Ratings agency Standard & Poors has managed a stunt which to my knowledge has no precedent in the history of the dark art of ratings. It downgraded some not all that highly structured commercial mortgage bonds last week to an eyepopping degree, from AAA to BBB-, just this side of being junk.
Then they restored them to AAA this week. And the reason was not some semi-defensible “the dog ate my homework”, like someone external had given them erroneous information that got plugged into their methodology. No, they had implemented a new model, it gave garbage results, and somehow no one inside the firm noticed the massive downgrades that resulted and bothered to check to see if there might be an error in the model. No, they published and then got customer howls. Now this only involved three bonds, but this happening at all is quite an impressive feat.
Standard & Poor’s backtracked on ratings cuts issued last week and raised the ranking on commercial mortgage-backed debt from three bonds sold in 2007.
The securities, restored to top-ranked status, had been downgraded as recently as last week, making them ineligible for the Federal Reserve’s Term Asset-Backed Securities Loan Facility to jumpstart lending.
S&P lowered the ratings on a class of a commercial mortgage-backed bond offering from AAA to BBB-, the lowest investment-grade ranking, on July 14. The New York-based rating company reversed the cut today, S&P said in a statement. In a related report, S&P said it adjusted assumptions on the timing of projected losses on the mortgages.
“It is a stunning reversal and certainly raises questions concerning the robustness of their revised model,” said Christopher Sullivan, chief investment officer at United Nations Federal Credit Union in New York. “It may engender further uncertainty with respect to ratings outlooks.”
Reader Entirely Random adds a vignette to this comedy of errors:
I finally got someone from S&P on the phone… tried to explain to them that capital markets simply won’t work if bonds go from AAA to BBB and back to AAA in the space of a week, that a number of people had been forced to sell the bonds last week when they had been downgraded and had lost quite a bit of money for the experience, and that any sort of credibility S&P had hoped to re-establish would likely be destroyed as a result of what they’d done. Of course the 25 year-old analyst at S&P didn’t have anything on his script to deal with those concerns and could do nothing but refer me back to their press release. I got so frustrated I suggested they completely disregard any pretense of “official methodology” and go straight to the South Park method — i.e., cut the head off a chicken and see where it lands on the rating board. I don’t think he found it nearly as funny or cathartic as I did.