Remember the rating agencies? S&P? Moody’s? The folks who rated all that subprime paper Triple-A?
Well, the Fed’s baillout program is going to be issuing a lot of new asset-backed securities, which means the rating agencies are about to be busy again. In fact, the Wall Street Journal estimates that they’ll make $1 billion of fees rating the paper produced in the latest bailout programs.
What will the Bailout Bonds be rated? Whatever. As we’ve learned, the ratings don’t mean squat. Because as it gradually becomes obvious that the bonds don’t deserve whatever rating the agencies were paid to give them, the bonds will be put on “WATCH.” And then when every sucker who still owns the bonds has lost all the money it’s possible to lose, the bonds will be safely downgraded.
So here’s a proposal: Let’s save ourselves a billion. Let’s just rate the bonds “WHATEVER.”
“WHATEVER” has a nice ring to it. WHATEVER won’t trick people into thinking that a Triple A or Triple B is somehow a safe investment. WHATEVER will save us the trouble of ever having to secretly downgrade the bonds by putting them on “WATCH” or, horrors, actually downgrading them.
WSJ: The new rescue effort, run by the Federal Reserve, kicked off Thursday with bond deals totaling more than $7 billion. Each bond issue will need to be blessed by at least two of the three big rating firms: Moody’s Investors Service, Standard & Poor’s Ratings Services and Fitch Ratings…
Under the so-called Term Asset-Backed Securities Loan Facility, or TALF, the Federal Reserve will lend money to investors who buy securities backed by such things as auto, student, small-business and credit-card loans. But the government, hoping to protect itself from losses, will allow its money only to be used to buy securities rated triple-A by the ratings services.
Rating services typically charge $40,000 to $120,000 for every $100 million in so-called structured-finance securities they rate. For the initial $200 billion portion of TALF, that translates to $80 million to $240 million. If the program is extended to $1 trillion as the government plans, those fees could skyrocket to anywhere between $400 million and $1.2 billion…
They are still paid for their ratings by the companies whose bonds they rate, a potential conflict of interest. And much-anticipated competition for the three companies has failed to materialise so far.
“Until the rating firms bite the bullet and develop forward-looking signals and methods, it’s going to be same old, same old, and their models can be gamed,” says Ann Rutledge, principal of New York structured-finance advisory firm R&R Consulting and a former credit-rating analyst.
*UPDATE: S&P spokesman Ed Sweeney says the Wall Street Journal article is inaccurate and includes a link to a fact sheet (PDF).
We have a number of issues with this article, but the most egregious one is the gross exaggeration of our fees on standard ABS. The article failed to point out that S&P has been paid less than one basis point – or .01%, – for its TALF work and, in fact, we have caps on our fees on asset backed securities.
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