Tuesday, September 04, 2007

Why S&P Is Not to Blame

by Tanta on 9/04/2007 03:50:00 PM

Clyde sent me this jewel this morning: S&P answers its critics in "Don't Blame the Rating Agencies":

The fallout over subprime mortgages has provoked a rush to judgment, and some are now blaming the credit-rating agencies for the recent market turbulence. These charges reflect both a misunderstanding of the work carried out by rating agencies, and a misrepresentation of the overall credit performance of securities backed by residential mortgages

Much of the recent commentary has missed several critical facts. For example, our recent downgrades affected approximately 1% of the $565.3 billion in first-lien subprime residential mortgage-backed securities (RMBS) that Standard & Poor's rated between the fourth quarter of 2005 and the end of 2006. This represents only a small portion of the mortgage-backed securities market, which in turn represents a very small part of the world's credit markets. Additionally, our recent downgrades included no AAA-rated, first-lien subprime RMBS -- and 85% of the downgrades were rated BBB and below. In other words, the overwhelming majority of our ratings actions have been directed at the weakest-quality subprime securities.
Translation: we only screwed up on the stuff that is obviously risky, and we only misrated the stuff that involves first-loss position. The stuff that is obviously less risky and was never much in danger of taking write-downs is still OK.
Ratings are designed to be stable. Unlike market prices, they do not fluctuate on the basis of market sentiment. But they can and do change -- either as a result of fundamental adjustments to the risk profile of a bond or the emergence of new information.
Translation: ratings don't change with market sentiment because market sentiment changes only when ratings turn out to be unstable. Or something.
As part of the ratings process, we do engage in open dialogue with bond issuers. This dialogue helps issuers understand our ratings criteria and helps us understand the securities they are structuring, so we can make informed opinions about creditworthiness. We strive to make sure issuers and investors are fully aware of how we determine creditworthiness and believe that all parties are better served when the process is open and transparent.
Translation: And we only change our mind when we find out how closed and opaque the process really was, in hindsight.

I can't read any more of this . . .