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Wednesday, 22 July 2009

They must be making this up as they go along

Last week S&P cut its ratings on billions of dollars worth of Collateralized Mortgage Backed Securities issued by Goldman, Credit Suisse, Wachovia and others, as part of its ongoing review of its methodologies. S&P downgraded one class of a Goldman transaction from AAA to BB and five from AAA to BBB-. BB is 2 notches below investment grade which is a long way from AAA (prime risk, practically zero risk of loss etc. etc.)

This gave the banks a problem because it made the bonds ineligible for TALF (the Term Asset-Backed Securities Loan Facility) – they have to be AAA to be in the program.

But surprise, surprise, yesterday the WSJ reported that S&P changed its mind in a “stunning reversal”, because it has “recently updated criteria” for its ratings and has returned all the ratings back to AAA.

Curiously, the same day the Obama administration detailed a plan to overhaul regulation of credit-ratings firms by requiring increased disclosure and stronger oversight, and curbing the practice of "ratings shopping." So S&P held a mid-summer sale while they still could.

According to the WSJ:

S&P spokesman Adam Tempkin said in an email that the firm had received inquiries from market participants on how it applies losses in the AAA category “that prompted us to clarify our approach. In doing so, we are also introducing refinements to the approach.”

Mr. Tempkin said the ratings firm listens “attentively to all feedback from the market at any time,” and makes “changes when we think it makes sense analytically.”

“While we consider all feedback received, we use independent judgement, testing, and analysis in arriving at credit opinions and criteria development/implementation,” he wrote.

Sounds like the guys from Goldman gave S&P more market feedback than their “independent judgement” could take. I have said it before and I’ll say it again: the ratings process is deeply flawed, and I wouldn’t gamble my life savings on the strength of their ratings.

BB is the current rating for Indonesian sovereign debt. Overnight, S&P decids that Indonesia is really Switzerland, Germany and the United States rolled into one.

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