Do S&P, Moody's Deserve the Street's Heat?

We have never been big cheerleaders around here for the rating agencies. But lately the agencies, particularly S&P and Moody's (MCO), have been getting lambasted by the media and -- surprisingly -- the Street for dragging its feet to downgrade vintage-2006 subprime mortgage bonds. Oddly enough, a lot of the lip seems to have come from fund managers that say the rating agencies should have seen these problems coming.

So was Moody's asleep at the wheel? Perhaps not. As William Blair & Company analyst John Neff points out well in a recent research note (Sorry, no link!), Moody's job isn't to react to pricing in the credit markets--be it the latest leg down in the ABX, or spreads widening. Its job is actually to assess the creditworthiness of specific debt securities, i.e., the repayment of principal plus interest, and to only change the ratings when sufficient evidence is available to do so (not just a month or two of elevated delinquencies). Not to mention that the rating agencies actually did issue warnings and begin changing their models (S&P in particular) ... in mid-2006! So the idea that the agencies have been completely asleep at the wheel (drowsy, maybe...) is not only whiny, but misguided.

Comments

[Long-Short Guy:]

Related:
<blockquote>
<b>AAA Grades on Subprime CDOs May Give Cold Comfort: Mark Gilbert</b>

Bundling mortgages into asset-backed bonds and then agglutinating those bonds into collateralized debt obligations sliced into different flavors of risk always smacked of a sophisticated pyramid scheme. As the foundations crumble, even the apex of the CDO market is looking shaky.

Investors who thought they were boxing clever by buying only AAA rated securities are about to discover that the top grade offers scant protection when a leveraged market melts down.

And the contagion threatens to infect the leveraged-buyout market, the stock market and, ultimately, the real economy...
</blockquote>

Source:
www.bloomberg.com/apps...

2007 Jul 23 01:49 AM