This is priceless. The Wall Street Journal, in a page one story, “How Rating Firms’ Calls Fueled Subprime Mess,” tells us that rating agencies might have had more than a little bit to do with the problems in subprime.
This is a new item? A page one news item? It would be a bigger news item if you could find a single person in America who has heard about subprimes and doesn’t know that the rating agencies had played a big role.
There is absolutely nothing novel in this story, save perhaps a thread regarding piggyback mortgages:
In 2000, Standard & Poor’s made a decision about an arcane corner of the mortgage market. It said a type of mortgage that involves a “piggyback,” where borrowers simultaneously take out a second loan for the down payment, was no more likely to default than a standard mortgage.
While its pronouncement went unnoticed outside the mortgage world, piggybacks soon were part of a movement that transformed America’s home-loan industry: a boom in “subprime” mortgages taken out by buyers with weak credit.
Six years later, S&P reversed its view of loans with piggybacks. It said they actually were far more likely to default.
By contrast, the Financial Times was on to the rating agencies’ compromised role in January, if not earlier:
There is, for example, a credit analyst at a bulge-bracket bank who worries that rating agencies are stoking up the structured credit boom, with dangerously little oversight. “[If you] take away the three anointed interpreters of ‘investment grade’, that market folds up shop. I wonder if your readers understand that . . . and the non-trivial conflict of interest that these agencies sit on top of as publicly listed, for-profit companies?”
Similarly, the FT has a much better story on the rating agencies’ compromised role in structured credit in May:
How these ratings are decided upon is the subject of growing anxiety, with concerns hinging on the relationships between the agencies and big investment banks on Wall Street and in the City of London. Some worry about the potential for conflicts of interest, given that investment banks rather than investors pay for ratings. Others simply think the agencies can be confused by the complexity of the deals they are asked to rate, and are not equipped to keep up with the creativity and resources of the banking world.
You can read more here.
S&P, Moody’s May Lose Subprime Mortgage-Bond Suits — May 7
CDO Boom Masks Subprime Losses, Abetted by S&P, Moody’s, Fitch — May 31