Crap Assets Structured By Cows?

So how badly did the bond rating agencies bungle the ratings during the bubble? Very, very badly, as they appear to have admitted at the time in emails to each other.

The Wall Street Journal¬† cites Henry Waxman’s description of a draft version of the SEC’s report on bond-rating firms. It’s ugly.¬†

Some highlights:

  • In one email, an S&P analytical staffer emailed another that a mortgage or structured-finance deal was “ridiculous” and that “we should not be rating it.” The other S&P staffer replied that “we rate every deal,” adding that “it could be structured by cows and we would rate it.”
  • Meanwhile, an analytical manager in the collateralized debt obligations group at S&P told a senior analytical manager in a separate email that “rating agencies continue to create” an “even bigger monster — the CDO market. Let’s hope we are all wealthy and retired by the time this house of cards falters.;O)”

First of all: emails? Really? Will people never learn? If what CNBC’s Trish Regan just called “the Era of Blodget” taught us anything, it’s that analysts need to be very careful slagging off financial products they are going to recommend. Did our editor teach you people nothing?

Second, there’s still an outstanding question of pricing on CDOs that shouldn’t get ignored. We don’t mean this to be a defence of sloppy or fraudulent ratings, but the pricing on even the highest rated structured products never matched the pricing of highly rate corporate bonds. That implies that regardless of ratings, the markets priced in additional risk. So if S&P staffers knew the ratings were ridiculous, the market knew it too.

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