Those New Structured Credit Ratings in Foole

by David S. Products

I was pleased to read Tuesday that, in response to widespread criticism of the performance of structured credit product ratings and ahead of impending regulatory intervention, the following announcement from the International Rating Cartel Trust:

New ratings methodology

This will once and for all make our models more precisely inaccurate. This will eliminate existing confusion over whether model errors resulted in material deviations from their intended inaccuracy, as at Moody's (MCO), or not, as at S&P.

Because the covered securities might be subject to huge amounts of compression pressure, the new methodology is designed to reflect the possibility that they will form natural diamonds, substantially increasing their value. The following pictorial guidelines are intended to address regulatory demands that ratings should assist investors in making "an independent judgment of credit risks," and eliminate doubts as to the consistency of our inaccurate ratings.  Without consistency our ratings might be perceived to not have any value at all, especially given their apparent inaccuracy.

Rating 1, Now AA (previously AAA (erroneous model)):  Note the securities have uniform color and a pleasing shape. Delivered in hard-to-open bags. Very ready for conversion to diamonds.

Rating 2, Credit Watch Negative (previously, No Ratings Impact): Note the presence of smoke, which sometimes implies the existence of fire. May also result from diamond-forming pressures. From now on we will keep a really, really close eye on these.

Rating 3, Downgrade (previously, Rating Affirmed): Note the change in color, the radiation of heat, and suitability for cooking a portfolio. Diamond formation improbable at this stage, but still investment grade, especially for hedge funds that have suspended redemptions from "Wishin' and hopin'" portfolio.

Rating 4, Unrated (previously, Super-Senior Tranche): Note slightly diminished potential for diamonds as much of the capital has been incinerated. Subject to UBS Exemption, covering possibility of diamonds being smuggled into the bag, via private bankers' toothpaste tubes.

SEC Publishes Proposals to Increase Investor Protections
by Reducing Reliance on Credit Ratings
US Securities and Exchange Commission
Press release Jul. 1 2008

SEC Proposes Comprehensive Reforms to Bring Increased
Transparency to Credit Rating Process
US Securities and Exchange Commission
Press release Jun. 11 2008