Post by unlawflcombatnt on Jul 17, 2007 3:42:43 GMT -6
It appears some of the models used by rating agencies have deliberately omitted information to improve bond ratings. Below are excerpts from the Financial Times describing some of these omissions.
Rating agencies under scrutiny
By Saskia Scholtes in New York
"When debt investments turn sour, the rating agencies have grown accustomed to drawing criticism for spotting problems too late and then taking too long to act on them.
The current turmoil in the US subprime mortgage market is no different for them. The crisis has generated a barrage of such investor criticism, which reached fever pitch this week in response to a swathe of downgrades of mortgage bonds and related complex debt products.
One investor repeatedly asked analysts at Standard & Poor's on a conference call this week: "What is it that you know today that the markets didn't know three months ago?"
Amid the steady drumbeat of bad subprime news - late payments and defaults on subprime home loans have been worryingly high for several months - the downgrades were broadly expected. But investors and analysts are struggling to understand what additional evidence the agencies were waiting for to justify the moves, and have raised a series of questions over the reliability of their analysis.
Susan Barnes, analyst at S&P said on the conference call that the rating agency waits for a body of evidence to accumulate before taking action: "It takes a period of time for these deals to show their true performance. We have been reviewing these deals closely and felt it was time to take action."...
Meanwhile, some analysts raise concerns that the rating agencies are not asking some of the most basic questions. Christian Stracke, analyst at research firm CreditSights, said: "An apparent lack of basic analysis behind [mortgage bond] ratings was on display in S&P's discussion of their estimate of the sensitivity of [late payment] rates to changes in interest rates: namely, they have no such estimate."
Josh Rosner, consultant at research firm Graham Fisher said: "The rating agencies appear to have relied, almost exclusively, on information provided to them by issuers and even have chosen not to require some meaningful disclosures about underlying residential loans included in the structures."
Mr Rosner 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.....
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.
The rating agencies wield enormous influence, not only because their pronouncements can affect the cost of funds for issuers of debt, but because ratings are often enshrined in the regulations that govern what securities can be bought by insurance companies, pension plans and mutual funds.
Analysts say some of the main reasons that initial ratings for subprime bonds may have been over-optimistic are weaker underwriting standards, fraud, and concentration in overvalued regions. Some analysts also warn that other parts of the mortgage market are beginning to show symptoms of similar troubles....."
The entire article can be found at
Rating agencies under scrutiny
Rating agencies under scrutiny
By Saskia Scholtes in New York
"When debt investments turn sour, the rating agencies have grown accustomed to drawing criticism for spotting problems too late and then taking too long to act on them.
The current turmoil in the US subprime mortgage market is no different for them. The crisis has generated a barrage of such investor criticism, which reached fever pitch this week in response to a swathe of downgrades of mortgage bonds and related complex debt products.
One investor repeatedly asked analysts at Standard & Poor's on a conference call this week: "What is it that you know today that the markets didn't know three months ago?"
Amid the steady drumbeat of bad subprime news - late payments and defaults on subprime home loans have been worryingly high for several months - the downgrades were broadly expected. But investors and analysts are struggling to understand what additional evidence the agencies were waiting for to justify the moves, and have raised a series of questions over the reliability of their analysis.
Susan Barnes, analyst at S&P said on the conference call that the rating agency waits for a body of evidence to accumulate before taking action: "It takes a period of time for these deals to show their true performance. We have been reviewing these deals closely and felt it was time to take action."...
Meanwhile, some analysts raise concerns that the rating agencies are not asking some of the most basic questions. Christian Stracke, analyst at research firm CreditSights, said: "An apparent lack of basic analysis behind [mortgage bond] ratings was on display in S&P's discussion of their estimate of the sensitivity of [late payment] rates to changes in interest rates: namely, they have no such estimate."
Josh Rosner, consultant at research firm Graham Fisher said: "The rating agencies appear to have relied, almost exclusively, on information provided to them by issuers and even have chosen not to require some meaningful disclosures about underlying residential loans included in the structures."
Mr Rosner 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.....
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.
The rating agencies wield enormous influence, not only because their pronouncements can affect the cost of funds for issuers of debt, but because ratings are often enshrined in the regulations that govern what securities can be bought by insurance companies, pension plans and mutual funds.
Analysts say some of the main reasons that initial ratings for subprime bonds may have been over-optimistic are weaker underwriting standards, fraud, and concentration in overvalued regions. Some analysts also warn that other parts of the mortgage market are beginning to show symptoms of similar troubles....."
The entire article can be found at
Rating agencies under scrutiny