, these instruments offered higher returns than government bonds with the same ratings.

`God-Like Status'

Investment banks including Bear Stearns Cos., Deutsche Bank AG and Lehman Brothers Holdings Inc. sold $1.2 trillion of these securities in 2005 and 2006, said Brian Bethune, director of financial economics for Global Insight Inc. in Waltham, Massachusetts.

None of this could have happened without the participation of Wall Street's three biggest arbiters of credit -- Moody's Investors Service, S&P and Fitch Ratings. About 80 percent of the securities carried AAA ratings, the same designation given to U.S. Treasury bonds.

This implied the investments couldn't fail, says Sylvain Raynes, 50, a former Moody's analyst who now is a principal at R&R Consulting, a structured securities valuation firm in New York.

``The rating agencies had an almost God-like status in the eyes of some investors,'' Raynes says. ``Now, that trust is gone. It's been replaced with a feeling of betrayal.''

Guidance to Issuers

The companies' ratings underpinned Wall Street's expansion of the global market for securities based on high-risk subprime loans. Driven by the innovations of a group of Wall Street bankers, the subprime securities markets expanded quickly in 2005 and 2006, reaching into every corner of the world's investment community and winding up in the portfolios of banks and public investment pools from Europe to Asia.

Many institutional investors' own rules, in addition to state or national laws, bar them from buying securities that don't carry investment-grade ratings.

Issuers got guidance from rating companies on how to shape their subprime securities to win the ratings, says Joshua Rosner, managing director of the New York-based research firm Graham Fisher & Co. Investment banks used software distributed by the ratings companies to show them how to meet the requirements, then paid the companies to have the securities rated, he says.

Reaching `Desired Rating'

``The idea that the rating agencies are impartial in the world of structured finance is a joke,'' Rosner says. ``The issuers use the publicly available model to structure a pool and then sit down with the rating agencies to fine-tune it until they reach the desired rating.''

Distributing the criteria and discussing them with issuers is a matter of transparency, says Claire Robinson, Moody's senior managing director of asset finance and public finance.

``We do not structure transactions,'' Robinson says. ``We do not provide consulting services in terms of assembling transactions or choosing assets or pools or anything of that nature. We comment on credit quality.''

Moody's raised ``credit enhancement'' requirements for bonds in 2006 as analysts noted the deterioration of lending standards, she says. The practice requires additional collateral or insurance to protect investors who purchase the higher-rated levels, or tranches, of a security.

Continued: Dec. 20 (Bloomberg) -- As storm clouds gathered over New York on July 10, Standard & Poor's started a 10 a.m. conference call to discuss why the credit rating company was about to take its most dramatic action in more than two years.

S&P analysts said they might cut ratings on $12 billion of the world's worst-performing subprime mortgage bonds, some of them less than a year after they had been given investment-grade designations. Not since 2005, when it downgraded Ford Motor Co. and General Motors Corp., had S&P generated so much attention.

S&P Chief Economist David Wyss, 63, and Managing Director Thomas Warrack, 45, made a 20-minute presentation and then opened the line for questions from investors and analysts.

``I'd like to understand why now, when you could have made this move many, many months ago,'' said Steven Eisman, 45, who manages the $1.5 billion FrontPoint Financial Services hedge fund for Morgan Stanley in Greenwich, Connecticut. ``The paper just deteriorates every single month.''

Warrack and Managing Director Susan Barnes, 42, explained S&P's view of the time needed to accurately judge the performance of securities. Eisman cut them off. ``You need to have a better answer,'' he said.

As the five-year real estate boom approached its peak in 2005, Wall Street marketed a new type of security backed by high-interest subprime mortgages issued to the least credit- worthy homebuyers. Blessed by the biggest credit rating companies as safe investments, these instruments offered higher returns than government bonds with the same ratings.

`God-Like Status'

Investment banks including Bear Stearns Cos., Deutsche Bank AG and Lehman Brothers Holdings Inc. sold $1.2 trillion of these securities in 2005 and 2006, said Brian Bethune, director of financial economics for Global Insight Inc. in Waltham, Massachusetts.

None of this could have happened without the participation of Wall Street's three biggest arbiters of credit -- Moody's Investors Service, S&P and Fitch Ratings. About 80 percent of the securities carried AAA ratings, the same designation given to U.S. Treasury bonds.

This implied the investments couldn't fail, says Sylvain Raynes, 50, a former Moody's analyst who now is a principal at R&R Consulting, a structured securities valuation firm in New York.

``The rating agencies had an almost God-like status in the eyes of some investors,'' Raynes says. ``Now, that trust is gone. It's been replaced with a feeling of betrayal.''

Guidance to Issuers

The companies' ratings underpinned Wall Street's expansion of the global market for securities based on high-risk subprime loans. Driven by the innovations of a group of Wall Street bankers, the subprime securities markets expanded quickly in 2005 and 2006, reaching into every corner of the world's investment community and winding up in the portfolios of banks and public investment pools from Europe to Asia.

Many institutional investors' own rules, in addition to state or national laws, bar them from buying securities that don't carry investment-grade ratings.

Issuers got guidance from rating companies on how to shape their subprime securities to win the ratings, says Joshua Rosner, managing director of the New York-based research firm Graham Fisher & Co. Investment banks used software distributed by the ratings companies to show them how to meet the requirements, then paid the companies to have the securities rated, he says.

Reaching `Desired Rating'

``The idea that the rating agencies are impartial in the world of structured finance is a joke,'' Rosner says. ``The issuers use the publicly available model to structure a pool and then sit down with the rating agencies to fine-tune it until they reach the desired rating.''

Distributing the criteria and discussing them with issuers is a matter of transparency, says Claire Robinson, Moody's senior managing director of asset finance and public finance.

``We do not structure transactions,'' Robinson says. ``We do not provide consulting services in terms of assembling transactions or choosing assets or pools or anything of that nature. We comment on credit quality.''

Moody's raised ``credit enhancement'' requirements for bonds in 2006 as analysts noted the deterioration of lending standards, she says. The practice requires additional collateral or insurance to protect investors who purchase the higher-rated levels, or tranches, of a security.
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« Reply #1 on: August 05, 2011, 08:26:40 pm »

S&P and Moody’s continue ratings scam
By The Fundamental Analyst, on March 12th, 2008

An interesting article by naked capitalism on the ratings sham that Moodys and S&P continue to perpetrate.

Quote
    Moody’s and S&P Avoid Cutting Ratings on AAA Subprime

    Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor’s and Moody’s Investors Service haven’t cut the ones that matter most: AAA securities that are the mainstays of bank and insurance company investments.

    None of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February, according to data compiled by Bloomberg. A bond sold by Deutsche Bank AG in May 2006 is AAA at both companies even though 43 percent of the underlying mortgages are delinquent.

    Sticking to the rules would strip at least $120 billion in bonds of their AAA status, extending the pain of a mortgage crisis that’s triggered $188 billion in writedowns for the world’s largest financial firms. AAA debt fell as low as 61 cents on the dollar after record home foreclosures and a decline to AA may push the value of the debt to 26 cents, according to Credit Suisse Group.

    “The fact that they’ve kept those ratings where they are is laughable,” said Kyle Bass, chief executive officer of Hayman Capital Partners, a Dallas-based hedge fund that made $500 million last year betting lower-rated subprime-mortgage bonds would decline in value. “Downgrades of AAA and AA bonds are imminent, and they’re going to be significant.”

    Bass estimates most of AAA subprime bonds in the ABX indexes will be cut by an average of six or seven levels within six weeks.

    The 20 ABX indexes are the only public source of prices on debt tied to home loans that were made to subprime borrowers with poor credit histories. About $650 billion of subprime bonds are still outstanding, according to Deutsche Bank. About 75 percent were rated AAA at issuance…..

    S&P and Moody’s, the two biggest rating companies, are lagging behind Fitch Ratings, their smaller competitor….

    The ratings methods balance estimated losses against so-called credit support, a measure of how likely it is that owners of each piece of the bond will incur losses. For AAA rated debt, credit support needs to be five times the expected losses, according to Sylvain Raynes, author of The Analysis of Structured Securities, a college textbook.

    All but six of the 80 AAA ABX bonds failed an S&P test for investment-grade status, which requires credit support to be twice the percentage of troubled collateral. The guideline was one of four tests used by S&P, and a failure to meet the standard wouldn’t have automatically resulted in a downgrade. The other companies used similar metrics to grade bonds, Raynes
    said. Investment grade refers to all bonds rated above BBB- by S&P and Baa3 by Moody’s….

    On a $118 million Washington Mutual bond issued in 2007, WMHE 2007-HE2 2A4, 5.6 percent of its loans are in foreclosure
    and its safety margin, or the debt available to absorb losses, is less than the combined total of its loans at risk. Both S&P
    and Moody’s rate it AAA.

    Fitch rates that bond B, five levels below investment grade and 15 levels less than its rivals….

    The problem extends past the mortgage bonds. Financial firms own high-grade collateralized debt obligations, which package securities such as mortgage bonds and slice them into pieces with varying risk. As the underlying mortgage bonds are downgraded, those securities will also lose their ratings and tumble in value.

    A bank would have to increase its capital against $100 million of bonds to $16 million from $1.6 million if a bond was downgraded to below investment grade from AAA, under global accounting rules…..

    Bond insurers such as MBIA Inc. and Ambac Financial Group Inc. also have to hold more capital against insurance they write
    if the securities’ credit quality declines.

    The prospect of losses may be holding the ratings companies back, said Frank Partnoy, a University of San Diego law professor and former Morgan Stanley banker who has been writing about the impact of credit ratings companies since 1997.

    “If the 800-pound gorilla moves, it’s going to crush someone, so it’s not going to want to move,” Partnoy said. “They know they will trigger a price collapse. They are understandably reluctant.”

We see it time and time again, this attempt to prolong the pain that will inevitably come, the Fed, the ratings agencies and the financial institutions are all trying to suspend reality and hope things get back to normal. The problem is, what was normal 6 months ago was never normal to begin with.

Source: http://www.thefundamentalanalyst.com/?p=480
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« Reply #2 on: August 05, 2011, 08:53:38 pm »

Standard & Poors pull off a dangerous hoax (2 items)

The Credit Rating Hoax


Standard & Poor’s, the self-righteous credit-rating agency, has a damn lot of nerve. It provoked scary headlines by solemnly threatening to “short” America. That is, downgrade the credit-worthiness of US Treasury bonds unless Congress and the president oblige creditors by punishing the citizenry with severe budget cuts. What a load of crap.

The headline I would like to see is this: “S&P Execs Face Major Fraud Investigation, Take the Fifth Before Federal Grand Jury.”

News coverage on S&P’s credit warning typically failed to mention that Standard & Poor’s itself is in utter disrepute. It was an unindicted co-conspirator in the Wall Street deceitfulness that brought the nation to financial ruin. During the bubble of inflated housing prices, S&P and other rating agencies blessed the fraud-based mortgage securities issued by Wall Street banks with AAA ratings-deceiving gullible investors around the world and assuring bloated profits (and executive bonuses) for the greedy bankers. S&P provided cover for the massive scam that led to the crisis that sank the national economy.

Read more.

***

The real reason for the “negative credit” warning

by Cannonfire

Standard and Poors has revised the sovereign credit rating of the United States. We used to be stable; now we’re “negative.”

Futures fell from a 33-month high as Standard & Poor’s said there’s a “material risk” that U.S. policy makers may not agree on a plan to address long-term budget issues by 2013.

Translation: The revised credit rating is meant to push the administration and lawmakers into going after Social Security and Medicare. The right-wing now has an additional propaganda tool to push for draconian cuts in areas that will most hurt working and middle class Americans. You can already see how this move will play out.

Read more.

Link: http://markcrispinmiller.com/2011/04/standard-poors-pull-off-a-dangerous-hoax-2-items/?amp&amp
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« Reply #3 on: August 09, 2011, 11:28:00 am »

Standard and Poor's: Just More Corrupt Wall Street Insiders Waging Class War on America
S&P's downgrade provides compelling evidence of the corruption eating away at the foundations of yet another key Wall Street institution.


August 7, 2011 

Standard and Poor's decision to downgrade our public debt tells us absolutely nothing about the probability of the federal government meeting its future obligations. The move really only offers us some compelling evidence of the corruption eating away at the foundations of yet another key Wall Street institution.

I should say that it offers us additional evidence. According to a Senate investigation concluded earlier this year — a probe that was greeted with a collective "ho-hum" by the corporate media — S&P and Moody's, another leading agency, “issued the AAA ratings that made ... mortgage backed securities ... seem like safe investments, helped build an active market for those securities, and then, beginning in July 2007, downgraded the vast majority of those AAA ratings to junk status.” And when they did, it “precipitated the collapse of the [mortgage-backed securities] markets and, perhaps more than any other single event, triggered the financial crisis. (PDF)”

According to the Senate investigation, in the years leading up to crash, “warnings about the massive problems in the mortgage industry” — including internal warnings from their own analysts — had been ignored because of the “the inherent conflict of interest arising from the system used to pay for credit ratings” — the big “rating agencies were paid by the Wall Street firms” that were making a fortune selling that glossed-up garbage to credulous investors.

Continued: http://www.alternet.org/story/151935/standard_and_poors_just_more_corrupt_wall_street_insiders_waging_class_war_on_america
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