Tuesday, July 17, 2007

All Right, I Give Up: Rating Agencies cannot find barn door to close

by Ken Houghton

I'm disinclined to blame rating agencies, who are explicitly not fiduciaries, for delays in downgrading, largely because they will not have updated information so quickly as, say, the service provider or the owner of the securities.

However, closing the barn door after the horses escape is one thing; not knowing how to tell if the horses have escaped, or where the door is, is another.

Via Naked Capitalism, the FT discusses rating agency mis- or nonfeasance:
[Josh] Rosner [a consultant at research firm Graham Fisher} points to an April report from Moody's that showed the rating agency did not consider debt-to-income ratios as a primary piece of data in their mortgage models, although this is generally considered as one of the three key predictors of mortgage default.

In the same report Moody's said it would for the first time request loan level data detailing the structure of adjustable-rate mortgages, the servicer, the month of the first interest rate adjustment and other data that would allow them to analyse risks. S&P admitted this week that it does not receive this kind of granular data on performance of individual loans within the mortgage pools backing the bonds that it rates.[emphasis mine]

Anyone interviewing for a job as an MBS analyst who didn't mention most of the above would not get a second interview. Except, apparently, at Moody's.

There still should be other agents acting first. (The most reasonable argument against regulation is that, by the time regulators have the information, the problem may be being solved.) But rating agencies are at worst the last resort of the small investor.
One revelation that analysts have described as "extraordinary" this week is that S&P has no specific estimate of how much turmoil in the housing market would be needed to force downgrades of the AAA and AA ratings that have been left untouched in this round of downgrades and constitute the bulk of the principal value of most mortgage-backed deals. Moody's also said in an interview that it had no such estimate.

Oh, well. So much for that theory?

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