Rating Agency Incompetence Scales New Heights

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.

RATING REINSTATED  

NovaStar Mortgage Funding Trust Series 2002-3 Asset-backed certificates

Rating:

Class: AIO     

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

Comments

[Ishortyou:]

Well at least they recognized their mistakes, it would be nice if they restore the triple A ratings of some of the major bond insurers like AMBAC and MBIA which are doing a good job in book remediation by the way.

2008 Sep 07 09:04 AM

[SW Richmond:]

Holy dump-and-pump, Batman!

Cui bono?

2008 Sep 07 01:04 PM

[SW Richmond:]

Next question: How is anyone supposed to make intelligent investment decisions in an environment where something like this is even possible?

2008 Sep 07 01:09 PM

[fxtrader07:]

it becomes clearer dday by day that the ratings agencies more often than not do not have a clue. Funny thing is, they still get paid large amounts for their cluelessness. Others pay up for it big time. Now, who is the greater fool? The clueless or the clueless throwing money at the other clueless? Go figure.

2008 Sep 08 05:00 AM

[maz:]

Hi Tom,

Any comments or Mea Culpas on other mistakes like First Marblehead :-)

2008 Sep 08 01:07 PM

[JAJones:]

The trustee for this security should have identified the problem before the incorrect downgrade went out and should be just as embarrased.

2008 Sep 08 01:18 PM

[Lockstep In...:]

Tom, you have been wrong on more than 50% of your predictions regarding the financial services industry over the last year. I have a hard time hearing this from you.

2008 Sep 10 04:02 PM