Just when you think the rating agencies can’t make any more of a hash of their structured finance business than they already have, they disclose they’ve developed new ways to screw things up. Last Thursday, S&P (MHP) announced it has upgraded some NovaStar ABS to AAA from CCC because its prior downgrade of the paper was, well, kind of a mistake:
NEW YORK (Standard & Poor's) Sept. 4, 2008--Standard & Poor's Ratings Services today reinstated its pre-Aug. 21, 2008, rating on the class AIO asset-backed certificates from NovaStar Mortgage Funding Trust Series 2002-3 (see list).
The AIO class was inadvertently downgraded as part of Standard & Poor's Aug. 21, 2008, rating actions on various U.S. residential mortgage-backed securities transactions backed by subprime mortgage loan collateral, as detailed in “Ratings Lowered On 41 Classes From 13 U.S. Subprime RMBS Deals Issued Between 2002 And 2004.
NovaStar Mortgage Funding Trust Series 2002-3 Asset-backed certificates
To: AAA, From: CCC [Emph. added]
Thus S&P has invented a whole new type of risk for fixed income investors to worry about: the “inadvertent downgrade.” And this wasn’t just a tweak, either. The NovaStar AIOs in question careened from triple-A to triple-C back to triple-A in the space of two weeks. Geniuses. These people are geniuses.
Tom Brown is head of Bankstocks.com
Disclosure: See declared holdings for fund managed by author: Second Curve Capital