When a rating is awarded to a corporation, the two are clearly separate. The company had an existence that predated the rating. The opposite is true of a structured deal. All of these toxic structured deals were designed at their inception according to specific standards set by the rating agencies. Without their credit ratings, these would never have been created. This is especially true of CDOs, which are designed about credit ratings, not around cash flows. Consider Squared CDO 2007-1, Ltd., a J.P. Morgan deal that closed in May 2007. Upon completion of the ramp up period for acquiring assets, the deal would be forced to liquidate unless Moody's had confirmed the CDO ratings, which depended on compliance with, among other things, the "Moody's Asset Correlation Test," the "Moody's Minimum Weighted Average Recovery Rate Test," and the "Moody's Minimum Weighted Average Recovery Rate Test." Again, there are hundreds of other deals just like Squared CDO 2007-1, which happens to be one of the notorious Magnatar deals, which were all secretly designed to fail by a hedge fund.
Read the initial ratings "commentary" on Squared CDO 2007-1, and you'll notice that, like hundreds of other CDO ratings announcements, it reveals nothing that would enable an outside reader to form an independent judgement.
3. We downgraded these mortgage securities on a timely basis.
"We took rating actions as soon as warranted by actual performance data." Nicolas Weill, Moody's
At what point should a mortgage securitization be downgraded? It's hard to say. But it's easy to identify the point in time when a downgrade is overdue. Whenever, within the first two years, the total loans in foreclosure exceed the dollar amount of the subinvestment grade tranches, some of the investment grade tranches need to be downgraded. At that point there's no need to wait and see might happen, because it happened already. The cushion to protect those investment grade tranches from credit losses -the excess collateralization and the excess spread - has been irreparably damaged. At that point the triple-B tranches have not yet lost their principal; but there was no way that anyone could argue that they were still investment grade.
And while there may not have been absolute certainty that the triple-B tranches would not lose their principal, the same way there is no absolute certainty that the Republicans will carry Idaho in 2012, the odds of a loss are pretty overwhelming. Because of the way these cash waterfalls are set up, the senior tranches get their principal repaid from the good loans in the pool, and the subordinate tranches get repaid from the bad loans. And each month during 2006, home prices were falling and delinquencies were rising, which was an acid test that things would not get better for years.
So consider, for example, a $2.75 billion subprime deal called Argent Securities Inc. 2005-W2. The deal closed in September 2005, with $135 in capitalization subordinate to the tranche rated Baa3 by Moody's. And a year later, by October 2006, a total of $135 million in loans were in foreclosure, were classified as "real estate owned'" or were written off. There was no excuse to wait until October 2006 to announce a downgrade; and the deal should have been put on credit watch months earlier. But Moody's waited another 18 months before it issued its first downgrade in April 2008. By then, about $315 million in loans were in foreclosure or worse.
Or consider Morgan Stanley ABS Capital I Trust 2005-HE5 , which closed in October 2005. The $1.5 billion deal had $63 million in sub-investment grade capitalization, and by November 2006, $63 million in loans were in foreclosure or worse. So by then, a downgrade was overdue. But the deal was not downgraded by Moody's until April 2008, when the deal had almost $180 million in loans in foreclosure. And once again, there are hundreds of other deals just like these two, which that, by any standard, were neither downgraded nor put on credit watch for at least a year after the need for a downgrade had become certain.
The foregoing only scratches the surface. It does not cover the issues of corporate governance reported by insiders. But it should help you avoid getting sidetracked. Good luck!
Next Page 1 | 2 | 3 | 4 | 5 | 6 | 7
(Note: You can view every article as one long page if you sign up as an Advocate Member, or higher).
