Rolfe Winkler

From Reuters:  S&P tweaks CMBS model, reverses week-old downgrades

Standard & Poor’s on Tuesday reversed some controversial downgrades of widely watched commercial mortgage-backed securities in a highly unusual response to investor ire.In a rare and dramatic reversal from just a week ago, S&P upgraded the bonds to the top AAA rating. The move reinstates their coveted eligibility under a Federal Reserve lending program that is behind a strong rally for the $700 billion market.

Among upgrades, S&P raised ratings on the A2, A3 and A-AB classes in Goldman Sach’s 2007-GG10 transaction, considered a benchmark for CMBS, back to AAA from BBB-minus.

The key issue is in the second paragraph, where the article notes that to be eligible for TALF financing from the Fed, CMBS have to be rated AAA from at least two of the big credit rating agencies.

So who is (are) the market participant(s) that prompted S&P to “clarify” its approach?  Is it the Fed?  On the one hand, the Fed doesn’t want to get stuck with crappy collateral on its balance sheet.  On the other hand, it wants to shovel as much money out the door as possible in order to bail out the shadow banking system to boost “liquidity.”

But the Fed can’t have it both ways.  Lately, according to Moody’s, commercial real estate prices are falling quite spectacularly:  Off 16% in the last two months (I plan to blog on this tomorrow).

So in order to get money out the door, the Fed has had to bend its own rules and accept junky collateral.  But it needs “independent” raters like S&P to cover its tracks by inflating credit ratings.  It’s not like anyone’s going to get wise.  The Fed doesn’t use regular accounting rules nor are its books audited, so burying losses ain’t so tough.

Taxpayers are the ultimate losers.  TALF loans are non-recourse.  Which means if the collateral goes bad, the public eats most of the losses.

Of course banks themselves might be pressuring S&P.  They need buoyant ratings in order to sell paper to gullible, and lazy, portfolio managers who want to chase yield.