In an article quoted by fundamentalanalyst.com from Naked Capital back on March 12, 2008, in the middle of the unwinding financial disaster, said article highlighted the ongoing ratings scams that Moody’s and S&P perpetrated back then. So, does S&P have a short memory or does it just enjoy playing the ‘pot calling the kettle black’ when it went ahead and downgraded the US government’s credit rating from AAA to AA+ to create more havoc? Click below for the tale . . .
Moody’s and S&P Avoid Cutting Ratings on AAA Subprime
Naked Capital wrote, “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.”
Why were they dragging their feet on such a crucial matter, you ask?
In fact, “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.”
Let’s see, nearly half of the mortgages supporting a bond sold by Deutsche Bank AG in May 2006 are delinquent and S&P and Moody’s were still giving the bond AAA rating? Isn’t that against ratings standards and the law? Wasn’t that misleading investors and causing a lot of them to lose big money? Here’s why S&P and Moody’s did it . . .
“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.”
My, my, AAA-rated debt fell as low as 61 cents on the dollar after a record was set for home foreclosures and it was possible a decline to AA could push the value of the debt to 26 cents on the dollar, according to Cred Suisse Group. So, Moody’s and S&P, what kind of skullduggery was that about? People could lose their shirts, and did! And did you make any side money on that?
“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,” said Bass.
So the real pros knew these actions were laughable and that the AAA ratings of Moody’s and S&P would be downgraded to AA soon and that the losses would be significant. Naughty, naughty, boys! What’s more Kyle Bass even provided a time-frame for the inevitable cutting of the subprime-mortgage bonds about to decline in value, as in imminent and significant. Isn’t that enough to lose your license as a rating agency, that is, if you’re as corrupt as the people whom you should be honestly monitoring?
“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.”
Cut six or seven levels within six weeks? That’s criminal. Accurate rating is the alphabet of their business. It was absent here. Naked Capitalism went on to say . . .
“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. . . . .” And that is just unbelievable!
But it looks like, “S&P and Moody’s, the two biggest rating companies, are lagging behind Fitch Ratings, their smaller competitor. . . .” That’s not nice. So how now was S&P so ready to bang down the US dollar from AAA too AA+? Is it a fit of conscience? Was it making up for lost ethics? Is it up to more tricks?
Naked Capitalism wrote, “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.”
But did Moody’s and S & P follow that “five times the expected losses” guideline of Raynes’ noted textbook? Nooooo, it did not.
In fact Raynes points out, “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. . . .”
So S&P and Moody’s turned their backs on their own protective standards, according to Raynes. You could and should go to jail for that, S&P and Moody’s!
For instance, “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.”
In comparison “Fitch rates that bond B, five levels below investment grade and 15 levels less than its rivals. . . .”
Can you imagine that? WaMu with a $118 million bond in 2007 with 5.6 percent of its loans in foreclosure and its safety margin, or the debt available to absorb losses, is less than the combined total of its loans at risk, and still S&P and Moody’s rated it at AAA. That’s more than chutzpah. That’s corruption. Why not change the name to Muddy’s, as in muddying the truth, not Moody’s?
What’s more, “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.”
That’s the old CDO sleight of hand trick. Cut up the good and bad debt like good and bad chopped meat and pound them into one poisonous debt bond. That’s illegal. Go to jail, WaMu. I’ll bet you didn’t. Maybe you got a slap-on-the-wrist fine?
Naked Capitalist writes, “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. . . .”
Did you hear that S&P and Moody’s? You were $14.4 million short on capital per $100 million in bonds. And you’re balling out the US Government for bad form in almost defaulting due to idiot politics, when you were short by a lot out of sheer greed to guarantee an AAA rating for WaMu. Bad boys, bad boys! And listen to this . . .
“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.”
You’ve got some crooked fellow travelers that need new calculators for covering declining credit quality. And here you guys are supposed to be the gold standard of rating agencies. But you’re just as crooked as the rest, including the over-spending, under-regulated USG. Did you follow their lead? That’s what it looks like.
“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.”
Well, is that the case, Mr. S&P and Moody’s? Are you holding back to protect losses like the good professor tells us? Then why didn’t S&P hold back on downing the USG to AA+ to prevent further havoc and pain? Or did you want to play moral catchup? Or were you playing new games?
Partnay went to say, “If the 800-pound gorilla moves, it’s going to crush someone, so it’s not going to want to move.” He added, “They know they will trigger a price collapse. They are understandably reluctant.”
But you, S&P, 800-pound gorilla that you are, had no compunctions about the possible triggering of a price collapse in the US dollar. Ergo a price collapse for the USG would be okay, but what about the net-net affect on US dollar holders as consumers and savers?
Partnay comments, “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.”
How well put. Just endless meddling, by the Fed, the ratings agencies and financial institutions, in other words corruption up and down the line, nobody playing with a full ethical deck, and normal never being normal, because the deck is always being shuffled by sleight of hand, including the high and mighty S&P and Moody’s. So take a hike, guys. You’re as crooked as anyone, the pot calling the kettle black, and should be behind bars with Bernie Madoff. Unless someone from the SEC is handling you with kid gloves, as in the Not Into Moody’s’: SEC Drops Ratings Agency Fraud Case of August 31, 2010.
Turns out, “The Securities and Exchange Commission today announced that it has dropped a fraud case against ratings agency Moody’s ‘because of uncertainty regarding a jurisdictional nexus between the United States and the relevant ratings conduct’ related to the recent passage of the Dodd-Frank financial reform bill.”
How’s that for a convoluted piece of language and reasoning?
“[It] turns out Dodd-Frank limits the SEC’s ability to pursue Moody’s.” Isn’t that cozy—and why?” The regulator nevertheless gave the ratings agency a hefty slap on the wrist for not adjusting credit ratings even after it had found them to be inaccurate.” And what was the hefty slap on the wrist” A fine, how much? And did this slap on Moody’s wrist generate the US rating downgrade by S&P? See if this sounds familiar.
In 2010, the company had determined that a computer error had caused one of Moody’s credit ratings to come out between 1.5 and 3.5 increments higher than it should have. ”Nevertheless, shortly thereafter during a meeting in Europe, an MIS [Ed.: Moody’s] rating committee voted against taking responsive rating action, in part because of concerns that doing so would negatively impact MIS’s business reputation.” What about the US reputation?
“Certainly objectionable,” Mike Taylor writes, “but apparently not subject to SEC intervention.” And there we have it in a nutshell, folks.
P.S. A computer error of several trillion dollars, the White House claims, is what triggered S& P to downgrade the USG credit to AA+ from AAA. Ouch!
Jerry Mazza is a freelance writer, life-long resident of New York City. An EBook version of his book of poems “State Of Shock,” on 9/11 and its after effects is now available at Amazon.com and Barnesandnoble.com. He has also written hundreds of articles on politics and government as Associate Editor of Intrepid Report (formerly Online Journal). Reach him at gvmaz@verizon.net.
