AAA Bonds That Fail the Investment Grade Test

Includes: C, CS, DB, LEH, MS, UBS, WMIH
by: Prince of Wall Street

Check out this interactive chart from Bloomberg which looks at the 80 AAA bonds in the ABX. It compares the ratio of credit support to collateral at risk for these 80 bonds. It makes it pretty clear that 74 of 80 of these funds fail the test used by the ratings agencies for investment grade i.e. above two times credit support. Yet, miraculously many of these bonds still remain AAA according to the rating agencies. Twelve of the bonds in the ABX, mostly those issued in 2006 and 2007, have collateral at risk which exceeds credit support. Check out The Prince’s post encouraging the rating agencies to come clean and proceed with across the board downgrades of mortgage related securities. This is getting ridiculous, don’t you think?

For the uninitiated:

Credit Support: Percentage of a bond’s total collateral that can be lost before it stops making payments.

Collateral at Risk: Percentage of a bond’s total collateral that is 90 days delinquent, foreclosed, or repossessed.

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