The farce of structured credit ratings

By Felix Salmon
May 17, 2010
the second time as farce:

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Structured credit ratings history repeats itself, the first time as tragedy, the second time as farce:

Standard & Poor’s cut to junk the ratings on certain securities, backed by U.S. mortgage bonds, that it granted AAA grades when they were created last year…

The reductions were among downgrades to 308 classes of so- called re-remics… About $150 million of the debt issued last year, as recently as July, with top rankings were lowered below investment grades.

I consider myself pretty cynical when it comes to structured finance, but this comes as a shock even to me. S&P knew, when it was rating these re-remics, exactly where it had gone wrong in the first round of structured-credit ratings, yet somehow was unable or unwilling to fix the problems in that group.

Tracy Alloway quotes S&P citing significant deterioration” in the performance of the underlying mortgages as the reason for the downgrade — but the whole point of a triple-A-rated mortgage-backed security is that it’s robust to such deterioration. If it isn’t, then it should never have been rated triple-A in the first place.

If we needed one more reason to strip all official recognition from credit ratings, this is it. S&P and Moody’s are clearly completely incompetent, and no one should base any investment decisions on the random series of letters they apply to bonds. If the CDO fiasco wasn’t enough to make them change their ways, then nothing will be.

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